Members of a new check image exchange group are claiming some early success in promoting best practices.
The Image Industry Interoperability Group, or i3G, announced its formation last week. Rather than set standards or rules for image exchange, its goal is to address the "pain points" that institutions large and small share, according to Marie LaQuerre, a senior vice president at Bank of America Corp.
In discussions with counterparts at the Bank Administration Institute's annual TransPay conference last year, Ms. LaQuerre found that "a lot of the issues we were experiencing were common across the industry." Better collaboration could solve these problems, she said, "but to do it one-off with each other was going to take a lot of time and effort."
The nine-member i3G formed three months later, with representatives from the Federal Reserve banks, large national banks such as B of A and JPMorgan Chase & Co., regionals such as Cullen/Frost Bankers Inc., and credit unions represented by Southwest Corporate Federal Credit Union in Plano, Tex.
Larry Taft, a first vice president at Midwest Independent Bank in Jefferson City, Mo., a unit of Midwest Independent Bancshares Inc., said some issues were fairly straightforward. The question of how to handle the endorsement records on imaged checks is an example of the approach the group may often take.
The key question was what endorsement a paying bank should rely on in the case of returns when the electronic endorsement in the file disagreed with the endorsement on the underlying paper check's image, Mr. Taft said.
The group came up with a hierarchy — first the electronic endorsement from the bank of first deposit, then the endorsement on the back of the check image, then the oldest electronic subsequent endorsement, and so on.
"The group itself doesn't have any authority. What the group does have is the buy-in of everybody, including the Fed," Mr. Taft said.
Members of the group, who also are members of the Electronic Check Clearing House Organization, the rulemaker for image exchange, submitted their recommendation to Eccho for a rule change, which was approved in December. The Fed is in the process of modifying its own rules, which are included in its Operating Circular 3 that defines the Fed's check clearing rules, to conform with the same practice.
David Walker, the president of Eccho, said he considered the rule change by his Dallas organization to be "a parallel process" with what i3G was working on.
"What's critical is that Eccho is interested in improving the overall process," Mr. Walker said in an interview. "There are conflicts when you have to do things multiple ways."
Bill Brennan, the director of item processing operations at Southwest Corporate, said one point of contention that is unlikely to be resolved early involves recognition of the magnetic ink character recognition line, which identifies the bank and the customer account upon which a check is written. Digital images contain no magnetic ink, and there was concern over who was responsible for dealing with images with partial or imperfect representations of MICR lines.
"Most of the banks in the major image exchange networks that are exchanging peer to peer are using incomplete MICR in some fashion," Mr. Brennan said on the i3G conference call. But because the Fed and Eccho require full MICR, the banks that accept incomplete MICR must do so via bilateral agreement.
In general, the big banks that are collecting institutions support "best effort" MICR, figuring that the repair work will net out between them, while paying institutions support "perfect" MICR, i3G says. The issue has become a matter of discussion among users of The Clearing House Payments Co. LLC of New York, which runs the private-sector SVPCO Image Payments Network, where big banks do direct exchanges of image files, the group said.
Mr. Brennan said he and others serving community-scale institutions oppose any change.
"The reason I'm so adamant about this is because I'm a net receiver. It would impact me tremendously," said Mr. Brennan, whose organization is the nation's second largest corporate credit union, providing share draft processing and other services to 1,200 members.
This problem is likely to get worse, Mr. Brennan said. Today most check images are still being captured on heavy-duty reader-sorters, but as distributed capture expands, more images will originate from desktop check scanners, flatbed devices, even cell phone cameras, he said.
Brian Egan, a vice president in the Fed's retail payments office, and a vice president in the Atlanta Fed, said i3G is trying to reconcile numerous competing demands. "Depending on where you are in the collections stream, you have different interests."
Though it has not tried to settle the debate, i3G has produced a white paper outlining the issues. It promises to continue to monitor MICR quality.
Ms. LaQuerre at B of A said the exercise has been worthwhile.
"The MICR line has been discussed for going on three years. These guys were able to sit down very objectively and put the issues on the table," she said. "We still don't have a perfect solution, but we're a lot closer than we were."
The group has taken up two other issues so far where it has made more progress. Mr. Taft said i3G has begun a pilot test for resolving large-scale "duplicate file presentment incidents," when the same set of images is processed more than once.
The group has developed a "duplicate event notification system" for the industry to spread the word more quickly when duplicates are discovered, but Mr. Taft said it remains to be seen how well it will work.
The other founding members of i3G are U.S. Bancorp, Wells Fargo & Co., and Wachovia Corp. Wells' acquisition of Wachovia opened a seat at the table, and Ms. LaQuerre said the search for a replacement is under way.
