October 28, 2004, the effective date of the Check Clearing for the 21st Century Act, will be a watershed date for banking.
This law will revolutionize U.S. banking by requiring that banks be able to receive substitute checks - "image replacement documents." Check 21 will affect almost every facet of banking, including products, marketing, facilities, equipment and technology investment, float and check clearing, and operations.
Though the result will be revolutionary, the implementation will be evolutionary. Banks need only be ready to receive substitute documents, not to create them.
This approach has caused uncertainty about the impact on individual banks, so it is not surprising that Check 21's effect has not yet made it into earnings forecasts.
When forecasting earnings, chief financial officers speak with assurance when they have some idea about portfolio growth and are confident about interest rate trends. They also have a good handle on what cost cuts can do for earnings.
But the result of a Check 21 investment is also determined by what other banks do. No framework or business model shows how fast Check 21-related benefits will accrue.
Nevertheless, there are competitive benefits to be gained, and banks that act slowly may suffer for it. Most banks still have time to go beyond what the legislation requires - but they must have a plan.
Check 21 represents an opportunity to reduce the costs of moving paper within and among banks. These costs may be significant, particularly if a bank has a large network spread over a number of states or does a lot of check clearing.
More important, the law opens the door to addressing the needs of corporate customers. Traditionally their deposits are collected through a lockbox system, but banks with an effective imaging system can use capture technology within the framework of Check 21. Those banks can provide electronic deposit services, including image services, for which demand is increasing.
Check 21 can greatly expand the geographic market for banks to serve existing customers and compete for new business better. And because checks are cleared faster, banks can enhance their availability-of-funds policy and reduce fraud.
Banks should communicate with each other to help ensure success in the electronic era. Those with elaborate image exchange and capture strategies can reap the full benefits only if their competitors have deployed systems that support this strategy.
The whole industry will win if everyone moves to participate in Check 21 with all deliberate speed.
