The Check Truncation Act, the new law better known as Check 21 that industry experts are calling the single biggest event in the history of item processing, has some suggesting credit unions are uniquely positioned to take advantage of the new powers now that President Bush has signed it into law.
"I know you don't normally use the word 'exciting' in reference to truncation, but this is easily the most exciting thing to happen in the check-related business in a long, long time," said Steve Ward, EVP with Fiserv, which hopes to see big payoffs if the new law spurs more interest in its check imaging technology.
"Credit unions are probably more prepared for this new environment than any other financial institution," said Jody Beck of Southwest Corporate CU, Dallas. "Credit unions have been truncating from the very beginning of share drafts, and most of them are already in an image environment."
Check 21, which doesn't become effective until Oct. 28, 2004, gives check images (called Image Replacement Documents, or IRDs) the same legal status as the physical check from which they were created. This allows financial institutions to stop returning the actual paper checks to their customers-something many credit unions have been doing since the late 1970s and early 1980s.
But it also helps pave the way for financial institutions to exchange images of checks instead of having to push the paper checks across the country, creating greater efficiencies in a system that had continued to be tied to the shipping and transit industry. But to make that happen, financial institutions still will have to forge image exchange agreements with other financial institutions.
"It's a common misperception that Check 21 will mean that you don't still have to establish those agreements, but that's not the case," Ward explained. "But Check 21 does not mandate image exchange. In reality, an institution could choose to do nothing as a result of this bill and just continue processing checks the way it always has. We believe that eventually, as truncation begins creating greater efficiencies and cost savings for the institutions that do choose to take advantage of it, the cost of doing things the old-fashioned way will drive these other institutions to change, too."
If check truncation and imaging can offer such major benefits, why would anyone choose not to participate? NAFCU Lobbyist Brad Thaler noted that approximately 9% of those credit unions that offer share drafts do not truncate the checks.
"A few credit unions have held out on truncation because they believed their members really want to get those share drafts back," said Michelle Profit, assistant general counsel at CUNA. "Maybe they believe they can create a niche for those who really want that paper back."
But it could also be a liability and cost issue, suggested Nancy Virkler, SVP-Operations at Empire Corporate CU in Albany, N.Y. "[Natural-person] credit unions have responsibilities that we don't have as a corporate," she explained. "Credit unions will have to disclose to their members what is happening, once the regulations are written. Plus, there is a liability factor for credit unions if they decide to truncate, so they'll have to look at that, as well. On the cost side of things, truncation eliminates the courier charge [of forwarding physical items], but that will be replaced with a telephone cost, as they'll still be forwarding the images. And there's the investment in equipment."
That's why the check processing equipment at corporate credit unions are still a long way off from becoming endangered species, much less extinct. Both Virkler and Beck said they expected most natural-person credit unions to continue relying on a third party for processing, which means they'll be forwarding the physical items on to their third-party vendor, which, in many cases, is a corporate credit union.
"I'm expecting there won't be a whole lot of credit unions that find it economically feasible to scan items at their own window, so they'll still be forwarding items to us," Virkler commented. "Paper is going to be around for a great deal of time."
"The good news is that I think just about every corporate is image-capable right now or actually in a full image environment," Beck advised. "We do have some member credit unions who are image enabled at their end, so we will look at in-branch capture where the credit union actually truncates at the branch. But physical checks are going to be around for quite some time."
Like many of their corporate counterparts, both Empire and Southwest have joined image exchange networks. Empire has joined SVPCo, while Southwest has joined EndPoint Exchange.
If truncation has been around since the 1970s, why has Check 21 been such a long time coming, and what finally motivated Congress to move on this issue? One primary motivator was Sept. 11, 2001.
"When Sept. 11 happened, it really highlighted the weaknesses in a system that required financial institutions to physically move checks across the country," Thaler offered. "Suddenly, for several days, those checks couldn't be flown across the country, they had to be driven across the country. And it didn't have to be that way-the technology already existed that could have eliminated that. That was one of the big sparks that drove Congress to really take up this issue."
For most credit union members, who are already used to not receiving their checks back, the change will be seamless, with one major exception: the shortening of the float.
"Checks are going to be cleared a lot faster, so now more than ever members need to know: don't write it if you don't have it," Beck counseled.
But the decrease in float time also means a potential decrease in check fraud. At the same time, however, there are still a lot of variables out there.
"We still don't know what the cost of creating an IRD is going to be, and we don't know how easily IRDs can be counterfeited," she noted. "It's just too early to tell."
