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October 2003
Check 21 Act Passes Congress – Opportunities and Concerns
There are still a lot of checks out there
to be impacted by the Check 21 Act, even though as reported in February
the number of checks being written is on the decline, and as a result
the Fed is consolidating its processing network. The percentage of
checks that are actually posted to customer accounts as Automated
Clearing House (ACH) items rather than as checks is increasing. Checks
are being converted to ACH items at the Point of Purchase and for
consumer Accounts Receivable Checks (ARC) at lock boxes. While checks
and ACH items both effect payment, they are covered by different laws,
regulations and processing standards. While checks or check images are
generally returned to the customer, ACH items are only listed on the
statement. In part because of these differences, commercial checks are
excluded from ARC conversion.
There are and will continue to be for some time a lot of checks out
there to be handled. What the Check 21 Act does is make it easier to
move images about in lieu of paper checks. The act makes electronic
check images the legal and functional equivalent of their paper
counterparts. The act also allows for the printing of substitute checks
for delivery to paper-only banks, ensuring backward compatibility.
While it may take several years before the inter-bank exchange of
images is widespread (The effective date of the legislation is 12
months after enactment.) change is in the wind creating opportunities
and challenges.
Check data and images will be captured not just centrally, but in
branches, ATMs and even customer locations. This will create an
expanded market for scanning equipment of all speeds and related
software, including adding cameras to sorters not already equipped with
them. Fewer sorters will be needed as check volume declines, more
checks are imaged at remote locations, and each check makes fewer trips
through the sorter. Prices in the used sorter market have already
softened. The demand for electronic archival media is likely to
increase, while that for non-electronic media declines.
Physical transportation once arranged to meet stringent deadlines will
either no longer be necessary or can be carried out on a lower cost
more flexible schedule. Affected will be courier runs to move checks
between branches and operations centers, and between operations centers
and clearing partners. Airlines will carry many fewer checks between
banks. The Fed's inter-district transportation system with its fleet of
aircraft will have to be reconfigured and possibly go out of existence.
There will be a need for increased bandwidth to move images and data
between banks. This will need to be a secure and reliable network.
Many banks currently in house for item processing may consider
outsourcing rather than making additional investments. Those players
remaining in the service business may see their business grow while the
whole shrinks. Banks which continue to process checks will need to
decide when it is best for them to begin to send and receive images.
October 2003 - When Will Banks Get On Board for Check Imaging?
That's a good question. Talks with industry leaders indicate
significant uncertainty as to when, but not to whether. The crux of the
problem revolves around the need and cost (still a lot of uncertainty
here as well) to print substitute checks. If all banks magically went
to imaging one night this would be a non-issue, since very few
substitute checks would need to be printed. On the other hand early
adopters will need to make an investment in the capacity to print
substitute checks. Over time as imaging is accepted this capacity will
be less and less needed.
How much capacity a bank needs depends on the behavior of other banks;
and the extent to which it returns checks to its own customers. Before
joining the inter-bank image bandwagon a bank will want to move as many
of its customers as possible to image or truncated statements. If other
banks are good corporate citizens, before they convert a paper check to
an image they will try to determine if the paying bank and all banks
involved in clearing that check are image ready. If they aren't,
converting to an image will cause some bank down stream to have to
reconvert it and bear the cost of printing a substitute check. Early on
operating paper and image clearing paths in parallel may make sense,
but at some point it won't. Then images will have to be reconverted for
the few remaining paper only banks, which raises the question who then
should pay. Today the cost of clearing is paid by the collecting bank.
Will this change?
There is a lot a bank needs to consider before making a decision
including whether to be proactive or reactive, image checks in
branches, ATMs, or even at customer locations. The decision is
complicated by: still evolving regulations, cost uncertainty, and
uncertainty about partner behavior and pricing.
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