Bankers are preparing to adopt a new standard for formatting check image exchange.
Since banks began routing the files across image exchange network in 2004, they have used the X9.37 standard to format the data. However, that standard is just a draft that will be superseded over the next few years by a permanent one known as X9.100-180.
These standards define the information that banks must include in the digital cash letters they send to their trading partners.
The Federal Reserve System expects most major banks and processors to use X9.37 until 2008, and its proposed replacement is being reviewed by the American National Standards Institute Inc. The X9.100-180 standard is expected to become official after a public comment period ends Monday.
X9.37 "doesn't go away right away," said Dexter Holt, a vice president in the Fed's retail payments office. "The industry is going to be using it for a couple of years yet.
Mr. Holt is the chairman of a panel at the industry-backed Accredited Standards Committee X9 of Annapolis, Md., that has been assembling the new standard.
Industry use will determine "how long X9.37 is in play," he said.
Daniel J. Welch, a vice president at Bank of America Corp. and the vice chairman of the X9 panel, said there are some deficiencies with the current standard, which is technically a draft standard for trial use.
X9.37 was originally used for sending payment information electronically, he said; banks would send the paper checks later. "We would use that to tell each other what checks were coming in tomorrow."
When the Check Clearing for the 21st Century Act took effect, banks no longer needed to send the checks, and banks adapted the standard to accommodate image exchange networks. However, Mr. Welch said the approach did not quite meet the industry's needs.
"We made some records variable, but we didn't make enough of them variable," he said. "It's in our best interest to get rid of DSTU X9.37 as quickly as possible," because the X9.100-180 standard is "more robust."
The new standard will make changes in the intricacies of check clearing and imaging technology and address issues that occur in imaging but not in paper clearing, such as the remote capture of check images at a corporate lockbox.
The new standard, for example, will accommodate electronic payee endorsement records. The Uniform Commercial Code lets lockbox operators in every state except New York and South Carolina submit paper cash letters to a bank without stamping an endorsement on the back of each check. However, Mr. Welch said this approach does not work with check images, because if there are any problems reading the image file, the receiving bank will need the endorsement data to figure out what to do with the payment.
The X9.37 standard does not permit banks to include electronic endorsements, but the new one will, he said. "For remote capture, you want that endorsement on there."
The new standard also uses two types of records for image quality reports; the X9.37 standard has only one. Mr. Holt said some banks use multiple image quality assurance applications, and using two records provides banks with more space to explain the results of these important evaluations.
For example, one application might red-flag an image for being too dark, while another might say it is acceptable. Banks would put a summary of the results in one image quality report record and more details in the other.
Intricate borders or large graphics could make parts of the check hard to read but do not affect a bank's ability to settle the payment, so the image quality issue "may be a red herring," Mr. Holt said. "We're learning the extent to which it is a problem."
The two standards apply not just to consumer checks printed by commercial printers, but also to similar payment documents that are regulated under Check 21, such as money orders and corporate checks that customers print themselves. The two executives said banks must take steps to persuade corporate clients to pay more attention to the standards.
"There's greater variation in commercial checks," Mr. Holt said. They represent a greater share of the "misbehaving checks" than consumer ones, where volume is declining faster.
Mr. Welch said that part of to problem is simply vanity. "Corporates want their fancy logos on the checks, and they don't want it where we want it," so there are problems when machines try to read the checks.
But he predicted that the problem would sort itself out as imaging becomes more prominent. "Once the corporates get it, you're going to see more corporate checks line up with the standard."
Mr. Holt also said that some companies that produce money orders are "not aware of that standard and do not use check printers" to produce them.
B of A probably would begin using the new image-exchange standard with trusted trading partners, such as Wachovia Corp. and JPMorgan Chase & Co., he said. The two Charlotte companies exchanges items through the SVPCO Image Payments Network operated by The Clearing House Payments Co. LLC of New York. B of A and JPMorgan Chase use a repository operated by Viewpointe Archive Services LLC of Charlotte.
B of A formats its X9.37 files somewhat differently for various trading partners, Mr. Welch said. "We have a format for the Fed. We have a format for SVPCO. The most vanilla format we have is for Viewpointe."
He said his company probably would begin by using the new standard with one trading partner while continuing to use X9.37 with others, Mr. Welch said. "It's a controlled ramp-up. We've got to be sure our infrastructure is up to par."
Mr. Holt said there are already plans for a successor to the new standard. A working group is putting together a next-generation standard based on extensible markup language, which employs data tags that can be used in services-oriented data processing.
"It's likely to be the way of the future," he said - a draft standard might be available by yearend. "I think it's time to get it out and exposed to the industry."
