Financial services executives like to call Check 21 the legislation that will finally let banks and credit unions start exchanging images of checks. But the reality is far narrower.
Neither the House nor the Senate versions make much mention of check images or image exchanges. Both would require banks and credit unions to accept "replacement checks," which are, in fact, paper.
But that rather limited requirement would have huge implications, said C. Grant Cole, a senior vice president at Bank of America Corp. Replacement checks which are simply printed versions of digital check images are just a stopgap until consumers and banks feel more comfortable with electronic image files, he said. The Senate has passed a version of the bill quite similar to the one the House approved.
"This is great," Cole said. "I think this will give new energy to banks that are developing image exchange programs."
Learning To let Go
Once people are willing to examine the economics of an image-based banking system, most will be willing to let go of the need to hold the actual checks, said Cole, who is the government and industry relations executive with Bank of America's technology and operations division.
"We would assume that rational folks would realize we don't really need the paper." Replacement checks must include recreations of both the front and back of the original, including a new version of the magnetic ink character recognition data. Once all banks and credit unions are required to accept replacements, those that are gung-ho about imaging would be able to begin shifting their paper- based clearing operations to ones that rely on electronic image files.
"This eliminates moving the paper," said Joe Kniceley, the vice president for payments solutions for the Americas region with NCR Corp. in Dayton, Ohio. "In my opinion, this is the biggest event in check processing since the invention of MICR."
Steve Ledford, the president of the Atlanta market research firm Global Concepts Inc., said many banks have been reluctant to make the transition, because other banks can and do demand the original items. As a result, a bank that is ready to truncate checks, or convert them to images, would still have to run them through sorters to locate those that need to be shipped to the receiving bank. By forcing the acceptance of replacement checks, the new legislation would make it possible to transmit images for all checks and create the printouts only for banks that still ask for the paper versions, he said. "This lets everybody get over the hump of providing paper."
Though many banks were already gearing up for a day when replacements are acceptable, the legislation's rapid progress on Capitol Hill this spring has lent new fervor to the preparations. Though both houses have passed bills, there are minor differences that need to be reconciled. One of the most significant: The Senate version calls for the law to take effect a year after it is enacted, while the House one would take effect after 18 months. The reconciliation procedure could take as long as a month, though the House may move to accept the Senate bill and eliminate the need for reconciliation.
'It's A Big Deal'
The legislation is often considered one of the final steps in the complex transition to using image files to clear checks. The long- term goal is for banks to transmit check images across the country electronically, rather than moving the paper itself. While the technology exists now, and some banks are already swapping images instead of paper, the regulatory hurdles have limited the widespread use of images. Once that hurdle is gone, some executives expect the banking industry to move further into image exchange.
"This gives us the ability to stop moving paper. It's a big deal. This will significantly accelerate the movement to image exchange," said Hank Farrar, the president and chief operating officer of Small Value Payments Co. in New York, which is creating a nationwide image network that should be operational by the first quarter.
SVPCo is owned by 20 major banks and The Clearing House (formerly the New York Clearing House), and those banks are expected to create an early critical mass in image exchange once the network is up and running. That's good news for SVPCo., which is in the vanguard of the image movement, but it could also be a wake-up call for banks that have put less effort into image technology.
"I think a lot of banks have been waiting and not getting very active in their planning for a truncation environment," Farrar said. "Banks that have not done anything yet will have to work very aggressively."
Not everyone is thrilled at what the legislation might bring. The Consumers Union says that even though the banks are eager to eliminate paper, many individuals are not.
"We know there are a lot of consumers who care about getting their checks back, and they won't be getting them anymore," said Janell Mayo Duncan, a legislative and regulatory counsel for the Washington consumer advocacy group. She is especially concerned about the recredit provisions, which the group contends may not be applied broadly enough. "
The banking industry says there will be all these benefits, and the big question is what will the consumers get out of this."
Among the obvious benefits to banks are significant opportunities to save money. Eliminating the sorting process means lower labor costs. Sending files electronically instead of by armored car and courier planes means far lower transportation costs. Digital files can arrive in seconds instead of days, which means checks can clear faster. Speedier clearing means fewer float costs, and maybe a better chance of heading off fraud.
All those factors add up; Global Concepts has estimated that moving to image exchange could save the banking industry $2.1 billion per year.