In a sign of how fast paper checks have lost ground, Clearing House Payments Co. plans to shut down in May - seven months ahead of schedule - its jet courier service that hauls them east from California for clearing.
Instead, an executive told American Banker, it plans to transmit electronic images and then print them out at the receiving end as image replacement documents - legally acceptable reproductions.
The switch is expected to accelerate the clearing of checks that move west to east, against the deadlines imposed by time zones. Many banks are developing image exchange capabilities that would enable them to settle checks electronically by sending only their images between themselves.
The Clearing House's plan to increase the use of IRDs may seem a detour on the road to end-to-end image exchange, but that road has been slower and bumpier than the banks and vendors may have expected.
By shifting much of its volume to IRDs, the Clearing House will be able to take advantage of image technology now instead of waiting for more banks to get up to speed at sending and receiving check images.
Jerry Milano, the senior vice president of the Clearing House's SVPCo-Check Services operation, disclosed Wednesday that the jet service will be grounded early. He said substituting electronic transport will save the organization $1 million per month.
The average IRD costs a nickel to produce, so using them "makes all sorts of sense rather than spending $1 million a month to fly jet airplanes," Mr. Milano said.
The Clearing House, which is owned by 19 of the nation's largest banks, previously planned to end its west-to-east jet service by the end of this year.
"If you've already invested in digital imaging in your bank, then you don't have to wait for somebody to be able to receive a digital file," Mr. Milano said.
Banks will "worry about the benefits of image exchange later," he said. "This allows you to have it both ways."
Mr. Milano's disclosure followed an announcement Monday that the Clearing House has connected its image exchange system to the Federal Reserve System's own network.
That arrangement takes advantage of the Fed's FedForward service, under which the Clearing House can transmit check images to the Fed, which will then forward them to the Fed branch nearest a paying banks, where the files are converted to IRDs and delivered.
The Fed is already following strategy similar to that of the Clearing House. Its FedForward service went live in October, when the Check Clearing for the 21st Century Act made IRDs legal. The Fed is still working on the complementary component, FedReceipt, which would allow banks to receive electronic check images.
Aaron McPherson, a research manager at the Financial Insights Inc. research firm in Framingham, Mass., said he expects more banks to switch to digital transmission for high-value and long-distance exchanges, even though they cannot yet clear the images they receive electronically.
The plan to ground the courier service early "is a significant event in the growth of IRDs," Mr. McPherson said. "I would expect in a short time that all coast-to-coast or long-distance exchanges move to IRDs."
The Clearing House picked up its West Coast check operations with the December 2003 acquisition of Western Payments Alliance, a regional clearing house. For 20 years the operation has used jet couriers to ship checks from San Francisco and Los Angeles.
Under the current arrangement, Mr. Milano said, one plane leaves San Francisco at 10 p.m. and another from Los Angeles at 10:20. He said the Clearing House uses two couriers, AirNet Systems Inc. of Columbus, Ohio, and Ameriflight Inc. of Burbank, Calif.
Those planes unload their checks at AirNet's national hub in Columbus, where the packages are loaded onto other AirNet planes and delivered to their final destination using 10 routes, Mr. Milano said. By the end of May the two flights from California will cease.
"It's a logistical nightmare," he said. By using the Clearing House's image-exchange network instead, he said, the organization can produce IRDs and cash letters at the receiving end. Those can then go the last mile to the paying bank via truck, "using the traditional services of the Clearing House."
George F. Thomas, an executive vice president at the Clearing House, said that even though it will still be clearing paper after the jets stop, it will get "significant savings by moving the items faster and eliminating the transportation expense."
Observers expect fewer and fewer checks to be delivered by air. AirNet said in January that it would "evaluate various strategic alternatives to enhance shareholder value" as its core business declined.
In a related development, the Clearing House announced on Thursday that it had absorbed another local clearing house operation, the Upstate New York Clearing House Association.
"What we're trying to do is to grow volume in a declining market" for paper checks, he said. "There really is synergy when you do that."
