They call it "goo," the paper items persisting in the check-clearing process that threaten to gum up the final stages of the evolution to an all-electronic payments system.

Five years after banks began clearing checks as digital images, the transition is largely complete; some experts estimate that 85% to 95% of items will be cleared electronically by yearend.

Bankers are now starting to focus on the goo, stragglers such as savings bonds, money orders, damaged checks and other payment instruments that must still be hauled around the country on trucks and planes, instead of being sent through the electronic networks that are now carrying the vast majority of plain-vanilla checks.

As long as even a handful of payments instruments are presented as paper, "you still need the infrastructure to move it," Marie LaQuerre, a senior vice president at Bank of America Corp., said during a panel discussion at the Bank Administration Institute's TransPay conference last week in San Diego.

And with fewer checks being handled as paper, the fixed costs of handling paper are driving up per-item expenses, according to Michael P. Fisher, a vice president in the central technology and operations unit of JPMorgan Chase & Co. "These have gotten to be very expensive items," he said.

No official statistics exist on the extent of the problem. "Everybody has a different view of how bad the goo is," LaQuerre said.

In fact, even the terminology is contested. Phyllis Meyerson, a senior vice president at the Electronic Check Clearing House Organization, the Dallas entity that is the rulemaker for image exchange, refers to the residual paper as "Checks Resisting Automated Processing."

Bankers say that rough estimates indicate that goo comes to about 11.5% of total check volume. The vast majority of this, about 10% of total volume, comes from banks that still do not use imaging technology, and major corporate customers that continue to deliver significant volumes of paper checks, Fisher said.

Steve Ledford, an associate principal in the New York consulting firm McKinsey & Co., said an easy solution exists to this part of the problem: encouraging the laggards to jump on the electronic payments bandwagon. Though some banks that have been in the vanguard of the transition to imaging now grumble about the laggards, Ledford said most will eventually come around.

Many bankers have been surprised at the pace of the industry's shift to image-exchange. Even executives with the Federal Reserve banks have had to repeatedly accelerate their plans to mothball paper processing sites and expand their imaging capabilities, so it should be no surprise that some banks, even a few of the biggest companies, are still struggling with the transition, Ledford said. "It just takes time to implement these things."

The remaining 1.5% of check volume poses a bigger challenge to the industry, Ledford said. Of this segment, two-thirds comes from nonconforming items, such as checks that are torn or otherwise mutilated and are difficult or impossible to scan. The final one-half of 1% will probably be the most intractable: items that are not eligible for imaging, such as U.S. Savings Bonds, tax coupons, and similar items.

Fisher said a variety of problems can make a sorter spit out a check as nonconforming, including tearing or other quality issues that makes the magnetic ink character recognition line unreadable. JPMorgan Chase has also encountered problems with checks that are printed in red or purple ink or with colorful graphics that may be appealing to consumers but present reproduction difficulties.

"As long as I have to key that item and I can't read it, I have to go back to physical paper," Fisher said.

In the past banks would put nonconforming checks in glassine envelopes known as carrier documents, but the Fed announced last year that it would stop accepting items that arrive this way.

Martha Maher, an assistant vice president in the Fed's retail payments office, said these envelopes simply pass on to the recipient the goo headache and do nothing to make it possible to handle these payments electronically. "There is no such thing as an image-friendly carrier document," Maher said.

Meyerson said in an interview Monday that Eccho is looking at rule changes that might accommodate nonconforming items. A proposal under consideration, she said, is to expand the definition of a "destroyed check." This would let the bank of first deposit manually input such a check's payment details and clear it over the automated clearing house network.

Ineligible items are likely to be the most persistent problem. These include savings bonds; foreign checks; and "TT&Ls," Treasury tax and loan coupons that banks receive along with business tax deposits, such as payroll.

Some of the problem could be addressed with incentives for people to change their behavior, Meyerson said, for example, persuading small-business customers to use direct deposit instead of payroll checks, which would largely eliminate TT&Ls.

"ACH is a much better solution than anything else out there," she said.

Savings bonds, however, are likely to remain ineligible for the foreseeable future, Maher said. "Treasury has a lot of things on their mind right now," so developing an electronic process for redeeming these bonds is not a priority. "Those are not going to become imageable any time soon," she said.

This could prove a long-term issue for banks, Maher said. "Savings bonds can be out there for 50 years or 60 years."

Meyerson said that banks have traditionally handled savings bonds much as they do paper checks, delivering them to the Fed bundled in a cash letter. "But they're not checks," she said, which means they cannot be delivered through image-exchange networks.

She said that savings bonds, like checks, have a MICR line, which could be used to develop an interim settlement process. Before image exchange was permitted, some big banks accelerated their clearing with ECP, or electronic check presentment: using the MICR data to create an electronic file that could be used to initiate a payment and sending the paper later.

"Maybe they could do something similar here, with the bond to follow," Meyerson said.

McKinsey's Ledford said that the industry has had several years to deal with the biggest issues thrown up by image exchange and now must address the remaining hurdles.

"There are some things that can wait till the end," he said. "It's now time to deal with those last issues, those most difficult problems."