Financial technology executives a year ago were predicting that by fall 2004, as soon as the Check Clearing for the 21st Century Act took effect, there would be a wholesale shift by banks to settling transactions with images.
But two weeks after the Oct. 28 implementation date, it has become clear that image exchange is still very much a work in progress for most banks and that the first Check 21 application to really take off will probably be remote capture for corporate customers.
This service - which has businesses converting paper checks into digital images at their own locations and depositing the funds by transmitting the files to the bank electronically - is popular with bankers because it lets them take advantage of image technology now and does not depend on other banks' readiness to settle transactions with images instead of paper.
Furthermore, with a flood of banks announcing remote capture services and partnerships in the last week, it appears that the capability has moved onto the list of services that banks see it as a competitive advantage.
Banks offering remote capture, however, will soon be receiving deposits in image form that they probably cannot yet settle in image form, so they will have to print out the electronic items to create substitute checks, which will increase the banks' expenses. This could provide an incentive for the companies to move more quickly to hook into image exchange networks, which would allow them to simply forward the image files instead of printing them out.
And this could also accelerate an anticipated face-off between image exchange and ARC - check conversion to automated clearing house payments at the retail lockbox, using the accounts receivable conversion (ARC) format.
Bank of New York Co. announced its plan for remote deposit services Monday. Eric D. Kamback, a senior vice president and head of the company's global payment services group, said it already has eight clients around the world in pilot-testing stages, including its own securities clearing unit, Pershing LLC, and a Dutch correspondent, Rabobank Group.
"We think there are a lot of immediate benefits" for bank and customer alike, chiefly the faster availability of deposited funds and reduced float risk, Mr. Kamback said in an interview Tuesday. "We're looking to take it out to all our clients real soon."
At least three other banks, Wachovia Corp., HSBC Bank USA, and BB&T Corp., made announcements in the last week about their plans to enter remote capture.
Bank of America Corp. began testing the technology a year ago, and NetBank Inc. and First Horizon National Corp. introduced their own services earlier this year.
Several vendors are trying to cash in on the trend as well. Those unveiling remote capture applications this week include VectorSGI, of Addison, Tex., Alogent Corp. of Alpharetta, Ga., and P&H Solutions Inc. of Newton, Mass. (the former Politzer & Haney Inc.)
And one analyst said he expects more banks go after corporate deposits via image. "This is a very natural entry point, low-hanging fruit for the banks to pursue and for vendors to pursue," said Richard Winston, a partner at the New York consulting firm Accenture Ltd. "It's definitely a key play right now."
Certainly the AFP 25th Annual Conference in San Diego this week, sponsored by the Association for Financial Professionals of Bethesda, Md., has been one catalyst for the spate of remote capture news.
But it is also likely that the timing reflects bankers' eagerness to get some returns on the heavy spending they did in the past two years to prepare for image exchange.
They have a limited number of potential image exchange partners now, but Check 21 - which makes substitute checks legal instruments - has given them a way to capitalize on their investments immediately by allowing them to accept image deposits and then dump the printed substitutes into the existing check processing system.
Two corporate clients of Wachovia are planning to begin a pilot program in December using image software from the Advanced Financial Solutions unit of Metavante Corp., said Joe Cornelius, a Wachovia product manager in charge of image services in its treasury services division.
"We'll have a bold ramp-up of this product in the first quarter," with general availability for treasury clients by the second quarter, Mr. Cornelius said. He would not identify the pilot companies or even their industries but said "there is broad interest in this product."
Creative Payments Solutions, a subsidiary of BB&T, said this week that it began a test of its remote capture system last month with another BB&T subsidiary, Prime Rate Premium Finance Corp., an insurance premium finance company in Florence, S.C. Creative Payments is working with the Dallas image-software vendor Carreker Corp.
Harold Williams, a senior vice president at Creative Payments, said Prime Rate is imaging up to 3,000 items a day - 70% personal and 30% business checks - using a desktop scanner. Those images are transmitted to a Creative Payments center in Wilson, N.C., for posting and collecting.
Mr. Williams said his company could either produce substitute checks for clearing as traditional paper items, or convert the files into ACH payments using ARC.
Today it is cheaper to clear those checks with accounts receivable conversion. But as more banks begin to settle transactions across image exchange networks and no longer have to convert some of those remotely deposited files into expensive substitute checks, the costs could become more comparable.
And because there are some limits to ARC - notably that only consumer checks are eligible for ARC conversion - the two technologies could soon be positioned as head-to-head competitors for corporate receivables.
"Long term, we'll have to wait and see what happens" on pricing and adoption of the competing technologies, Mr. Williams said. "Our view is that there's a place for both."
Accenture's Mr. Winston argued that check imaging, over time, could largely supplant ARC. "I wouldn't call this the ARC killer - that would be too strong - but I believe it will become the dominant play."
But it is doubtful such a shift will take place until banks are ready to clear and settle payments entirely with image, without printing substitute checks, Mr. Winston said. And because remote capture could initially increase bank expenses, the banks would be eager to move toward image exchange.
"I think it could happen fairly quickly," he said. "Over the next six to 12 months you could see a lot of movement in that direction. That's why a lot of people are making announcements now."
Anthony P. Gandolfo, a vice president at Bank of New York and its head of deposit services, said that even with the higher cost of reconverting images to substitute checks, he is hoping to gain some first-mover benefits.
"We feel that the capabilities and advantages, to the customers and the Bank of New York, outweigh the impacts and incremental costs that we may incur," Mr. Gandolfo said.
Robert Hunt, a senior analyst at MasterCard International's TowerGroup, agreed.
"If I'm first to market, I can move some market share by offering something my competitors can't," Mr. Hunt said. Especially for large companies that may receive checks at offices around the country, funneling those check images to a single, central cash management bank could be less expensive than maintaining local deposit accounts with banks in different regions, he said.
The growing competition for business deposits could even spur banks to adopt image exchange sooner than they planned if they face the loss of important corporate accounts, Mr. Hunt said. "That will drive more banks to receive [check images] electronically, which is the end goal."
