The Check Clearing for the 21st Century Act has made checking and item processing the industry's sexiest topic since a similar watershed moment in banking history, Y2K.
Unlike its much maligned predecessor, Check 21 has the potential to radically transform payments processing, and perhaps banking, as we know it today. This is particularly significant in light of the fact that payments account for 40 percent of bank revenues, and checks account for 60 percent of non-cash payments in the U.S.
Yet, this potential rests on a paradox. Check 21 doesn't mandate anything. It simply declares that a substitute check (created from an image of the original) has the same legal standing as a physical check. Some banks, however, are using the legislation as a catalyst to re-engineer their operations for competitive advantage through the use of image technology. Their reasoning is that if images have to be captured anyway, why not use them for maximum benefit?
This is likely to unleash competition at many levels over the coming months. There will be winners and losers in the long-range war for market share in the payments industry. Some of these battles will be among banks, and some will be with third-party providers who have proven they know how to unseat banks from monopoly status in the payments industry.
In the face of declining check volumes, today's highly manual infrastructure, with many touch-points dependent on the physical transport of paper, leads to rising unit costs of processing. With the right solutions in place, like automated workflows built around access to images, operator efficiency and throughput are greatly enhanced. Many labor-intensive functions are eliminated; others are made significantly more efficient because they are performed with automated tools-making institutions more nimble. Banks that are pro-actively implementing image workflows to rationalize the processing value chain stand to reduce unit costs ahead of their competitors. These cost savings can be potent weapons in attracting business from less nimble brethren.
If an image is going to be captured, why not do it as early in the processing cycle as possible? And while doing so, why not use technology to ensure error-free and balanced deposits? Why transport paper from branches to processing centers if electronic data and images can be sent instead? Thus goes the thinking of leading banks that are looking at Check 21 as an opportunity to achieve the twin objectives of improved service and reduced cost simultaneously.
Today, technology that captures images and automatically ensures a deposit is balanced is being implemented at teller stations across branch networks. These banks have the ability to ensure the deposits are free of errors at the outset of processing, eliminating the cost of correcting mistakes after the fact and the corresponding cost in customer goodwill. Savings in transportation expense are possible by truncating some or all of the paper at the branch, for a more efficient bank that delivers high quality service or certainly one that is prepared to weather the storm ahead.
An important element in retaining business customers has been the physical proximity to bank branches to make daily or weekly deposits. Innovative banks, including branchless Internet banks, are putting technology in business offices to automate deposits, and transmit images in lieu of a trip to the neighborhood branch. Widespread adoption of remote deposit automation can open the floodgates to customer migration, as banks can no longer rely on physical proximity to brick and mortar branches as an instrument of customer retention. Smaller banks will suddenly have a national footprint. The contest for business customer acquisition and retention will move to a virtual battlefield.
The length of a business day in today's world is constrained by the need to pick up and deliver paper from branches to processing centers to meet the all important nightly cash letter deadline. Thus, the mid-afternoon cut off after which deposits become next days' business. Once the dependence on the pick up of paper is removed through the automation of deposits, branches can stay open longer to provide service to customers. Over the years, we have seen the evolution of longer store service hours as a point of differentiation in traditional retail business. If past is prologue, retail banks that seize this opportunity will be better positioned to attract and hold customers.
Yet another dimension of the emerging contest is centered on funds availability. If check transactions are going to be captured, validated, cleared and settled electronically, there is an opportunity for banks to make funds available to customers earlier. There will likely be an evolution to a zero float environment. In the meantime, however, banks that have electronic infrastructure that extends from the earliest points of presentment through their back offices are well positioned to use funds availability as an avenue to attract customers. It is likely that those who are wooed away from existing relationships are a bank's most profitable customers. Banks will need to have both offensive and defensive strategies to counter this threat.
Will check payments go the way of other electronic payments, where third-party processors built electronic infrastructure to garner outsourced payment processing business, and took on merchant acquiring as banks abandoned it over time? Is it possible that third-party image processors and remote capture of electronic checks will affect a replay of what happened in the card world? While difficult to predict, it is an important strategic question that bankers need to address as they consider the broader implications of Check 21.
Check 21 offers an unprecedented opportunity for banks to transform themselves. There is no doubt that those who are pro-active will effect a radical realignment of the industry along the lines of the ideas embodied in this article. Given both the size and importance of check payments, it is imperative that bankers define, and implement strategies that align with the changing competitive landscape.
Vijay Balakrishnan is evp of Alogent Corp.
