As Check 21 Act goes into effect this year, the main question is whether it will replace accounts receivables conversion (ARC) in the payment stream. The two processes have been discussed as if they are similar, competitive payment processes, and there are misconceptions that they deliver the same benefits. What is more likely is that Check 21 and ARC will thrive operating as complementary payment options.
The ultimate goal for Check 21 is check truncation. The law removes the requirement that banks process and route the original check by allowing for a "substitute check" as the equivalent. The new law does not replace a paper check with a purely electronic one, nor does it require banks to accept digital images. The payments industry will have to maintain multiple infrastructures, including check, ACH, wire and card systems.
Ironically, one of the initial impacts from Check 21 will be a rapid rise in the use of substitute checks, called "image replacement documents" (IRDs). Printing and sending an IRD will be required by banks who are either not prepared to receive electronic images or between banks that have not established agreements to clear checks through 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 becomes a reality.
The technology infrastructure for the exchange of images is evolving. The processes, rules and infrastructure for settling checks must be agreed upon, so they offer benefits and protections for both the banking industry and their customers. With much work still to be tackled, there will not be a switch thrown on October 28 to usher in the Check 21 era.
ARC converts a consumer check remitted to an accounts-receivable location to an ACH debit, and thus removes paper from the check clearing process entirely. The combination of paper and ACH processes will enable organizations that are already applying imaging in remittance operations to create cost and operational savings today for many payments, instead of at an indeterminate point in the future.
It remains to be seen how much Check 21 will reduce overall check processing costs in the near-term. Today there are unknown costs for the post-Check 21 world, including the cost and volume of IRDs, set-up costs, per-item fees, transportation arrangements for IRD print alternatives, telecommunication expenses for transferring imaged items-not to mention the costs of creating the agreements required to present images.
The short-term challenge is that the cost estimates for IRDs are difficult to define because no one can accurately project IRD volumes. As volumes escalate, banks will need to develop cost-effective ways of transmitting and printing high-quality IRDs. The scenarios for printing IRDs such as the location of printing facilities, transportation and printing costs will be complex. Another cost factor is that banks will need to expand bandwidth to transmit high volumes of images, which could be costly.
ARC does not require the extensive bandwidth and storage requirements for clearing items, because only the data is transmitted. ARC costs are predictable and should drop over time, since it uses existing networks and payment processes. ACH processing costs have already dropped substantially, and the Federal Reserve recently announced plans to lower costs even further.
Many organizations using ARC have found immediate benefits through increased cash availability and more efficient operations. ARC transactions clear within one day, delivering certainty and consistency, resulting in effective cash flow management. Conversely, the impact Check 21 will have upon float is still unknown. Check 21 does not change the fact that banks will still have to enter into agreements with corporate customers to determine the length of time for check clearing.
While the banking industry invests in removing some of the paper from check clearing through Check 21, many can still gain a solid return on their investment in ARC. Ultimately, Check 21 and ARC together will provide a cost-effective solution for all transaction types, eventually eliminating the costs and difficulties with traditional, paper-based check clearing processes.
