As preparation for Check 21 enters its later stages, a handful of trends are becoming evident.
One is that core processors are tripping over themselves to introduce image-exchange services, which will let financial institutions settle and clear check transactions electronically.
For example, Jack Henry & Associates said last week that it would phase in a service that will allow its clients to exchange images among themselves, in accordance with the Check Clearing for the 21st Century Act.
And, as fewer checks are written, check processing is an area where banks are looking for ways to scale down rather than up. The Federal Reserve banks reinforced this message Monday when they an-nounced plans to close nine check-clearing centers on top of the 13 whose closings were announced last year. By early 2006 the number of Fed sites would fall to 23.
The developments underscore how much flux the item processing industry is in, and how much uncertainty there is among ban-kers about what Check 21 will mean. Should they invest more in item processing, to become fully image-enabled, or should they spend their money elsewhere, secure in the knowledge that check-writing continues to wane?
The vendor community is betting that banks will increasingly look to outsource this area of operations - particularly if it means they will not have to buy image-capable check sorting equipment. In May, Fiserv Inc. announced that it was developing an image-exchange service, the Fiserv Clearing Network, that will eventually offer clearing and settlement services to all the Brookfield, Wis., company's 1,700 check-processing clients.
Fiserv has signed agreements with four banks to settle checks on a correspondent basis, though it is not yet moving any check images through the system.
Jack Henry, of Monett, Mo., will make its clearing service available this year to the 2,400 banks and credit unions that use its software, including the 370 that outsource item processing to its network of 17 centers nationwide.
Jack Henry says it will be some time before the service's volume builds up.
"Our ability to aggregate the volumes will allow us to clear those transactions ourselves without having to go through an outside network," said Tony L. Wormington, Jack Henry's president. The service will allow Jack Henry to handle transactions between two participating banks essentially as on-us items.
The National Clearing House Association, of Dallas, will handle final settlement of the payments.
Jack Henry was already a member of the Endpoint Exchange Network, which is operated by CheckClear LLC, and will use that system to transmit checks outside its network. Metavante Corp. acquired CheckClear last month.
Jack Henry's exchange will use the same telecommunication lines as the online banking service it provides to 1,000 customers. "The infrastructure already exists," Mr. Wormington said.
The first customer to test the clearing service will be RCB Bank of Claremore, Okla. Tom G. Bayless, an executive vice president and the chief financial officer of the $668 million-asset banking unit of RCB Holding Co. Inc., said it plans to begin transmitting test files to Jack Henry this month.
RCB is not yet exchanging images, and Mr. Bayless said he expects it to take 12 to 18 months to convert completely from its paper-based processing system to an image-based one. Initially, it will likely process some items by paper and some by image.
Though Jack Henry plans to expand its item processing capacity - a Philadelphia-area center is to open by Nov. 1, and Jack Henry may open at least three more next year - Mr. Wormington said it does not plan to act as a clearing house for paper items.
With paper check volume falling as more consumers adopt electronic payment methods, even the Fed is facing an oversupply of item processing capabilities. On Monday it said it plans to discontinue item processing operations in Boston, Columbus, Ohio, Birmingham, Ala., Nashville, Detroit, Oklahoma City, Houston, Portland, Ore., and Salt Lake City.
"These changes are intended to improve the efficiency of our check operations while maintaining high-quality check services to depository institutions nationwide," said Gary Stern, the president of the Federal Reserve Bank of Minneapolis.
