Image-replacement document technology is supposed to be a stopgap for Check 21 compliance in lieu of an industry-wide image exchange environment. But some bankers and industry watchers are starting to ask the question: why should IRDs only be considered an interim solution?
They are already proving unexpectedly popular-the Fed will be processing 2 million of them a day this summer, compared to only 200,000 as recently as January-and are providing surprising back-office benefits, like accelerated return of nonsufficient funds items. Many banks piloting image exchange programs have also added on IRD capability, usually to produce paper images for customer statements.
Despite their long-term cost inefficiency and dependence on paper, IRDs are gaining a foothold where few banks imagined them to be just a few years ago, according to a recent report from Financial Insights. Alongside declining check volume and the simultaneously unexpected rise of accounts receivable check conversion (ARC), some believe IRDs may pose a threat to the momentum of image exchange adoption as much as the technology is supposed to serve as a gateway.
"It's more a concern that the banks we talk to are showing a real comfort with IRDs, maybe thinking they don't need to do much about [imaging]," says Financial Insights senior analyst Aaron McPherson. "A number of banks have expressed frustration at having to invest in a declining market, which I interpret as they are concerned that it may not pay out. They don't seem happy about it."
In his March report ("Check 21 at the Crossroads"), McPherson detailed how the rise in IRDs and ARCs may put a chill on image exchange migration, enough so that "all but the largest banks" need to consider whether or not to outsource check processing within the next year. "A lot of banks are waiting to see what will happen," says McPherson. "But the problem is waiting to see what will happen, will reinforce the strength in IRDs and ARC."
Although the exodus from paper to image-based processing has been slow, industry surveys from the American Bankers Association and data from image exchange providers show banks large and small still plan to thrust headlong into image-enabled processing. SVPCo, the direct image exchange coalition owned by Clearing House Payments Co., added two new banks, Union Bank of California and Cleveland, OH-based National City, in April to its network coterie of seven large banks, the Federal Reserve and Electronic Data Systems. SVPCo also accelerated its phase-out of jet courier service this year, and is working on establishing connections with the EndPoint Exchange network, which provides image exchange to about 4,000 community banks and credit unions across the country, according to George Thomas, evp of Clearing House Payments.
Thomas says he's yet to see any banks back-tracking from commitments to image exchange. Continuing delays in implementing image exchange are from well-documented technical issues that banks are cautiously working through, he says. "There's really no delay because banks are sitting back saying 'gee, I don't know if I should do this or not.' They're all committed to doing it," says Thomas. "We'll start getting more and more volume next year, and this year, too, but 2006 will be a year of ramping up, and I think most of it will be on-line by 2007."
Even major IRD providers like EDS expect large banks to stay the course toward image exchange-either in direct or shared models-since the economies of scale favor the paperless route.
But mid-tier banks may face a decision on taking the imaging plunge within the next year or two for ROI purposes, says EDS' Ed Herman, director of global payments. "Among top 20 banks, I'm not aware of [any] that has made a decision to only stay with IRDs," says Herman. "They still see that as an interim solution, albeit a five-year solution. They still expect to be going image exchange. When you get past that first tier of banks...that's where you'll see the banks that are questioning themselves."
McPherson agrees that image exchange should become the dominant inter-bank processing format. The banks affiliated with SVPCo or the Viewpointe image exchanges dominate the image processing volume, and are working closely with their partners to improve the reliability and efficiency of image exchange, with plans to "flip the switch" at the conclusion of the pilot programs, according to McPherson. At least one top-five bank thought the image processing would be a go for 2006, but several others thought that 2007 or 2008 was more realistic.
However, banks are homing in on new offerings like remote corporate image capture, allowing business customers to transmit their own checks into banking systems to speed deposit and processing of items. Should that succeed, the number of daily IRDs will reach into the billions, and require banks to construct a printing and processing infrastructure that raises the question of whether further investing in imaging is necessary.
"We're in the process of building an infrastructure to print and handle these IRDs to basically parallel the paper check processing structure, so yeah, it's cheaper in the short run to do the IRD," says McPherson. "In the long run, you would want to go to the image exchange. [But] it's only going to get more and more difficult to make the case as your bank gets used to using IRDs and you're trying to make the case for switching from IRD to image, as opposed to just switching from paper to image-which might be an easier case to make."
IRDs' shelf life may be longer than originally projected, as well -perhaps for another eight years, according to EDS' Herman. The National Clearing House Association, an image exchange pioneer, inked a deal earlier this year with Fiserv for IRD service because of the slow adoption of image exchange.
ARC has been considered complementary for Check 21 services since business-to-business checks aren't eligible for conversion. But bringing corporate checks into the ACH environment is a goal of firms like CheckFree, which introduced a new product suite for business check conversion at April's NACHA payments conference in San Antonio. Although McPherson considers it unlikely, widespread adoption of business check conversion could make ARC the dominant electronic check format through the end of the decade- impacting the benefit of image exchange and again hindering investment.
Thomas also has strong doubts this would occur. He says both business check conversion and point-of-sale back office conversion are more suited to image exchange than ACH. Too many corporate customers have debit blocks on their accounts, and banks don't want the burden of refereeing merchant/ consumer disputes over payments that lack a physical proof item.
Check 21 image exchange solutions overall ultimately will provide the most processing benefits, Thomas says. Corporate customers with high consumer check volumes prefer imaging, and West Coast banks have made major strides on eliminating float time with East Coast processors through direct exchange.
He believes use of IRDs will start paring down once more banks can receive image cash letters, and when local exchanges come on-line, forcing banks to eliminate their paper processes. "With IRDs, it's still paper at the end, and at some point you're going to want to get rid of that paper," says Thomas.
