SVPCo LLC, a for-profit arm of the New York Clearing House Association, has agreed to take over a check truncation project started by the Financial Services Technology Consortium.
The technology transfer accelerates by about two years the progress of SVPCo, a group formed in 1998 to spur the advance of electronic check presentment, which aims to cut fraud by sending pertinent information electronically in advance of paper checks.
FSTC's project, known as the Paperless Automated Check Exchange and Settlement standard, combines elements of electronic presentment and check imaging. Imaging would eliminate paper checks from the system, helping to achieve the long-discussed but elusive goal of reducing or eliminating the transportation of checks after they are deposited.
The confluence of imaging and electronic presentment systems "is probably the single most important thing to happen to the check clearing business since MICR technology was released in the 1960s," said Hank Farrar, president and chief operating officer of SVPCo. "Getting this process in place is significant in setting an industry standard."
The technology consortium will formally conclude its involvement in the Paperless Check project in September, when all project materials will be presented to the public. The seven-year-old group of banks and technology companies, led by Citigroup, began work on the project in June 1998.
SVPCo, which is owned by 22 of the largest banks in the nation, plans to adopt the rules and operating procedures of the Paperless Check project and make it the foundation of its own check image interchange strategy. SVPCo already processes 900,000 electronic check presentments a day.
The goal of the paperless check project is the ultimate in truncation: to take checks out of the collection process at the bank of first deposit. The approach involves contending with potential roadblocks, including various state laws that guarantee consumers the right to receive canceled checks, not images. It also contrasts with current check safekeeping practices, in which checks are held at the paying bank, not returned in accountholders' statements.
By transmitting images rather than checks, the Paperless Check project hoped to stop the flow of the 68 billion checks written each year at the point they entered the banking system. Truncating all checks could lower processing costs by $600 million a year, according to the Electronic Check Clearing House Organization, a Dallas-based rulemaking body for bilateral electronic presentment exchanges and an adviser to the project.
FSTC began the project with participation from FleetBoston Financial Group, Chase Manhattan, Citigroup, Comerica Inc., and SunTrust Banks Inc. Technology companies included International Business Machines Corp., Unisys Inc., Banctec Inc., and Check Solutions Inc.
In adopting the project, SVPCo is eliminating a redundant effort in which it was developing similar rules and procedures. Meanwhile the technology transfer gets FSTC off the hook for a pilot program. Consortium officials had begun to realize that a pilot was beyond its scope. Since all the banks participating in the Paperless Check project are also members of the larger SVPCo, the transition became logical.
SVPCo, whose members hold 49% of the nation's bank deposits, now has a "tremendous foundation to work from," said Phyllis Meyerson, head of the project's rules team and senior principal at the Electronic Check Clearing House Organization.
This is not the first time the technology consortium has handed off a development project to a bigger organization. Last year it signed a memorandum of understanding for CommerceNet to take over its E-Check project, which aimed to create a functional equivalent of paper checks for the Internet by using electronic mail and digital signature technology.
This pattern of handing off projects is helping to solidify specific roles for the many associations and consortiums that have formed to promote various technologies.
Adam Backenroth, executive director of the FSTC and a Chase vice president, said he is comfortable viewing the group as the research and development arm of the banking industry. In turn, SVPCo naturally plays an operational role, and BITS, the Banking Industry Technology Secretariat, which is the Financial Services Roundtable's technology group, becomes a coordinator. The Electronic Check Clearing House Organization and Nacha, the electronic payments association, fulfill rulemaking roles.
"I do not want to speak for the industry and create a model here," Mr. Backenroth said. "But we believe very strongly that the industry needs to have somewhat of an R&D arm in order to get the time-to-market thing done much faster. We are happy enough to be in that niche, if you will, and to leave some of the other niches to other players."
Steve Ledford, a vice president at Global Concepts, an Atlanta consulting company, said large banks are realizing the special roles that each banking trade group plays. They are increasingly turning to the trade groups for specific reasons, as opposed to supporting many parallel efforts.
"I think it is part of the overall desire among large banks to focus their efforts, as opposed to scattering them," Mr. Ledford said. "They do not want to create a lot of disparate approaches to this that would then have to be reconciled."
John Beran, senior vice president at Comerica and a member of BITS' advisory council, said he senses that BITS is not only assuming a coordinating role, but is generally seeking to eliminate redundancy among banking trade groups.
"I think people have more understanding of their roles," he said. "Whether or not there is overlap - I believe there is - and to what degree that overlap should be done away with, I do not know."
Kit Needham, senior director of BITS, said her group is trying to get a better understanding of the incidence of check safekeeping, a milder form of truncation that eliminates transportation costs.
The recent BITS survey suggested that safekeeping is more successful than many bankers believe. Some banks are safekeeping as much as 75% of all checks, she said, which could pave the way for a more concerted industry push into truncation.
"Increasingly, in the last three years, a significant portion of checks has been moved to safekeeping, and that is with or without imaging," she said. The notion that safekeeping or truncation "won't fly is not true."
BITS is planning a to conduct a larger study of safekeeping practices this year.
