A rule revision this month by the Federal Reserve Board could open the way to wider acceptance of a check processing technology that could save the banking industry billions of dollars a year.
The change in Regulation CC, effective Dec. 15, stated more clearly that check images are suitable replacements for physical checks. By clarifying how electronic presentment procedures can fit into the handling of exception, or returned, items, the revision removes an issue that had been a sticking point for many institutions.
The old wording had been subject to various interpretations, effectively confounding proponents of electronic check presentment, or ECP, said Phyllis Meyerson, a staff member at the Electronic Check Clearing House Organization, a rulemaking body for ECP exchanges among banks. Legal uncertainties kept many banks from getting involved in ECP, she said. Officials at Dallas-based Eccho say this presentment method could help banks save $2.8 billion a year in fraud and operating costs.
"It is a minor rule change that opens up a whole world of possibilities," Ms. Meyerson said. "This will move forward electronics, which is an important part of imaging and an important part of ECP."
Regulation CC, which was mandated by the Expedited Funds Availability Act of 1987, had required banks to send paper versions of exception items whenever possible. The law allowed electronic representations to be used only if the physical items were destroyed or lost during check processing.
The revision more clearly states that an image can replace paper, "and not just in cases where the paper is no longer available," said Richard Oliver, retail payments product manager for the Federal Reserve banks and senior vice president at the Atlanta Fed.
"In fact, it is an acceptable replacement for the paper when any two parties agree on it or when a consortium of parties agree to the same agreement," he said.
Though exception items make up less than 1% of the estimated 65 billion checks written each year, the handling costs are disproportionate. The requirement that they be returned physically causes costs to mount, Ms. Meyerson said.
That is because "a lot of it is still very manual," Ms. Meyerson said. "You have to find the paper and return it and get it back to customers."
The revision could breathe life into a stalled check truncation project begun last year by the Financial Services Technology Consortium. The project, called Paperless Automated Check Exchange and Settlement, or Paces, was supposed to be operating as a "proof of concept" by this time.
Uncertainty over the electronic return of exception items was one of several issues that hindered the development of Paces, Ms. Meyerson said.
"We didn't think we could do it," she said. Electronic returns using imaging "was a direction that Paces wanted to go but couldn't because we did not have any regulatory relief."
Banks are interested in pursuing ECP because the forwarding of electronic information ahead of the paper would give receiving banks more time to detect and catch fraudulent items. After the initial transmissions, banks could transport the physical items using cheaper methods.
Clarification of the return item issue could lead to wider adoption of ECP, said Mr. Oliver of the Atlanta Fed. "One thing I think a lot of people in the industry believe is that the opportunity for ECP to be successful, from a cost standpoint, is dramatically increased by the ability to use images in the return process."
But there are other concerns, he said. Some banks question whether ECP is cost-beneficial and whether other legal issues might arise.
The industry may be a step closer not only to ECP but also to full truncation, Mr. Oliver said, referring to the possibility of completely eliminating check transportation after the point of payment or deposit.
"Certainly this interpretation can help one see how a full truncation environment will be viable," he said.