The Challenge

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Credit unions must meet members' current needs while preparing for the future of checks and their usage.

The health of the paper check is a subject of continued debate and a key issue for credit unions. "For more than two decades, we've been talking about paperless banking, but we're still here using paper checks," says Tony Ward-Smith, principal of Ward-Smith & Company, a Seattle-based performance consultant of credit unions. However, he maintains that the march toward the elimination of the paper check is inexorable.

"The technology is in place now that wasn't before, and people are becoming very comfortable with it," he says. "It's like any new trend; there's a long, slow incubation period where techniques are tried, abandoned, and adjusted before it truly begins to accelerate."

Predictions of the demise of the paper check have been bolstered by the often-cited studies of the Federal Reserve reporting that check usage peaked in the mid-1990s and continues to decline each year, but exactly how long it may take that prediction to come true is anyone's guess. In fact, Rick Foy, communications director of Liberty Check Printers, maintains that paper checks will remain a leading option for payments for years to come.

"When you go beyond the headlines and look at statistics related to check usage, you will find that the check is remarkably resilient," he says. "Undeniably, electronic forms of payment have experienced strong growth and greater acceptance, and we also don't see the yearly increase in check usage that we did in the 1970s. However, check usage has still increased overall more than 50 percent over the past 30 years, and the check is still the instrument of choice for most consumer payments today."

Foy argues that the viability of the paper check has actually been confirmed by recent check truncation legislation, which allows an original paper check to be converted to an "image replacement document" at some point in the clearing process. "This clearly indicates that in our effort to modernize payment systems, the industry has to accommodate the paper check," he says.

The reasons for the resiliency of the check among credit unions in particular are several, according to Foy. "Credit union members continue to favor checks because of record keeping, familiarity, and person-to-person payments. You can write a check to somebody, but you can't as easily do that via electronic payment. So, we see members wanting choices--the convenience of online banking, but also the paper check."

Providing those choices is a challenge for credit unions, particularly if they do experience a decline in usage of one type of payment. Therefore, Ward-Smith recommends that credit unions continue to provide a breadth of services but to also simplify the options within those service choices.

"We are urging credit unions to think about realigning their checking account packages from multiple options down to two basic choices," he says. "One is a standard checking account with fees, and another is a free account that is a true 'relationship package' that encompasses all the credit union's services, such as credit and deposit services, in the same account."

Any decline in check usage will also present a challenge for check printers themselves. As a result, Ward-Smith reports that many have begun offering additional services to their credit union clients. "We see them adding such services as marketing support, database management, and customer relationship management capabilities," he says.

Fighting Fraud

Another important check-related issue facing credit unions today is fraud. "With today's high-quality printers and photocopiers, (check fraud) has evolved from using stolen checks to creating counterfeit checks, including even counterfeit cashiers' checks," says Jim O'Dell, manager of risk management services at CUNA Mutual Group.

In response, the printing industry has continued to develop and refine techniques, such as micro-printing, watermarks, and other features that do not reproduce on photocopies, to prevent fraud. However, "the problem is that the technology that allows (criminals) to produce counterfeit checks despite these features keeps getting better," says O'Dell. He recommends that credit unions better educate their tellers how to identify genuine checks.

He also reports that one vexing problem of check fraud relates not to checking accounts but, rather, to convenience checks. "Convenience checks against preauthorized lines of credit, such as credit cards, are one way credit unions have successfully targeted their loan business. However, mail theft of convenience checks is a problem. At a minimum, we recommend using maximum valid amounts as well as expiration dates on convenience checks," O'Dell says, adding that credit unions need to work closely with their check printer to ensure these features are included.

Member education is also important if a credit union issues convenience checks. "Many members simply throw convenience checks away even though they contain account information," says O'Dell.

The debate regarding the future of the paper check will continue, and only time will reveal its true fate. In the meantime, credit unions must meet the current needs of their members that include check writing, while simultaneously preparing for a possible paperless future.

"Except for the fact that lines may be getting a little shorter in the branches (due to electronic banking), the outward appearance at credit unions is that it's business as usual," says Ward-Smith, "but statistics show that consumer banking behavior is unquestionably changing. The only question is, how fast?"

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