The Financial Services Technology Consortium said Tuesday that its members have made significant strides toward a potentially paperless check- clearing system.

The consortium, which includes Citibank and several other of the biggest U.S. commercial banks, demonstrated two types of image processing that participants said could evolve into full-scale check truncation.

William J. Krajewski, a consortium project director and Citibank vice president, called truncation - the holding of checks at the banks where first deposited - "the ultimate goal ... eliminating the need for tens of billions of paper checks to move through the banking system."

The more modest steps announced Tuesday are the first products of an interbank check imaging project that the group launched last February: notification of return items and forward presentment.

In both cases, banks transmit and view images of checks, rather than the physical items.

While many banks have invested in image processing over the last several years, most of the benefits have accrued in internal efficiencies or in marketing, as in the case of bank statements with facsimiles of canceled checks.

Experts say that extending the technology to interbank check clearing, and perhaps ultimately truncation, would go a long way toward eliminating payment delays, improving customer service, and reducing fraud.

In the demonstration, at a press conference in New York, Citibank and Chemical Bank exchanged a return-check image over computer screens. First National Bank of Boston and Huntington National Bank of Columbus, Ohio, did the forward-presentment demonstration, showing how banks could detect and prevent a fraudulent transaction.

Citibank and Chemical used an imaging system from the New York Clearing House Association, an advisory member of the technology consortium. Mr. Krajewski described the system as "a good way to get started with image interchange beyond what banks have been doing internally."

Though it was based on the clearing house's Electronic Check Clearing Return System, or Checcrs, it can be expanded through the technology consortium's membership to other users and parts of the country. The group expects to launch "pilot implementations" in the first quarter of 1996.

The Huntington-Bank of Boston example, using bad checks that had purposely been deposited by employees of the respective banks, illustrated the benefits of system interoperability: Huntington relies on Unisys Corp. imaging equipment, Bank of Boston on International Business Machines Corp. technology.

The image interchange enabled the banks to home in on exception items that, if allowed to clear, would likely have turned into fraud losses.

"We have been using Unisys check capture equipment for more than five years, and have been doing electronic check presentments more than three years," said Richard C. Ercole, president of Huntington Treasury Management Co. "This is a marriage of technologies that we think will greatly reduce fraud."

Mr. Ercole pointed out that approximately 1% of all checks written, some 630 million items, are returned unpaid, causing "a loss to the banking community and its corporate clients of $10 billion to $20 billion a year."

The interbank check imaging approach "is meant to reduce that number by shortening the forward presentment of checks to the paying bank by anywhere from a few hours to a day," Mr. Ercole added. "The paying bank can hold its funds and prevent a loss."

Despite bankers' increasing attention to electronic delivery systems, check volumes are vast and still growing, said Philip G. Stanley, director of business systems planning at Bank of Boston.

"Customers prefer the existing paper-based payment system," he said. "The bulk of our investments, therefore, like the image interchange with Huntington, are aimed at improving this existing system by making it better, faster, and cheaper."

Mr. Stanley said the project has proved that "unlike systems can talk to each other, images can be used just as well as paper, significant benefits can be delivered to ourselves and our customers," and the consortium can manage "large projects that can benefit the entire industry."

Mr. Krajewski said the consortium's high level of cooperation makes full-fledged truncation fathomable after "the banking and computer industries have been chasing after this possibility for at least 20 years."

In addition to the four test banks and two system vendors, Chase Manhattan Bank and CoreStates Bank are image exchange project members. Brooklyn Polytechnic University, Lawrence Livermore National Laboratories, and the New York Clearing House are advisory members.

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