The move toward check truncation is picking up steam for a number of reasons. They include the declining cost of technology, constant increases in mailing costs, the shock of Sept. 11, when banks came to realize how vulnerable the current system can be, and pending legislation that would make a digital image of a check legally equivalent to a paper version.
According to the Federal Reserve, roughly 50 billion paper checks are processed each year, and that system is not going to be replaced overnight, but in the last six months banks have started making more of an effort to put the necessary infrastructure in place. Fred R. Herr, senior vice president in the retail payments office of the Federal Reserve Bank of Atlanta, says a number of banks have significantly increased their investments in digital check infrastructure. "Technology has gotten cheaper as of late," says Herr, adding that it is evolving more rapidly than before. "Banks are starting to customize a lot of their back room technology," Herr says.
For instance, the digital camera, which is a necessary component in creating digital check images, has become a widely used technology, and more and more banks have been able to invest in the once-costly item.
Herr says "electronification of the paper check" will lower costs and risks for banks.
In the past six months, other factors also have been motivating banks to step up their electronic checking initiatives. The events of Sept. 11 prompted a number of banks to increase their efforts to end their dependence on the paper check, as well as the physical process that is necessary to complete the current checking cycle.
Gerard Milano, CEO of the Western Payments Alliance, which collects and clears over seven million checks a day for 1,100 banks in the western U.S., says Sept. 11 "showed how the vagaries of transportation can affect the checking cycles."
In the days following the attacks on the World Trade Center and the Pentagon, planes were grounded, and an estimated half a million checks could not reach their intended parties on time. The Fed's Herr said it was difficult to get an exact figure on just how many checks were involved, but there were enough to cause consternation.
It takes WesPay up to three days to collect and transport checks, but following Sept. 11, that became a weeklong process. Because the checking cycle was disrupted that week, the Fed was left to supervise a much greater amount of processing float roughly $10 million a day in the days following Sept. 11.
The Fed has been busy putting together a proposal for new legislation, called the Check Truncation Act. Many banks believe that if Congress approves the bill, the use of digital check images will become more widespread.
The proposal, which was submitted to Congress in December, would allow for digital images of checks to be legally recognized as "substitute checks" making an image of a check legally the same as its paper version. Banks would not have to wait to receive the paper check, and could begin processing the payment as soon as the digital image is received.
In anticipation that the act will be passed, many banks have said they've begun investing more in back office technology to move to a digital checking environment.
Dan Buchanan, executive vice president of e-commerce at Zions Bancorp, says if the bill passes, Zions will be "much more aggressive," but in the interim, he says the Salt Lake City-based banking company is still forging ahead with a number of digital imaging projects. Buchanan estimates the legislation could be passed within the next year to two years. Other banks as well are not waiting for the legislation to pass.
Banks can use digital images internally, provided that they have the approval of the necessary parties. For example, a bank is currently required to return original checks to its customers unless the customer says he or she wants to receive their checks electronically, or not at all. The Check Truncation Act would provide for more "ubiquity," as WesPay's Milano puts it.
Bill Christensen, executive vice president for item processing at Union Bank of California, a subsidiary of the $36 billion-asset UnionBanCal Corp., says the bank has been developing digital checking technology for more than four years, but has been speeding up its efforts as of late.
"We made a lot of changes in the past six months," says Christensen. He says Union Bank of California developed a digital archive in 1997, which it has been using largely for the bank's commercial clients. The San Francisco-based bank has been expanding its archive, Christensen says, and has also invested in more image cameras since it began using digital image proofs four years ago.
"It's been operationally challenging," says Christensen, "but we are starting to see some of the benefit already."
Christensen says Union Bank of California has been able to improve its customer service "dramatically" since it started keeping digital images of its checks. Also, he points out, digital images can reduce the amount of mailings that must be done, which could substantially cut a bank's costs.
"There was untapped demand for better customer service when it came to the checking business," he says. "Customers accepted that it was difficult for a bank to find records of a specific check when they asked for a copy."
Rather than having to search for a check on microfilm and then make a photocopy to get it to the customer, Christensen says Union Bank of California's representatives can immediately produce a copy of a check from their PCs, which are linked into the digital check archive. Soon, Christensen says, the bank plans to offer its consumer and commercial customers the ability to retrieve check images on their own as an option on Union Bank of California's online banking site. The bank is currently piloting the online service.
Besides improving customer service, many bankers are eager to clean up operations in their check processing back offices.
A number of bankers have said the check processing back office can be a hectic environment, and too large a number of bank employees are currently necessary to handle all of a bank's checking operations. The process, some bankers say, is antiquated and inefficient.
"We hope to eliminate the need for a check-processing back office," says Buchanan. "There are a number of middlemen in the process, and not all are necessary."
Zions has developed a digital image check truncation service that several banks said this past March they would begin using. The product, NetDeposit, converts paper checks into digital images by taking a photograph of the check with a digital camera. This substitute check is then sent to the receiving bank to be processed.
Buchanan says the checking process takes less than a day using the image service. Zions has several partners that will help in the distribution of its service. The huge Plano, TX-based EDS recently licensed the product and supplies the infrastructure needed for the Zions product to function. EDS will attempt to sell the product to other banks, and it is one of the first such products to hit the bank technology market. EDS has also partnered with WesPay, and plans to distribute the NetDeposit product to WesPay's member banks.
While converting paper checks to digital images may save banks time and money, it requires that banks have access to some sort of database or archive that can store the millions, and sometimes billions, of images that are created each year.
Christensen says Union Bank of California has been developing its archive at a steady pace, and in the four years since it was created, it already stores 1.2 billion check images. For smaller banks in the country, say Christensen and Buchanan, the cost of developing an in-house archive will be too great.
But there are several digital check archives that have been introduced in the last two to three years that will allow banks to outsource the service. In November of 2000, Bank of America Corp., J.P. Morgan Chase & Co. and IBM introduced the Viewpointe Archive Service. Bank of America alone clears roughly 40 million checks a day, and over 10 billion checks a year, and needed to develop its own archive to store the massive number of check images its customers produce.
Since its introduction, Viewpointe has signed up a number of banks to use its service, including First Tennessee National Corp., and most recently SunTrust Banks, which also bought a stake in the archive this past March. Viewpointe reports that it currently stores more than 10 billion check images, despite its services being available for less than two years. Wachovia Corp. and the Federal Reserve also have developed archival systems.
