The Oct. 28 implementation date of the Check Clearing for the 21st Century Act is often portrayed as the banking industry's equivalent of a start gun at the Olympics, the opening salvo in a race to use check images, the day on which every bank must be in perfect technological form.
But the vast discrepancy between that portrayal and the financial and operational realities at most banks is starting to show.
Yes, banks have been moving forward with image technology, installing the necessary equipment and making other essential preparations. Two weekends ago KeyCorp and the Bank One Corp. division of J.P. Morgan Chase & Co. started exchanging check images and suppressing the paper in a limited number of items. The level of activity related to image and paperless check processing has probably never been higher.
But many banks have been less aggressive on this front than image enthusiasts had forecast, and the results are manifesting themselves in various ways. In particular, vendors specializing in Check 21 technology say 2004 will not turn out to be the banner year many people thought it might - that perhaps the big investment in Check 21-related products and services will be next year or even later.
One vendor, Carreker Corp., announced a meager second-quarter profit ($199,000) last week, versus a net loss of $800,000 for the first quarter and a $3.9 million profit in the year-earlier period. The Dallas company said it expects a break-even third quarter and that it does not expect revenues to rise until "later 2004 or early 2005."
Invoking the statements it had made in earlier earnings calls, Carreker said on Aug. 31 that "the timing of bank decisions relative to Check 21 was generally one to two quarters later than our initial assumption."
That projection is now "playing out," said Lisa Peterson, Carreker's chief financial officer. "We're not seeing really additional delay in the marketplace."
At a rival vendor, the privately held Alogent Corp. of Alpharetta, Ga., Vijay Balakrishnan, an executive vice president, called 2004 "the year of the early adopter." Only a small number of banks have invested heavily in Check 21 technology, he said, but he predicts that others will follow quickly after the early adopters prove the benefits of swapping check images.
In the meantime, Mr. Balakrishnan said, banks are busy researching their options. "Request-for-proposal activity has been tremendous," he said. "From January through April of this year, our guys were constantly responding to RFPs. There's really been a blizzard of them."
Sydney Smith Hicks, the chief executive at a third Check 21 specialist, VECTORsgi Inc., said that because so many aspects of image technology are new, "The sales cycle is a bit longer than it is on a traditional process."
It typically takes her company about six months to close a deal that involves other technology, but its imaging technology sales are taking about a year, Ms. Smith Hicks said. "The analysis around the buying decision is very heavy."
But revenue at VECTORsgi, a private company, has not stalled as it has at Carreker, Ms. Smith Hicks said. It projects a 40% jump in revenue for 2004, she said.
Carreker reported second-quarter revenue of $29.6 million, against $29.8 million in the first quarter and $36.2 million in the year-earlier quarter. J.D. "Denny" Carreker, the chairman and CEO, said, "We basically saturated the U.S. market coming into this year" for early Check 21 products. Carreker's clients include KeyCorp and Wells Fargo & Co.
Gary Craft, a research analyst at Financial DNA LLC in San Francisco, said it is doubtful that big banks will make any major purchases this year, and that will hurt all vendors in this market.
"The real question comes down to, who's making any money off" check imaging technology, Mr. Craft added. "I don't think anybody is."
Stephen Ward, an executive vice president with the item processing group at Fiserv Inc., said that "there isn't a compelling reason" for banks to migrate to image exchange yet. "The one thing to keep in mind about image exchange: the payback isn't there until everybody does it."
