Check Payments

Imagining the Brave New World of Checks

By Patricia A. Murphy

When will full-blown check truncation take hold in the U.S.? That’s the $2 billion question punctuating bank operations meetings these days.

The consensus opinion appears to be that significant inroads won’t appear for at least three- five years, and even then, it’s not clear all banks will be exchanging image check files in lieu of shuttling paper checks around the country. While technologies, processes and services that can support check truncation are available and running in the marketplace today, return on investment (ROI) and implementation concerns are throttling plans at some banks.

The price tag on image enablement and other truncation technologies can be high. Some of the nation’s largest banks are said to be budgeting $100 million to $200 million for truncation hardware and software; for a typical community bank the price tag runs between $250,000 and $400,000, according to several experts. To put this latter figure into perspective, an Independent Bankers Association of America survey last year found most community banks (46%) had budgeted less than $50,000 for 2004 technology spending.

“Investments of this size are going to require ROI periods of 12-18 months,” says J.D. (Denny) Carreker, chairman and CEO of Carreker Corp., Dallas. Experts agree that banks will be compelled to adopt truncation by the rising cost of running paper check shops in a declining market for check writing. Until all checks are truncated, however, banks will have to bear the cost of supporting dual (paper and image) check shops.

Potential savings are a key motivator for truncation. Studies by Carreker Corp. and by SVPCo, a payments company that works with some of the nation’s largest banks, suggest the banking industry could save $2 billion, or more, once truncation is adopted industrywide. Alogent Corp., an Alpharetta, GA-based firm that markets image-based transaction processing systems, recently released data suggesting that a bank with assets in excess of $50 billion stands to save $45 million a year by truncating check images at the point of presentment and moving the items electronically. Truncation today has limited appeal, in part because banks have become extremely efficient at processing checks (driving per-item costs to a penny or less) and in part due to laws and legal precedents that rely on the existence of paper checks. The coming enactment of the Check 21 Act, in October, removes the legal obstacles to check truncation by creating a new, legal document, the “substitute check,” that can be
generated from an electronic check file when a paper copy is needed or requested by the
paying bank or its customer.

“We see a lot of activity in terms of sending [image check files] as soon as possible after the legislation takes effect in situations where items area already being truncated, such as credit union share drafts” says John Lettko, chairman and CEO of Viewpointe Archive Services, which runs a shared image archive that stores checks for some of the country’s
largest banks. Viewpoint’s four owners – Bank of America, J.P. Morgan Chase, U.S. Bancorp and SunTrust Banks Inc. – have tested the concept and will soon begin sharing check images via Viewpoint instead of exchanging paper checks, according to Lettko. In 2003, Viewpointe stored 12 billion check images that were available for image exchange.

Check Imaging Not Yet the Rage

Check imaging technologies, which are at the heart of the truncation process, to date have seen limited application in U.S. banking. Only 65% of banks have these technologies in place today, and the vast majority of that technology isn’t suited to the initial presentment and processing routines of check shops, according to Capco, a New York-based technology consulting firm. Most banks instead limit imaging applications to “day 2”
activities, like statement rendering, returns and adjustments, Capco reports.

Research from Financial Insights, Framingham, MA, confirms less than overwhelming
interest in “check electronification” among bankers. Among billers – a group that stands
to benefit greatly from check electronification – there’s even less interest, says Jeanne
Capachin, the research director on the project. Nearly 6 in 10 (59.6%) billers queried by
Financial Insights last fall and again in February hadn’t even heard of ARC, the
automated clearinghouse (ACH) transaction identifier for remittance checks that get
converted to ACH debits. The term “truncation” didn’t fare much better.

“Check electronification” is a phrase used generically to describe processes for removing
paper from the clearing cycle – in effect, electronifying the processing of checks without
depriving customers of the experience of writing paper checks. Allowing customers to
continue writing paper checks seems to be a key to success with imaging, considering
Americans will write about 40 billion checks this year, by Federal Reserve estimates.

Today, there are two widely-used approaches to electronifying checks: electronic check
presentment (ECP), which replicates traditional paper check exchanges in the digital
environment (except that final settlement usually requires receipt of the original paper)
and electronic check conversion through the ACH. Once Check 21 takes effect, banks are
free to evolve ECP programs into full-blown check truncation.

