Aiming to reduce fraud and operating costs in check processing, the New York Clearing House Association plans to begin electronic transmissions of payment data in advance of the paper check.
The money-center clearing house expects to begin testing the technique, called electronic check presentment, with two or three members in November. The participating member's names have not been disclosed yet.
Late this year, the clearing house also will start to test technology for the exchange of check images.
Eccho Came First
The New York effort is the second trial of the method among large banks, coming after a similar initiative by the Electronic Check Clearing House Organization, or Eccho, a nationwide organization of some 40 institutions. About 10 are now transmitting check data under the auspices of Eccho.
Electronic check presentment is aimed at reducing the risk of fraud a risk that banks say has increased with the accelerated clearing schedules required by Federal Reserve rules.
"We've identified fairly substantial losses from [accelerated] returns," said Hank Farrar, senior vice president at the New York clearing house," and if we can reduce them by a fraction, that will help us."
In electronic presentment, a receiving bank transmits data from a check's magnetic-ink, or MICR, line to the paying bank on the same day that the check is received. The paying bank has the data an extra day before the check formally clears, allowing it to verify that funds are available in the account.
The paper check follows through traditional clearing channels.
As more banks begin to test electronic presentment, they are having to deal with customer service and other issues. And questions are surfacing about how banks should treat data they have received in advance of the check.
One question is central to the discussion: Does presentment occur when data are received or when the paper check is delivered a day or more later?
The New York clearing house believes there is no clear answer yet. If presentment is assumed to take place when electronic data reach the paying bank, then the customer's account can be debited the evening of the same day. Some paying banks in Eccho are opting to debit their customers' accounts upon electronic presentment.
Losing a Day of Float
Those banks are doing so after notifying their customers and contracting with them. But others say that debiting an account early could lead to friction with customers, who will lose a day of their accustomed float.
"If we can establish that presentment can be done electronically, then we can debit the account sooner, and the customer can get his funds sooner," said John F. Lee, president of the New York clearing house. Meanwhile, "there's a legal issue and a customer service issue."
Eccho, which has worked with Washington-based lawyers from Morrison & Foerster on this issue, says that, as long as new agreements are made with customers, accounts can be debited the day that electronic presentment is made.
One lawyer, who asked not to be named, said that recent revisions in the Uniform Commercial Code allow banks to work out with their customers when presentment takes place.
"It's hard to accelerate returns if you don't accelerate the debiting of accounts," said David Walker, a vice president at J.D. Carreker & Associates, a Dallas firm that consults for Eccho. "We've addressed the forward presentment side exclusively as our starting point."
Starting the Clock
The timing of presentment raises a further question because it triggers a clock timing the period a bank has to return a check for insufficient funds or other reasons. Once presentment has occurred, the bank has until midnight of the following business day to return an item.
A paying bank could believe an item is good on the basis of the electronic data received but discover it is fraudulent on receiving the paper check.
If the check is delayed a day in getting to the paying bank, that bank could miss the deadline for returning the item.
While the New York Clearing House expects to treat presentment as occurring when a paper check is received, it also intends to accelerate the return-item deadline to a day and a half after the electronic transmission.
The plan is to move gradually to a system in which electronic presentment will start the return-item clock.
Banking companies such as Citicorp and Chemical Banking Corp. belong to both the New York clearing house and Eccho.
But the initiatives do not compete. Eccho's focus is reducing costs among banks clearing outside their regions, and the New York clearing house effort will focus on reducing local clearing risks and costs.
A third electronic MICR-transmission effort is being sponsored by the National Automated Clearing House Association. Checks are stopped, or truncated, at the receiving bank, which then passes on the MICR line data via the ACH system.
Eccho has opted not to use the ACH, in which the parties to a transaction are credited and debited simultaneously. Eccho instead is relying on bilateral agreements that determine the timing of credits and debits.
In some cases, a bank may be credited the day of the electronic transmission, giving it a head start on use of the funds.
The New York clearing house, which operates one of the largest regional ACHs in addition to its check-clearing role, plans to use a modified version of its proprietary ACH software for electronic check presentment.
Image Capture by Yeareand
The New York clearing house intends to begin transmitting check images on a trial basis this year. By yearend, the clearing house itself expects to be able to capture check images, and by mid-1993, members will also be exchanging images.
The organization plans to use relatively inexpensive ($75,000 to $80,000) desktop devices to capture and display images.
The clearing house is considering using systems from NCR Corp. that capture MICR line data and check images. NCR is a subsidiary of American Telephone and Telegraph Co.