Summary

In response to a legislative requirement, GAO assessed private banks' ability to compete with Federal Reserve banks in providing check collection services, focusing on: (1) the Federal Reserve System's exemption from the imposition of presentment fees; (2) the impact of the imposition of presentment fees on check collection system efficiency; and (3) whether the Federal Reserve System required check clearinghouses to provide services to the Federal Reserve banks and whether those banks should pay check clearinghouses for any such services.

GAO found that: (1) the Federal Reserve uses its authority to deviate from state laws governing private banks to advance check collection system efficiency; (2) Reserve banks require paying banks to make payment on the same day Reserve banks present checks and without charging fees, to make check payments that Reserve banks have not endorsed, and to make payment on checks Reserve banks present after the customary presentment time; (3) collecting banks need to match Reserve bank collection terms, including choosing which customers they serve, to be competitive; (4) Reserve banks do not have the authority to unilaterally vary from state check collection laws; (5) collecting banks negotiate agreements with other banks for check presentment and payment terms, which usually entail the collecting banks paying presentment fees to the paying banks; (6) presentment fees increased bank check collection costs from 18 to 40 percent; and (7) although banks join clearinghouses to facilitate check exchanges among banks, they still negotiate arrangements to present checks to banks outside the clearinghouse. GAO also found that the: (1) differences between the collecting and Reserve banks' abilities to present checks are not essential for the safety, soundness, or efficiency of the check collection system; and (2) Federal Reserve had not developed criteria for evaluating competitive fairness, making it difficult to deal with potential conflicts of interest between its roles as a competitor and payment system overseer.