(Current laws hamstring truncation by requiring possession of the original paper check at the paying bank to effect settlement, and retention of original checks by banks or bank
customers for seven years. Check 21 overrides those requirements.)

The U.S. is the last industrialized country to adopt inter-bank check truncation. France,
Germany, the United Kingdom, Hong Kong and Singapore are all recent converts to
truncation. “The U.S. market today is very similar to the way things were in these
markets; it’s just a matter of scale,” explains Gary Cawthorne, vice president and
managing partner in Unisys Corp.’s global banking division. Unisys is one of several
U.S. firms that worked on these foreign truncation programs and are now positioning for similar work in the U.S.

“With Check 21, truncation becomes a slam dunk for U.S. banks,” says Brian Geisel,
founder and CEO of Alogent, which worked closely with several U.K banks on check
electronification schemes. With the federal government behind them, U.S banks can now
make substantive changes in operations, Geisel suggests.

The biggest change Geisel would like to see is from batch to real-time transaction
processing. “Check 21 makes change and investments in change so much more
worthwhile. It allows a bank to eliminate processes, not just improve operations,” insists
Geisel.

Geisel’s comments reflect a common understanding among champions of check
truncation that it’s not just a “check thing.” The adoption of check imaging and image
exchange will affect information and work flows throughout the bank. With on-line
access to paid check images, for example, customer service folks can research and
resolve customer inquiries in a matter of minutes, instead of days.

“Banks are going to have to be particularly attuned to the workflow changes imaging
brings about,” says Rod Poskochil, president of Fiserv Inc.’s bank systems and eproducts
division. Poskochil expects larger banks will have the most difficulty moving to
truncation. Lots of community banks, he notes, have already made the underlying
systems investments in imaging; other community banks tend to outsource item
processing.

Poskochil, who heads up Fiserv’s bank outsourcing unit, says the company is already
clearing some checks electronically for clients, and will ramp up that activity once Check
21 takes effect in late October.
Executives at other outsourcing companies say they, too, are eager to handle client bank’s
check truncation programs. They note, for example, that they’ve been working with the
Fed and Viewpointe for imaged check archival services. They’ve also been establishing
connections to image check interchange networks – SVPCo, Endpoint Exchange and the
Fed.

“We want to be able to offer our clients access to as many endpoints as possible for
clearing images as opposed to checks,” says Tony Stallings, a vice president with Bisys.
Bisys sells imaging software and provides check outsourcing services. Stallings says
more than 40 of the firm’s clients have signed up already to interface with Endpoint
Exchange.

Endpoint Exchange lays claim to being the only national check image exchange network
up and running today. Mark Craig, general manager of CleckClear LLC, which owns and
operates Endpoint Exchange, says the network is being used to exchange about 100,000
items a day now. Roughly 40,000 of those items are truncated at the bank of first deposit, he says.

Craig predicts that more than 3,000 financial institutions will be using Endpoint by the
end of this year. Checks exchanged via Endpoint are settled through the National
Clearing House Association (NCHA). Eventually, Craig says Endpoint will be used to
present electronic check files to banks exchanging items through SVPCo, as well as the Fed.

The Fed is expected to announce a national set of truncation-friendly products for financial institutions that use its check clearing services, and Fed officials say they will be able to swap images with Endpoint and with SVPCo, which supports check image exchanges involving most of the largest banks, including J.P. Morgan Chase and Bank of America.”

SVPCo has yet to arrange with Endpoint for inter-network check image exchange,
although most bankers, and Craig, believe that situation will change once major volumes
of checks are being truncated. “If you’re exchanging images between the 20 largest banks in the country, why wouldn’t you want to exchange check files with 4,000 other financial institutions?” asks Craig.

Originally prepared for Thomson Media, Custom Publishing Group
www.thomsonmedia.com

Payments Articles

Mobile Phones as Electronic Wallets

New Era for Check to ACH Conversion

New ACH Rules: A Tipping Point for EFT

Check Electronification

Debit Facts: A Debit Card Tutorial

The Takoma Group © 2007