Create a National Bank for Imaging Services
It is by now an accepted truth that the key to reengineering the overburdened check clearance system lies in image processing technology.
An approach that permits the truncation of paper checks at the point of entry into the payment system is indeed efficient.
In a fully implemented image clearing system, every check in the country could be settled on the next business day.
The Need to Pull Together
But the fragmented, every-bank-for-itself approach to image processing that we are witnessing today does a disservice to the industry.
At this rate, it may be decades before the banking system achieves the benefits from check imaging and other available improvements in interbank operating services.
The convergence of the problems in the banking industry, the large-scale nature of the image technology investment, and the long-term nature of return on that investment makes this a most opportune time for a national operating-services consortium.
Alternative to the Fed
A national operating-services bank would provide an alternative to the Federal Reserve check clearing system and a vehicle for introducing image technology and other services to all banks.
The economies of scale and potential for efficiency and cost reduction in imaging are well-documented.
The Home Loan Banks Model
The Federal Home Loan Bank System, with 12 regional banks, is a virtual mirror image of the Federal Reserve System and represents a logical foundation for a national operating-services bank.
Such a bank's operating services could be sold much as the Home Loan banks sell loan products today. Per-item pricing and a capital stock investment by the participating banks would provide incentives to users and providers.
Longer term, a national operating-services bank could provide other services and ultimately allow the Federal Reserve to outsource certain aspects of its involvement in the payment system.
Over and above the clearance function are the value-adding services such a national bank could provide. Bulk filing and statement rendition with accompanying check images could be offered on a very cost-effective basis. Check archiving services on CD-ROM disks could be sold to the member banks along with other related services. The economic incentives are attractive.
Expense of Going It Alone
It is clear that most banks do not have the critical mass of check volume to justify the capital outlay for image processing. It is also clear that image technology for check clearing does not provide sufficient economic incentive for the Federal Reserve Banks to implement the technology.
After all, the Fed has custody of the check for the time it takes to present the debit to the drawee bank and credit the presenting bank. Aside from return item processing, there is little benefit for the Fed to advance image technology.
The Home Loan Bank System, restructured by the 1989 thrift-bailout law to allow commercial banks as members, could use image technology to increase the attractiveness of memberships for banks and thrifts alike. By biting the bullet on the capital investment, the Home Loan banks could provide imaging and all its attendant benefits to members on a pay-as-you-go basis.
The regional Home Loan banks, with one or two exceptions, offer a variety of operating services today. These services vary both in breadth of products and pricing from bank to bank.
The recent experience of Perot Systems and others trying to form operating-services alliances - and meeting with basically no success - suggests that the federal government needs to take a leadership position.
The benefit stream for the industry increases exponentially with a national solution. The proponents of such alliances understand that there is a great deal of money to be made by providing operating-services consortiums. My scenario would couple the Home Loan banks' regional network with an experienced service provider as a vendor/investor.
The current fragmented approach to check image processing is clearly not the best. The greatest economies would accrue from a system in which all banks have equal opportunity to participate.
Mr. McDonald is a financial services management consultant with Coopers & Lybrand, New York.