The Financial Services Technology Consortium wants to bring check clearing - more specifically, check truncation - into the 21st century.
The consortium is laying plans for Paperless Automated Check Exchange and Settlement, which it calls a "proof of concept," to be launched late next year.
Known by its acronym, Paces, the program would combine electronic check presentment and imaging technology to achieve the long-discussed but elusive goal of reducing or eliminating the transportation of checks after they are deposited.
Truncation has been tested or implemented selectively since the 1970s. Corporate dividend checks and credit union share drafts are two items that have not been returned to their writers, but they tend to go through much of the rest of the clearing process that the Financial Services Technology Consortium wants to eliminate.
The backing of such a high-powered group could provide a much-needed boost.
The five-year-old research consortium is led by Citicorp, Chase Manhattan Corp., and several other banks that are among the biggest in the country. It recently gained publicity for its design and testing of an electronic check for the Internet.
The fact that it took the FSTC this long to pull the Paces project together indicates the obstacles any truncation discussion runs up against. The process requires precision and standardization in communications among paying and receiving banks, and it is challenging an existing process that, despite being dependent on paper and physical transportation, is highly efficient and accepted by Americans.
The National Automated Clearing House Association has struggled against those very obstacles to apply its paperless debit system to check truncation.
"The industry has tried it a few times and it hasn't worked," said Elliott McEntee, president and chief executive officer of Nacha, which has been accelerating efforts to convert checks to electronic form at retail points of sale and billers' lockboxes.
But the economics of truncation seem compelling. It could lower industrywide check processing costs by $600 million a year, according to the Electronic Check Clearing House Organization, a Dallas-based rulemaking body for bilateral electronic check presentment and an adviser on the Paces program.
Participation in the project would cost a bank about $25,000 and it would have to commit one full-time employee. BankBoston Corp., Chase, Citicorp, Comerica Inc., Fleet Financial Group, and SunTrust Banks Inc. are expected to sign on.
The FSTC is going after the ultimate in truncation, taking checks out of circulation at the bank of first deposit, said Mariano Roldan, a Chase vice president who is project manager of Paces.
That contrasts with current practices, known more mildly as check safekeeping or nonreturn, in which checks are held only after they get back to the paying bank and do not get returned in account holders' statements.
FSTC officials are aiming at a national, interoperable check image exchange system, which would rely on imaging technology to retrieve documents when requested.
Mr. McEntee said for the FSTC approach to win acceptance, it will have to address - and provide compensation for - the different economic costs on either side of a transaction.
"The collecting bank incurs expenses due to conversion, holding on to the microfilm or the image, and responding to inquiries from the paying bank's customers," he said.
Nacha has an existing operating and legal structure, and Mr. McEntee contended it also takes care of customer service issues.
"The paying bank does not have to worry about going to another party to satisfy its customers," he said.
Phyllis Meyerson, senior principal of Eccho, said in the Paces framework "the paying bank will pay something reasonable. There is nothing that will stop a presenting bank from saying, '5 cents a copy.'"
Even the Federal Reserve System has raised questions about the economics of truncation.
The Rivlin report released in January on the central bank's role in retail payments, named for a committee headed by Fed Vice Chairman Alice Rivlin, said cost savings would be offset by the need to invest in a new infrastructure for electronic processing and image storage.
Federal Reserve Bank of Boston economist Joanna Stavins said truncation promised some "positive net benefits" to society, but cautioned that "there are so many unknowns."
She said banks seemed more eager to embrace safekeeping than truncation, as banks holding on to their customers' checks are not at the mercy of others when an error or dispute arises.
Any such system also would have to comply with the various state laws that guarantee consumers the right to receive canceled checks, not images, for auditing purposes.
Consumers may have to be persuaded that truncation is reliable. "The problem you have with truncation is convincing the consumer that you do not need your check back," Ms. Meyerson said.
"If you have already convinced them in a safekeeping environment, then this is easy."
Catherine Allen, chief executive officer of the Banking Industry Technology Secretariat, the technology offshoot of the Bankers Roundtable, said her organization wants to be a facilitator of truncation by working with Eccho and SVP Co., a for-profit spinoff of Nacha that is developing a system for multilateral electronic check presentment.
Ms. Allen conceded that there are many bumps on the road to truncation. "The business case is not the same for all banks," she said. "Even though in the end they know it's better to truncate, in the short run the business case may argue to just keep processing checks."
George White, president of White Papers Inc., Montclair, N.J., was an early enthusiast of truncation, having acted once as chairman of an American Bankers Association check standardization committee. He said he believes time has passed the idea by, as it has been superseded by the success of debit cards.
