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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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