The banking industry could boost its bottom line $2.6 billion annually by replacing conventional check-processing systems with more advanced technology, according to a recent report.
The report, issued by the Electronic Check Clearing House Organization, generally encourages the conversion of paper checks to electronic items whenever possible. The earnings improvements it touts would come largely from operational savings.
The organization recently distributed the findings to more than 200 top bankers, vendors, and trade association executives, as part of an effort to move toward a paper-free payment system.
The group, which has 67 bank members, uses the specter of nonbank encroachment on the payments system to give urgency to its message.
"Inconsistent bank commitment to this payments system evolution will compromise banking's collective efforts and allow nonbanks to secure a much larger share of the banking industry's payments franchise," says the report, "Managing Value in the Transition to Electronic Payments."
Though many banks offer electronic check services, especially in cash management, last year the industry still processed nearly 63 billion paper checks, which accounted for 72% of all noncash payments, the report said.
"There has been a resistance to change," said Michael Pasiecki, chairman of the clearing-house group and senior vice president of check and commercial loan operations at Chase Manhattan Corp. "There have been a lot of other priorities that operations areas and executives have had to deal with."
The clearing-house organization is not alone in pushing banks to embrace electronic check initiatives. The Bank Industry Technology Secretariat, an offshoot of the large-bank group known as the Banker's Roundtable, for the last several months has been developing standards for electronic payments.
The report outlined four ways for banks to improve the nation's check- processing system:
Electronic check presentment-the electronic transmission of account and payment data to a paying bank in advance of shipping the actual paper check for processing-could contribute an estimated $850 million in annual earnings by reducing bank expenses and by increasing access to investable funds.
Same-day transmission of bad-check data between banks could reap an additional $700 million, mostly in the form of reduced writeoffs. The Federal Reserve Board in Washington estimates that banks lost $600 million in 1996 due to bad or fraudulent checks.
Check truncation and imaging at the bank of first deposit could add $600 million to bank earnings annually. Most of this would come from eliminating operational costs associated with handling paper checks.
Various cash management services, such as electronic check return notification, could add $450 million to the industry's bottom line by improving fee revenue and cutting back on fraud.
The authors of the report note that these steps would not revolutionize the payment system. And they do not aim to discourage consumers from writing checks in the short term.
"We are not relying on changing the habits of bank customers," said David Walker, the organization's managing director. "We are trying to make the process easier to gain acceptance."
According to the report, the payoff of the electronic initiatives would be greatest for banks with deposits in excess of $100 billion, because those institutions "tend to have the greatest bad check writeoffs and the largest share of corporate cash management sales."
By embracing the advanced check technologies, a bank with deposits of $30 billion typically could enhance its earnings by $35 million annually. A bank with deposits of $10 billion could see gains of $7 million annually, according to the report.
The organization's executives are hopeful that over the long term they can reduce the number of checks written through electronic commerce projects.
"We can't wait for checks to go away," said Mr. Pasiecki. "There is value in taking action now."