The Federal Reserve, trying to give the banking industry's efforts to promote electronic check presentment a much-needed push, said it will form an advisory group on the topic.
Electronic check presentment is the electronic transmission of check data among banks.
Banks' underlying interest in the process stems from the defense it provides against check fraud - which cost them more than $800 million last year. Electronic check presentment also can drastically reduce the amount of float during check collection.
"The banking industry needs to try and establish and pursue some form of a long-term, broad-based ECP strategy," said Paul Connolly, first vice president with the Federal Reserve Bank of Boston.
"The Federal Reserve is the player best positioned and most responsible for helping to make this happen."
Mr. Connolly announced the plan to form the group this week at the American Bankers Association's National Operations and Automation Conference in Orlando. The Fed has yet to determine who will serve on the advisory group, but officials said the participants will hail from both banks and their regulating organizations.
The Fed's move follows several months of interviews with bankers aimed at better understanding the role it should play in the development of electronic check presentment.
Those interviewed, representing institutions ranging from money-centers like Citicorp to community banks like Michigan Financial Corp, Marquette, told Mr. Connolly "loudly and clearly that more leadership from the Federal Reserve will be needed if there is to be significant forward progress toward a comprehensive ECP system," he said.
"Frankly, this view came across sometimes as a criticism - a criticism that the Fed has not been doing enough to get behind ECP and push it ahead."
One barrier to acceptance of the process is that the systems typically cost hundreds of thousands of dollars.
Another perhaps more significant barrier has been the imbalance of benefits to participating banks. Specifically, electronic check presentment has more benefit for presenting banks, which are able to collect funds earlier. The benefits are often lost on the banks receiving electronic files because the paying bank delays the disbursement of funds as long as possible.
Although electronic check presentment speeds up the collection and return process, Mr. Connolly said it does not "take costs out of the check collection process."
In an effort to fix this situation, the Fed is working to modify the current system.
"Check collection works pretty well, but it's a very expensive process," Mr. Connolly said. "You have to attack the handling and delivery and the repetitive processing of the paper."
Electronic check presentment has been described as fragmented technology: The systems have numerous transmission formats, and a large number of isolated initiatives are currently under way in various quarters.
The initiatives include the New York Clearing House Association's mandate for member banks to capable of using the process by this summer; the multibank alliance between the Electronic Check Clearing House Organization and the Financial Services Technology Consortium, which wants to develop electronic check technology; and the National Automated Clearing House Association's Electronic Check Council, which wants to develop a product that truncates checks and converts them into electronic funds transfers.
These initiatives do not adequately address the industry's needs, according to Susanne Boxer, president of Michigan Financial's MFC First National Bank in Houghton, Mich.
"My recommendation to the Fed is that they be the leader in further developing (electronic check presentment) and introducing it to the financial industry," she said.