The final two pieces of the Federal Reserve banks' image strategy are clicking into place.
Last week the Fed began processing returned checks using digital images. Once it begins transmitting images to paying banks by the end of this month, the central bank will offer an end-to-end image service.
Given the huge number of banking companies that route checks through the Fed, and the rapid adoption of the imaging services it has already rolled out, it seems likely that these services will become an important part of the banking industry's check processing systems.
Fred Herr, a senior vice president in the Federal Reserve System's retail payments office, said that these services, when combined with its existing capability to accept image files from depositing banks, allow the Fed "to gain the true efficiencies of the A-to-Z process."
Wachovia Corp. has signed up as the first customer of the FedReturn service for handling return items, Mr. Herr said. The Charlotte banking company received its first batch of 3,500 returns last Tuesday.
Another Charlotte company, Bank of America Corp., should be accepting digital image returns by early next week, Mr. Herr said.
The Fed expects to start using its FedReceipt service for sending image files to paying banks on May 27. Mr. Herr would not name any banks that might be using FedReceipt because it is still being tested. "It is the last step."
In October, just days after the Check Clearing for the 21st Century Act took effect, the Fed began accepting check images from banks using its FedForward service. But because it was not able to send them on to paying banks electronically, it had to transmit the images to a Fed branch close to the paying bank, print the files out as image replacement documents (IRDs), and then deliver them to the bank.
FedReceipt will make that step unnecessary if the paying bank is capable of accepting images. Collectively, the three products in the suite enable the central bank to provide the cost savings and quicker clearing that bankers have sought from the shift to image exchange.
The Fed processes as much as 40% of the nation's check volume, by some estimates. In April it processed 6 million IRDs, and while that is a small portion of its total volume, it indicates that the 6-month-old service has quickly become popular with banks. In contrast, the Endpoint Exchange Network, which has been clearing checks since 2002 and now has more than 3,400 participating banks and credit unions, routed 5.5 million images across its systems in April.
The Fed now has 85 institutions sending images at least part of the way to the Fed, Mr. Herr said. Thirty-five deliver image files, which the Fed converts into IRDs, while 50 transmit images to an in-house or third-party processing site where they are converted into IRDs and delivered to a Fed branch.
By late fall 350 to 400 banking companies will be using the FedForward system, Mr. Herr said.
Still, the banking industry's shift to full image exchange is moving slowly. Mr. Herr said the volume of IRDs would continue to grow through 2007 before peaking and starting to decline as more banks begin accepting items electronically.
"The key is to get enough receivers that are truly receive-enabled," he said. "That's when you take this high-fixed-cost infrastructure out. As long as we're still having to print substitute checks, we are still going to be shackled to a paper-based process."
Mr. Herr had told American Banker in December that FedReceipt would be available in January, but he said the Fed opted to delay the introduction of both the return and receipt services in order to work out some bugs, including the production of duplicate IRDs. But once the Fed introduced systems to minimize these issues, he said, it was ready to start offering the two remaining services.
For the most part the growing pains were not as bad as bankers had been anticipating, Mr. Herr said. For example, many executives had feared that poor image quality would hinder electronic processing, but he said resolution has not been a problem.
Robert Hunt, a senior analyst at TowerGroup of Needham, Mass., a market research unit of MasterCard International, said the arrival of the new Fed services should be a wakeup call for banks that have not yet determined their image strategy. "I think the Fed was trying to send a little message - get moving, get started," he said.
Mr. Hunt said that the use of image exchange has been slow so far because many banks put off the difficult back-end process of posting and paying to focus on the higher-priority task of capturing the images in the first place. Big banks especially have had a hard time winning acceptance among corporate clients that still want their original checks returned. He said image-exchange volume could begin to accelerate in the fourth quarter.
The Fed wants to get an idea of how much image exchange is affecting the industry. Richard R. Oliver, an executive vice president at the Federal Reserve Bank of Atlanta, said the Fed plans to begin gathering data in the third quarter for a Check 21 impact study that it is to deliver to Congress in April 2007.
He said there is some legislative pressure to reduce the maximum permissible hold times on checks. Under current regulations banks can hold local checks for as long as two days and nonlocal checks as long as five.
"There is this inclination on the Hill" to cut those hold times, Mr. Oliver said; as check payments are increasingly electronified, some legislators believe that clearing should become virtually instantaneous, much like debit card transactions. "We've been up there disabusing them of that notion," he said. "We are only going to do it if there is significant evidence to accommodate that kind of change."
