One of the first banking applications to take advantage of check imaging technology is remote-capture deposit, which lets corporate customers convert checks to digital files and deposit them electronically by zapping the data to the bank.
Early response has been enthusiastic from both customers, who avoid a trip to the bank, and from banks, which call the service a new source of revenue. But the convenience is tempered by a new kind of risk, which may limit the service’s availability.
The reason: liability.
“It is becoming incumbent upon us to know our customer very well,” said Woody Tyner, the president of Creative Payment Solutions Inc., a subsidiary of BB&T Corp. of Winston-Salem, N.C.
CPS is developing a remote-capture deposit service it should begin testing in three months. The services is scheduled to go into full production in the fourth quarter.
First Horizon National Corp., Bank of America Corp., and NetBank Inc. have started or announced plans to start similar services in recent months.
When the Check Clearing for the 21st Century Act takes effect in October, many banks plan to start settling transactions by converting paper checks into images and zapping them around the country. Sometimes the transactions will be settled using only the image, and sometimes the paying bank will turn the image back into paper by creating an image replacement document, a physical printout of the electronic file.
And every time the paper is converted to bits, or changed back to paper, the burden of liability shifts.
According to the rules drafted by the Electronic Check Clearing House Organization, which many banks plan to follow, a bank that converts a check to an image also warrants that the image is readable and contains all the information necessary to settle a transaction.
But when banks sell check scanners to their corporate customers and let them convert the paper into images, the banks are also trusting their customers to create valid files. And even though most of these banks now plan to pass on this liability to the corporate customer, there appears to be some concern that not all customers can handle this burden.
Lou Riehl, a senior vice president at J.P. Morgan Chase & Co. and the chairman of the Financial Services Technology Consortium, said banks will be selectively offering remote-capture deposit services to customers. Banks will not want to take electronic deposits from potentially unstable customers, he said.
“They will pick and choose their customers,” he said. “We’re not going to let” the little corner store scan checks.
Harold Williams, the senior vice president for business development at CPS, said remote-capture deposit services put nonbankers in charge of a banking process. “When we push the capture of images out to our corporate clients, who really may be very good businessmen but who are not item processing specialists, it introduces a lot of risk.”
Taylor Vaughan, a senior vice president for treasury management services at First Horizon’s First Tennessee Bank, said its remote-capture deposit contracts include a clause that passes on the liability to the customer.
“It behooves them to inspect every image,” he said.
CPS and other banks are doing the same thing, and Phyllis Meyerson, a senior vice president with Eccho in Dallas, said they are smart to do so. Under the trade group’s rules, the bank that converts a check into an image bears the liability. The underlying principle is that whoever creates a file should be responsible for it, and letting a corporate customer do the conversion should not change this, she said.
“Banks need a way to transfer the liability back to the people who are actually creating the image,” she said.
However, many bankers expect image exchange systems to take off slowly and say they will initially convert the image files they receive from corporate customers back into paper by creating IRDs.
That’s what First Tennessee, of Memphis, is doing now, according to Mr. Vaughan. It introduced a remote-capture deposit service in March and currently uses IRDs to settle the transactions.
Using IRDs also adds a wrinkle to the question of liability, according to Ms. Meyerson. Check 21 states that a bank that turns an image back into paper assumes responsibility for the newly created document.
Mr. Tyner said CPS is using software from the Dallas imaging vendor Carreker Corp. that forces the corporate customer to inspect and verify every image. That feature is meant to solve the liability issue by preventing bad images from entering the system.
“We tried to make it idiot-proof,” he said.
