I. INTRODUCTION
Some banks may receive requests from large chain store retailers that their banks (which currently act as local depository banks) discontinue handling the retailer’s return checks. The retailers state that they have instituted a company-wide policy to consolidate all return checks with a third-party bank.
Bankers have questioned whether the retailers can require them to follow this procedure and in the event that they can, have also questioned who will be the “bank of first deposit.” The Federal Reserve Clearing System requires that checks being routed through the Federal Reserve Bank (FRB) be endorsed, but does not specify that the endorsement be that of the local depository bank.
II. THIRD-PARTY BANK PROGRAMS
Generally, retailers participating in such a third-party bank program will stamp the back of checks deposited with the local depository bank with their endorsement along with a second endorsement stamp reading “the ABC Bank as the bank of first deposit.” This process makes ABC Bank the “bank of first deposit” in the eyes of the FRB and any returned items are sent directly to ABC Bank. ABC Bank converts the return items into RCK items and redeposits them via the ACH payment system. If return items are sent to the local depository bank, the local depository bank must requalify (reroute) the item on the day of receipt to ABC Bank as a “not on us” return.
In order for this process to work, the local depository bank must turn off its endorsement stamp when running items through proof. The benefits derived by retailers include faster return of their return items and lower processing costs.
III. HANDLING REQUESTS FOR THIRD-PARTY BANK PROGRAMS
Whether a local depository bank is required to comply with the request from a retailer depends on its current deposit contract with the retailer. If the bank’s current deposit agreement does not state that it will perform this additional service, the bank is not obligated to accommodate the retailer’s request. The bank may want to consider renegotiating its account agreement with the retailer, perhaps to assess a fee for the additional service as well as to address relieving the bank of any potential liability involved with third-party processing. If the bank is unwilling or unable to accommodate the request (because it cannot turn off its endorsement stamp due to third-party processing), the retailer may choose to move its account to another bank that will be accommodating. A bank should consider the value and profitability of the retailer’s account to determine if it wants to provide this additional service and continue the banking relationship with the retailer.