Electronic Check-Clearing Embraced
The New York Clearing House plans to begin processing some checks electronically in an effort to speed settlement and address banks' concerns that tighter funds availability regulations will increase fraud losses.
The move to electronic clearing could also be the first step toward using image technology at the clearing house for checks returned because of insufficient funds, said John F. Lee, president. With image technology, digitized images of checks are captured and processed, rather than the actual paper checks.
Other clearing houses and banks, including some Federal Reserve banks, have experimented with electronic check clearing.
Focus on Fraud
The New York Clearing House's members are the 12 largest banks in New York and thus among the largest in the country. The decision illustrates money center institutions' concenrs about their exposure to fraud after new check-clearing regulations went into effect in the fall.
The Federal Reserve regulations, known as Regulation CC, set funds availability deadlines for deposited checks.
Mr. Lee said last week that the clearing house has hired a consultant to study the costs and the operational requirements to begin clearing house has hired a consultant Mr. Lee said a pilot program will probably begin next year.
Although it is unclear whether the tighter check-hold regulations have increased fraud losses, many bankers believe the risk is so great that they must take steps to clear checks faster. The use of electronics, though not new, is gaining more attention as a way to speed check clearing.
"The big motivating factor was Reg CC and the accelerated funds availability schedules," said Peter Allutto, chairman of the bank operations committee at the clearing house and vice president at Bank of New York.
"Initially the benefits of electronics will be a reduction in the potential risk of returned items. Down the road, it will give us some expertise in imaging and check truncation, and hopefully with that, a reduction of paper-handling costs for each bank."
Under the new system, banks will transmit data taken from the magnetic-ink line on checks to a data base housed at the New York Clearing House on the evening the checks are deposited. Banks then will extract data about checks drawn against their accounts to post debits. The actual paper checks will be delivered via ground transportation the following day.
The procedure, known as "electronic presentment," is similar to one being used by a few dozen banks that formed a a nationwide clearing house last year called the Electronic Check Clearing House Organization.
The procedure allows banks to identify checks, especially large-dollar items, that are not backed by sufficient funds a day earlier than they can now. Banks are now required to make funds available on local checks within two days after deposit.
Under current check-settlement procedures through the clearing house, banks often must make funds available on deposited checks before they know whether they are backed by sufficient funds.
"Right now its almost impossible to know whether the check is backed by sufficient funds" before the banks must make funds available to customers," said Mr. Lee. "With electronic presentment, we'll have that check information electronically, which will give us a fair chance of catching the crooks before they cash the checks."
Eventually the data base will house check images. The New York Clearing House has been experimenting with a test version of an image system from Unisys Corp. Mr. Lee said the organization will probably begin to implement image technology after next year.
Existing check-clearing procedures involve transporting paper checks from the banks where they are deposited to the clearing house. There they are exchanged for checks drawn on each member bank, usually the day after deposit.
Banks will continue sending the paper checks to each other through the clearing house. But because the electronic information was obtained the night before, the banks can send the check later in the day, and use less expensive forms of transportation.