Changes Alter Check Processing Market

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With the CO-OP Network surpassing the one-billion debit transactions mark last year, does it finally mean that old reliable paper check really is becoming a thing of the past at last?

Hardly, according to several check processing experts-and even electronic transfer maven CO-OP Network agrees.

"Debit is now outpacing growth not only in checking but even credit card transactions," said CO-OP CEO Robert Rose. "Between PIN and signature debit, it's a booming, growing industry. And checks are clearly starting to slow down. After all these years of people predicting the demise of the check, the numbers are finally slowing down. But checks aren't ever going to go away completely. At least not in my lifetime."

The financial services industry has worked hard to eliminate almost every scrap of "float" for checks, but even with Check 21, people can still count on float if they're mailing checks.

"Some people don't write many checks at all, but some are still very comfortable using checks. Even after they've taken most of the float out, there are still people who would rather use checks. Even I still have certain bills I want to write a check for. There's a comfort level, a level of control over check payment."

Clearly, Rose is not alone, as consumers across the country continue to whip out their checkbooks for some payments.

And it may be that the best way to get some float is to pay with a credit card, suggested Nancy Virkler, SVP-operations at Empire Corporate. "Any time I can pay by credit card, I do," she said. "That way, I'm writing checks 12 times a year instead of 60 or 70 times. That's where I get my float."

But the popularity of debit and other electronic forms of payment are taking their toll on check processing volumes, slowly but surely.

"We saw a decline in our check processing volume last year for the first time," noted Jody Beck, SVP-Operations at Southwest Corporate CU in Dallas. "For several years our increased number of business made up for the overall decline in the use of checks, but not this year."

In fact, Southwest tracks a group of its largest natural person CUs and found these credit unions saw a decrease in check processing volume of about 14%.

Southwest's director of item processing, Brad Ganey, noted that 14% is probably somewhat indicative of what's being seen across the nation, even though Southwest Corporate's overall numbers are only down by 7%.

"As the Fed's (check processing centers) close and consolidate, we're capturing a lot of that business, so as we acquire new business, that is rounding out our numbers," he explained.

In fact, Southwest may well see its check processing volume grow in the not-too-distant future. "Volume is the key to the check processing business, and as some larger banks and credit unions see their volumes sink, they may decide they don't want to continue processing checks in-house anymore, and they will look to outsource that," Ganey offered.

But like her colleagues at Southwest, Empire's Virkler noted that increased volume at the corporate level doesn't necessarily translate to increased check usage overall.

And electronic transactions are clearly in the ascendancy. Case in point: CO-OP Network's posting of a record 1,000,798,103 transactions in 2004, a 21% increase from 2003 and the 12th consecutive year C0-OP has set a new record for transaction volume. "It's really a huge milestone," Rose observed. "Particularly when you consider that we were at 500-million just a few years ago."

Moreover, the lines between paper checks and electronic transactions are starting to blur.

"With the ramping up of image exchange and Check 21, that's going to accelerate the collection of these funds. In essence, the check is becoming electronic," Ganey suggested. "Debit has a huge impact, but ACH (automated clearinghouse) and ARC (accounts receivable conversion) are having a huge impact, too."

What does this mean for corporates, for whom check processing has been their bread and butter?

"Even though this is a really changing environment for corporates, it's an exciting environment to be in," Beck offered. "It actually opens doors to offer more services."

But it will mean a shift in the way corporates-and others-approach check processing.

"This is going to put a real squeeze on the market, and you're going to see more consolidation," Ganey said. "Corporates aren't going to get out of check processing, necessarily, but you will see more and more partnerships. Plus, where for some time you saw larger banks shying away from correspondent accounts, now they're getting back into it again because they're getting easier to service. This will draw some competitors out of the woodwork. You're going to have to keep your head on a swivel to keep up with it."

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