With the volume of check images accelerating, and the number of transit checks expected to fall sharply in the wake of this year's acquisition wave, some payments executives say the banking industry's conversion to check imaging is nearing completion.
Some large processors are already handling all of their checks as images, and others are approaching 100%.
Moreover, the Federal Reserve banks, which handle checks for many of the industry's remaining users of paper items, are planning to reduce this capability sharply.
By the end of 2009, the Fed expects to have consolidated its item-processing operations in a pair of specialized centers, one for processing images in Atlanta, the other for processing paper checks and adjustments in Cleveland.
Richard R. Oliver, an executive vice president at the Federal Reserve Bank of Atlanta and manager of the Fed's retail payments office, said 65% of the Fed's check volume is now presented to the paying bank electronically. The shift to imaging is increasing sharply, he said.
"We were kind of disappointed with the pace of change, in the first year or so" after banks began adopting image exchange, Mr. Oliver said in an interview last week. "The past 12 months or so, the pace has accelerated incredibly."
The Fed has gradually cut back its check-processing operations in recent years, but Mr. Oliver said it is now paring back even more. The Fed announced this month that it would keep open just the two centers after late 2009, a major acceleration from the plan announced in June 2007 that called for a reduction by mid-2011 to four full-service item-processing centers, in Atlanta, Cleveland, Dallas, and Philadelphia.
Before the check-image law took effect in 2004, the Fed had 45 full-service processing sites.
The financial technology company Fiserv Inc., the nation's largest nonbank check processor, is already imaging 100% of its incoming checks, according to Stephen J. Ward, an executive vice president in the Brookfield, Wis., vendor's financial institutions group.
Fiserv, too, has been reducing the number of its centralized item-processing centers, Mr. Ward said, because fewer paper checks are arriving. Instead, banks are pushing imaging out to their branches, to their business customers with remote capture, and even to consumers, enabling them to send Fiserv electronic files instead of paper checks.
"I think everybody has fewer capture centers than we had five years ago," Mr. Ward said.
Susan Long, a senior vice president at Clearing House Payments Co. LLC and the head of its SVPCO check-clearing unit, said her company's 39 image-exchange customers are sending 85% to 90% of their forward checks as images, though not all of them can receive images at that rate.
"Not all the banks have all their endpoints open," she said. For example, banks have been slow to open controlled disbursement routing numbers to imaging.
"You're going to follow the path of least resistance and do the easiest things first," she said. But as banks complete other priorities, she expects them to accept more image files. "That's where a lot of the volume is going to come from next year," she said.
The Clearing House reported last week that its image-exchange volume grew 67% in October, to 24.9 million items, from a year earlier, and Ms. Long said she does not expect this growth to slow "for a couple of years."
Mr. Oliver said consolidation is likely to alter the check market drastically, by increasing the number of checks banks can clear internally, or "on-us."
For example, JPMorgan Chase & Co. acquired the banking operations of Washington Mutual Inc. in September, and Wells Fargo & Co. is buying Wachovia Corp.; Mr. Oliver said these purchases enabled the buyers to clear on-us many checks that used to be handled as transit items. "Over time, as they consolidate their operations, we'll see more on-us items" that will no longer pass through clearing house networks, he said.
One significant result of the Fed's plan to use a single check processing center is that all paper checks will clear in the same zone, essentially eliminating the difference between local and nonlocal checks, Mr. Oliver said. As a result, all checks will have a two-day maximum hold on funds availability rather than the five days now allowed for nonlocal items.
Faster clearing could reduce check float, which may not be welcome to corporate treasurers, according to Thomas M. Meiman, a vice president at Bank of New York Mellon Corp. The banking company sees strong demand for treasury services such as controlled disbursement, which is designed to maximize check float.
When the bank sends a check to a supplier on behalf of a buyer, "they may sit on it for an extra day before they make that deposit. There's value there," Mr. Meiman said. "I want to keep the cash as long as I can."
But the situation is reversed for its lockbox clients. "On the lockbox side, we're all about the payments. You need somebody to match that payment with your open receivables," he said, and faster clearing benefits those clients.
In 2006, banks handled about 30 billion checks, according to a payments study released last year, and check volume was declining about 6.4% annually.
Ms. Long said she expects annual check volume to continue falling but level off at about 10 billion, which would be hard to replace with other formats because they are either business-to-business or consumer-to-consumer payments for which few alternatives exist.