FED Study To Help Banks Choose Direction

by Joyce L. Schenewerk, Esq.

With all the concerns over privacy and security, a lot of ordinary consumers (me included!) are reluctant to use e-commerce to buy things or pay bills. We scaredee-cats read too many alarmist news articles about hackers and breaches of security, like the Russian hacker who had no trouble accessing credit cards on a bookseller's web site. Frankly, my life is way too busy to be dealing with the fallout from that kind of theft. Who has the time or energy to recreate their credit identity after one of those events?! I'll stick with my old-fashioned ways and keep writing checks.

So it came as no surprise to me when the Federal Reserve Board announced it will spend the first part of this year taking an inventory of how many checks are written in the U.S. Whew! We have no real numbers on this, the last such inventory being taken in 1979. (Many of you reading this were in high school that year so I know you don't remember the results!) The Fed wants to know how many people like me are out there still writing checks.

Who is paying whom?
The Fed will also try to figure out who is writing checks to whom (consumers? businesses?) and will count how many "noncash" payments are being made in the U.S. (debit cards, credit cards, ACH payments, electronic deposits, etc.). The rise of debit cards may be the biggest surprise number to come out of the counting: these are the equivalent to a check to the customer (the money comes right out of a bank account) but are processed like credit cards, which are much cheaper to handle electronically and therefore cost less to process than checks.

Fed study due out "quickly"
Perhaps the most surprising thing about this study by the Fed is that they will be publishing the results in what some are calling "warp speed": the results will be out by the fall. Whoa! Pretty good work for the government. This means we will have access by year-end to information to help decide whether check-writing is really on the decline or not, and perhaps plan our security strategies for 2002 accordingly.

Where do we go from here?
Do we spend more time and money on check fraud, since losses from that fraud have risen 32% from 1997 to 1999? And the really bad news on that is the figure is 35% at community banks with less than $500 million in assets and 46% at regionals (over $500 million but less than $50 billion) If your bank fits into one of those categories, perhaps the Fed study will reinforce your decision to stay focused on the check problem. Perhaps your Board will even authorize a budget increase on it (sure, sure). Estimates are that we write 65 to 75 BILLION checks in the U.S. each year so it will be interesting to see what the Fed study says.

Robbery still around
Perhaps the study has results that tell your bank to devote your time and energy to the old kinds of security problems: the FBI reported last fall that robbers really love North Carolina banks; the trend to robbery there is going up, while nationally it is on the decline. Of course there are a lot of banks in North Carolina, but can we be sure that's the problem?

Or perhaps the study will make us focus on a new variation of an old problem: our security systems only work if the electricity stays on. In California that could be a problem. Or during a winter ice storm in Vermont. Or during hurricane season in Florida. We can't process either debit card transactions or paper checks without the lights on and machines running.

Strange bedfellows
How to fix it? Do what E-Loan, Inc. has done, and share your electricity feeder line with a local prison. Guaranteed never to go down. Or try hooking up to a feeder line for a police station or hospital. There's a novel factor to include in your next branch location decision.

The Fed will try to determine just how many checks are out there in this mostly-booming economy, when consumers are buying more than ever. But whatever the results, remember that your job is to keep up with this stuff and use information to counteract those smart thieves out there who keep jumping one step ahead of all of us. The way to keep up is to continue to educate yourself so that you can be a resource for others, including your Board, your bank and your security colleagues, and network like crazy. Like we did at the Banker's Hotline 7th Annual Security Officers Workshop - a great way to stay in touch.

Joyce Schenewerk is a partner at the regional law firm of McGlinchey Stafford, at its main office in New Orleans, Louisiana. She has been practicing real estate and banking law for about 15 years now and her past life includes five years as in-house attorney with a larger regional bank based in New Orleans.
Joyce L. Schenewerk, McGlinchey Stafford, 643 Magazine Street, New Orleans, LA 70130
Phone: direct (504) 596-2761
Fax: direct (504) 596-2816
Fax: main (504) 596-2800
email to jschenewerk@mcglinchey.com

Fed Announces Results of Study of the Payments System First Authoritative Study in 20 Years

Copyright © 2001 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 11, No. 5, 5/01