Many banks are discovering that the process of converting checks into digital images and then back into paper as image replacement documents is creating a significant amount of duplicate items.
The number of duplicates is quite small when compared to the number of checks and IRDs moving through item processing systems, but the duplicates must all be corrected manually - a time-consuming task that offsets some of the advantages of imaging. The problem also threatens to alienate depositors, who may be charged twice for the same check.
Though bankers involved in the transition to image exchange had feared that both the original check and its digital image replacement might find their way into the item processing stream, the current problem occurs when an image is converted into more than one IRD.
"It has been an unforeseen problem that has shown up in a process that we didn't expect," said Fred Herr, a senior vice president in the Federal Reserve System's retail payments office. "It is occurring a little too often in the print process."
The problem of duplicate checks came up numerous times last week at the Bank Administration Institute's 2005 TransPay conference in Orlando. Several speakers at the conference said they are working to address the problem, but they also warned that bankers could face customer service problems until the fixes are in place.
In December the Fed noticed that large batches of files were being submitted twice for printing, Mr. Herr said. The Fed installed systems to detect and stop that problem, and there have been no major duplicate batches since early January, he said.
However, the duplication of individual IRDs is an ongoing problem. Mr. Herr said that if a high-speed printer jams and resets itself, it could produce two copies of a single check, both of which then proceed through the automated processing system. Last month the Fed processed 6 million substitute checks and found 3,000 items were duplicated, he said.
Though the problem is relatively small, "I don't want to minimize it," he said.
Mark Craig, the general manager of Marshall & Ilsley Corp.'s 3-year-old Endpoint Exchange Network of Oklahoma City, said duplicate items are less of a problem with his image exchange network, the only one being used to clear checks electronically on a large scale. Unlike the Fed's system, Endpoint processes images in small batches, he said, so if a single batch were processed twice by mistake, it would not be a huge problem.
Last month 5.5 million items were transmitted across Endpoint's network, but only two or three duplicates were reported, Mr. Craig said.
The same automated filters that banks use to detect fraud can also catch duplicate items, usually by checking the serial numbers on incoming checks, he said. "Typically the bank pays the first item and returns the second."
Mr. Herr said the Fed is working with the Electronic Check Clearing House Organization to develop standards for handling duplicate payments. The problem occurs not only with substitute checks, but also with checks that are converted to automated clearing house transactions, he said.
"We're building systems" to catch duplicates in imaging systems and in ACH transactions, "but they're new scenarios," Mr. Herr said. So far the Fed has relied on manual controls to catch these problems, he said; it is developing automated systems, but that process could take some time.
Image exchange is "a new payment system," he said. "It's in implementation. We're still learning."
Though the conference focused on the growing use of check images, several executives also discussed one concept for processing checks without using either the original check or an image of it. Advocates of the concept, known as image-on-demand, say it could make item processing more efficient than image exchange systems and could eliminate the problem of duplicated items.
Rather than transmitting large image files, Mr. Herr said, it would be more efficient for banks to simply transmit information about the check - such as the account number, the amount, and the bank routing number - in a smaller file that could help the paying bank find the image in an archive, if the bank or customer needed it.
"Moving these images takes a lot of resources, takes a lot of bandwidth, and takes quite a bit of time," he said. Image-on-demand is "the ultimate end game" for clearing checks, and though such a system still seems to be a long way off, "we may be closer than we think."
A. Jerry Chambers, the acting chief executive of Viewpointe Archive Services LLC of Charlotte, said it is using a very similar model for its shared image archive. Eleven major banks store their images in the archive, and two of them are settling checks between themselves by sending each other details about the check and directions to find the image within the archive.
"That is our model. An on-demand world is where you have to get," he said.
However, many bankers at the conference said they were worried about the idea of clearing checks without the checks, in part because it could render useless much of the effort that has been put into developing image exchange networks.
Mr. Chambers conceded that this could be a side effect of image-on-demand, but he said bankers should be more concerned with the result than with the transition. "A lot of the investment could be throwaway … [but] it's the payment that's really important. It's not the image."
However, Susan Long, the senior vice president of SVPCO - Electronic Clearing Services at Clearing House Payments Co. LLC, of New York, said that all of the investment in image exchange systems would remain valuable.
"The technology that the banks need for exchange, they're going to need anyway" for capturing images, Ms. Long said.
