With pending changes to current payments strategies as Check 21 Act goes into effect on October 28, many organizations are left with the large question: Will Check 21 replace accounts-receivables conversion in the payment stream? This question has left many organizations researching the best way to leverage different electronification strategies to reap the greatest benefits.
Check 21 and ARC have at times been discussed as though they are one in the same-and therefore competitive-payment processes. As such, misconceptions have been given life that they essentially deliver the same benefits and results. It is more likely that instead of becoming competing forces in the industry, both Check 21 and ARC will thrive and operate as complementary payment options for players. Check 21 and ARC, side by side, can allow organizations to reap the unique benefits of both payment processes, which together provide a comprehensive check electronification strategy.
Will Check 21 usher in a paperless payment stream? The ultimate goal for Check 21 is to foster innovation in the payments system by reducing the legal impediments to check truncation. The scope of the law is the removal of the mandate that requires banks to process and route the original check in paper form by allowing for a "substitute check" as the legal equivalent of the original check. The new law does not automatically replace a paper check with a pure electronic one. Nor does Check 21 require banks to accept digital images.
This leaves little doubt that the payments industry will have to maintain multiple infrastructures for quite some time, including check, ACH, wire and card systems.
Ironically, one of the initial impacts stemming from Check 21 will be a rapid rise in the use of paper substitute checks, called "image replacement documents." Printing and sending an IRD will be required by banks that are either not prepared to receive electronic images or between banks who still have not yet entered into the agreements to clear checks via electronic images.
According to the Bank Administration Institute, the biggest roadblock to the electronic presentment of check images will be gaining critical mass in the acceptance of images by banks. While Check 21 will no doubt lead to pure electronic image exchange for many items, widespread industry cooperation and collaboration will be required before that goal becomes a reality.
The technology and infrastructure for the exchange of images is still evolving, and will have to be adopted by banks large and small for a true paperless check clearing world to emerge. The processes, rules and infrastructure for clearing and settling checks must be discussed and agreed upon so they offer benefits and protections for both the banking industry and their customers.
This underscores the amount of work left to be completed, which means that there will be no switch thrown on October 28 that will usher in the Check 21 era overnight. Rather ,this check electronification method will evolve over time.
ARC converts a check remitted to an accounts-receivable location to an ACH debit, and thus removes paper from the check-clearing process entirely. The primary limitation to this process is that it can be used only for consumer checks. However, ARC combines both paper and ACH processes that will enable organizations that are already applying imaging in remittance operations have the processes and infrastructure in place to create cost and operational savings today for many payments, instead of an indeterminate point in the future.
Industry experts are predicting that Check 21 will deliver significant cost savings. While this outcome is likely in the long term, the reality is that it remains to be seen how much Check 21 will reduce overall check- processing costs in the short term. There are many undefined and unknown cost components for the post-Check 21 world, including the cost and volume of IRDs, setup costs, per-item fees, transportation arrangements for IRD print alternatives, telecommunication expenses for transferring all these imaged items. This doesn't even include the costs of creating the agreements required to present images.
As image volumes escalate, banks will be challenged to develop a cost-effective way of transmitting and printing high-quality IRDs. The scenarios for printing IRDs-choosing a printing facility and determining transportation and printing costs-will be complex. To further illustrate the short-term challenge, the cost estimates for IRDs are difficult to pin down because no one can accurately predict the volume of IRDs. With an undefined volume comes an undetermined cost.
Additionally, the bandwidth required for transmitting the volume of check images for a paperless environment will need to be expanded to accommodate increasing data volume. The cost for a bank to expand its bandwidth to handle large image transmissions could be costly-and extend the time required to evolve towards a completely paperless check- clearing system.
ARC, however, does not require the extensive bandwidth and storage requirements for clearing items, because it is only the data that is transmitted, not the image. The costs for ARC are also currently predictable and are expected to drop over time, since it uses standard networks and payment processes. Furthermore, the per-unit costs for ACH processing costs have already dropped substantially, and the Federal Reserve recently announced it was once again lowering the cost to transmit ACH transactions.
Many organizations already using ARC have found immediate benefits through increased cash availability and more efficient operations. ARC transactions clear within one day, delivering certainty and consistency, which results in more effective cash- flow management.
Conversely, the impact Check 21 will have upon float is still unknown, as the new law does not mandate the shortening of check-posting times. Check clearing is currently based upon agreements set up between banks and their corporate customers, and Check 21 won't change the need for banks to make agreements to determine length of time for check clearing.
There will be no "magical" day in the paper-to-electronics migration when Check 21 law goes into effect later this year. Banks will have to manage an ongoing, yet declining check volume, a growing electronic stream, and several hybrids in between.
Plans for how to deal with the "imaging revolution" in check processing heralded by Check 21 are still evolving. On the front end are technical issues, on the back end are potentially huge cost savings, and in the middle are the customers and billing organizations. This transition will take time.
One clear goal is driving paper out of the payments systems. ARC has already driven paper out of the process for consumer checks with an existing ACH infrastructure. Consumer bill payments account for nearly 8 billion to 10 billion transactions a year, with many billers processing more than 1 million paper-check remittances each month.
Accounts-receivables conversion allows billers to leverage the inherent efficiencies of electronic payment processing today. Additionally, the business case for ARC is expected to improve as the Federal Reserve continues to reduce the costs for processing ACH transactions while increasing the fees for checks.
ARC currently delivers predictability in pricing and processes for a large share of check volume. While the banking industry invests in efforts and technology to remove some of the paper from the check- clearing processes through Check 21, many organizations can still gain substantial benefits in the remaining years and reap a solid return on their investment in ARC. Check 21 will eventually be able to fill in the gaps and to allow for the electronic processing of all checks.
Together, Check 21 and ARC will provide a cost-effective solution for all transaction types, eventually eliminating the costs and difficulties with traditional, paper-based check-clearing processes.
Stuart Williams is head of strategic planning for CheckFree's ACH Solutions.
