When the Check 21 Act went into effect nearly four months ago, it was portrayed as one giant leap into the 21st Century. In reality, like any major transformation, what underlies it is a series of small steps. Likewise, while the hype focused on the long-term economic benefits of check imaging and electronic clearance, the short-term reality is that banks and other financial institutions must be ready now to accept, read, sort and print a new legal document, the Image Replacement Document (IRD), commonly referred to as a substitute check. When the Check 21 Act went into effect last October, banks welcomed it as a catalyst to help realize the industry's goals of reducing cost and risk, while improving compliance. Financial institutions now understand that it actually increases risk and raises new compliance issues.
Check 21 is, at its core, very simple. The IRD holds the same legal status for proof of payments as the original paper check. Banks can now truncate the physical checks and exchange digital images instead of transporting the paper versions.
With the promise of saving more than $4 billion annually, the entire financial services industry is eager for the nirvana of electronic check clearing. The accepted industry rule of thumb is that it costs from 7 to 15 cents to process every paper check.# Multiply that by 42 billion (the number of checks written annually in the United States)#, and it quickly adds up.
In reality, 70 percent of all financial institutions are not image ready today and Check 21 does nothing to change that#. Most financial institutions recognize that, for some time, they will need to maintain multiple two payment models: conventional paper processing, and electronic check processing and image exchange, including substitute checks.
Every financial institution, large or small, should consider Check 21 a business imperative and implement it at some level. To what level, and how, are the key decisions. For sound business reasons, some may delay converting to electronic processing. Others will immediately embrace it. Regardless, everyone needs to begin by incorporating IRD printing and processing into their existing payment process.
A major key to success is selecting a strategic partner experienced in mission critical payments processing, including print, and steeped in every step of the current check-clearing process. A partner with proven technology and expertise to deliver a well tested, integrated, end-to-end solution is instrumental.
Aside from a standard specifying the content and format of the IRD, the government has left Check 21 interpretation, creation and implementation up to the industry. For example, there are no predefined IRD image quality requirements, no specific details prescribed for scanning IRDs, no rules about when and how to dispose of the original checks, and no guidance on how long to retain the check images.
Incorporating IRDs is expected to dramatically increase check printing volumes and, at the same time, significantly reduce print windows. Printing check images instead of numeric check data may expand network bandwidth requirements as much as ten-fold. Banks and clearing houses should expect to print and reprint substitute checks at various points in the presentment, clearing and settlement process. Many banks anticipate processing upwards of 30,000 IRDs a day, each one time sensitive.
Banks should anticipate that there will be new requirements to remotely reprint substitute checks that have been destroyed, or to validate, audit, or inspect substitute checks for quality control. It will also be important for banks to assess their requirements for distributed MICR printers, and make sure they will also be networked and integrated into the payment processing system.
Reconciling IRDs is a new and absolutely critical step to both a bank's and the nation's monetary flow. In order to keep funds flowing, IRDs must be printed immediately after clearing the current bank's payment system and receiving banks must reconcile the IRD before transferring funds to the presenting bank.
In an environment without paper trails, everything that happens to a substitute check or its check image data file must be tracked and recorded, and that information must be easily retrieved and reconciled. To mitigate risks such as double posting and fraud, banks will need IRD solutions that are integrated with their payments processing systems, and include robust indexing and audit trail features. Workflow automation is essential to managing the inherent complexity, compliance and risk issues exacerbated by the introduction of substitute checks. That means deploying rules-driven image database workflows to integrate and manage images.
Humberto Prospero is global financial services solutions manager for IBM Printing Systems.
