KeyCorp announced Thursday that it had become the first banking company to use a new Federal Reserve service for transmitting checks as digital images, and the Fed said more will soon follow.
Key began using FedForward Paper-to-Image on Nov. 4, just a week after the Check Clearing for the 21st Century Act went into effect. It used the service to clear 3,700 checks, for $56 million, the first day.
No other banking company is using FedForward yet, said Fred Herr, a senior vice president at the Federal Reserve, but by yearend several banks of varying sizes will announce that they are using Fed image services.
"There's quite a bit of interest," Mr. Herr said.
To use FedForward, banks will deliver paper checks to the Fed, which will convert them into images and transmit the image files to other Fed branches. The checks will be printed out as image replacement documents and presented to the paying banks for settlement.
FedForward is currently offered only through the Fed's West Coast offices, but Mr. Herr said it will be available nationwide in the first quarter. The Fed's other new imaging services, with no users yet, are FedReturn, for returns processing, and FedReceipt, for image cash letters.
Michael Barnum, the executive vice president of Key's client services group, said FedForward "provides us with some of the ultimate advantages of image exchange with institutions that are not yet in a position to accept images."
Though the checks are not settled as images, the conversion cuts their transit time by as much as a day and means faster settlement, he said.
The Fed announced the existence of FedForward in May, but banks could not use it until Oct. 28, the day that Check 21 took effect. The law makes image-replacement documents legal payment instruments and requires banks to accept them in lieu of the original checks.
Mr. Herr said that FedForward will be able to handle an unlimited number of checks but that the Fed has limited volume for a shakeout period. The limit is being raised gradually, he said.
In addition to using FedForward, Key has been exchanging check images since late August with J.P. Morgan Chase & Co. in a pilot test of the image exchange network developed by Small Value Payments Co., a unit of Clearing House Payments Co. LLC.
But only about 100 checks a day, much less than the FedForward volume, are going through the Small Value Payments Co. network.
The difference constitutes a vote of confidence in the Fed system, said Edward L. Neumann, the managing director of consulting services at Javelin Strategy and Research, in Pleasanton, Calif.
"They're actually using the service instead of piloting it for a limited number of checks," he said. Though 3,700 checks is obviously a small part of Key's volume, Mr. Neumann said, it is "significant enough to show that the system works."
One advantage of FedForward, he said, is that banks can choose which checks they want to route through the Fed. For example, he said, they can use it accelerate the clearing of large checks, which reduces risk.
"This is a terrific starting point," Mr. Neumann said. "The business case makes a lot of sense for large banks like Key."
Mr. Barnum said FedForward does help reduce risk. Key is considering it for any checks that would otherwise have to travel from the West Coast to the East Coast for clearing.
Alenka Grealish, who manages the banking group at the Boston market research firm Celent Communications LLC, said image systems will become more useful as more banks use them. Wider use will enable banks to settle the transactions without converting images into image-replacement documents, she said.
Still, Key's announcement sends a message, Ms. Grealish said. "It definitely emboldens other banks to think about what their own actions should be so they don't get behind the adoption curve."
