The first piece of the Federal Reserve Banks' image exchange network is working, and the second will be available soon.
Fifteen banks are already submitting digital check images to the Fed, and though it says the system is ready to deliver electronic image files to a few banks, it has not yet started doing so.
But the Fed, which currently receives about 35,000 checks electronically daily, could become one of the most active image exchangers when its system begins true image clearing early next year.
"It's working now, and we expect it to ramp up throughout the rest of next year," said Fred Herr, a senior vice president with the Federal Reserve Bank of Atlanta's retail products office.
The Fed's FedForward service lets banks transmit checks to the central bank's image network in the form of image cash letters - batches of check images with a file listing the receiving banks and amounts.
The Fed then transmits the images to whichever Fed branch is closest to the receiving bank, prints out the files as image replacement documents, and delivers the paper to the bank for settlement. Mr. Herr said that the Fed began accepting image cash letters late last month.
The FedReceipt service, which will let banks receive and clear check images electronically, will be the next step in the process. Mr. Herr said FedReceipt is ready now, and though there are no customers using it, "a few" of the banks currently using FedForward are expected to start receiving image files next month.
"We will do some image clearing in early 2005," he said.
Barbara Wallace, the assistant vice president in charge of bank operations at Simsbury Bank and Trust in Connecticut, said that since delivering its first image cash letter Dec. 14, it has been sending between 20 and 75 checks daily. Because Simsbury is still making sure the system is working properly, it is using the system right now only for checks of $2,500 or more, she said.
The most obvious change Ms. Wallace has observed from using FedForward: Checks that previously took two to three days to clear are now typically settled the next day. "It's nice to get your credits more quickly," she said.
She also said that it is easier to trace and process checks and that in general "everything just goes much smoother."
Next quarter Simsbury plans to begin accepting images through FedReceipt, she said. If that proceeds without incident, Simsbury will also begin delivering all of its checks to the Fed electronically next quarter.
Mr. Herr said that the banks currently using FedForward range in size from community ones to giant national ones, and that their image volume varies dramatically; Bank of America Corp. said Tuesday that it started using FedForward on Nov. 22.
The Fed said it was developing both FedForward and FedReceipt earlier this year, but they were not officially introduced until October 28, the same day that the Check Clearing for the 21st Century Act took effect. That law requires banks to accept IRDs in lieu of original paper checks. Many banking industry observers predict the law will also promote the use of image exchange networks, once banks start to see the advantages of using images.
When the Fed starts using FedReceipt, it will become the fourth operational image clearing system. Endpoint Exchange, which is operated by Marshall & Ilsley Corp.'s CheckClear LLC, has been transmitting image files since late 2002, primarily for small banks and credit unions.
Viewpointe Archive Services LLC, which is owned by 10 of the nation's biggest banking companies, began settling a small number of checks this month. Viewpointe claims to archive more than half of the nation's checks, including more than 40% of the transit ones.
First Horizon National Corp. and SunTrust Banks Inc. are settling a few hundred checks daily through the archive; the remaining eight banks are expected to join the effort by mid-2005.
KeyCorp and J.P. Morgan Chase & Co. began pilot testing Clearing House Payments Co. LLC's system in August, and they continue to settle a limited number of payments electronically.
However, Robert Hunt, a senior analyst at TowerGroup Inc., a Needham, Mass., market research unit of MasterCard International, said that as the world's largest check processor, the Fed could eventually become one of the industry's largest image processors. Clearing with images "will be a big step forward" for the Fed, which handles about 40% of interbank checks, he said.
Mr. Herr said that in developing in its image exchange system, the Fed had the advantage of an existing data network, which it was able to use for the internal movement of image files between the Fed branches.
"It helps to already have connectivity. That's one of the pieces that was already in place," he said.
Simsbury is working with Open Solutions Inc., a Glastonbury, Conn., technology vendor and item processing outsourcing provider. Mike Nicastro, a senior vice president with OSI, said it is the first vendor to develop an image system that the Fed has certified for use with its image network.
Mr. Hunt agreed that OSI "seems to be furthest along in delivering a product that can work with all of the Fed's services."
OSI is "not your traditional item processing outsourcer," Mr. Hunt said. Many check processing vendors run their own sorting and processing centers, but OSI's operation is almost entirely image-based, he said; banks convert the checks into image files at the branch and transmit them to an OSI data center, where they are forwarded to the Fed.
Mr. Nicastro said that OSI is working with a dozen banks that will be using FedForward soon and that many of them are also preparing to use FedReceipt. Simsbury, which is based near OSI, is serving as the vendor's technology demo site, and he predicted that the bank would be one of the first to use FedReceipt.
"What we're doing is taking a bank's entire day's work and sending it off as images," Mr. Nicastro said. "With one flip of the switch, we are making the entire world of item processing centers obsolete. It won't happen overnight, but it is going to happen."
He also said several of OSI's customers are ready to use the system but are still waiting for approval from the Fed, which requires banks to undergo an extensive testing process.
