Last month, when the Federal Reserve Board announced FedReceipt, its long-expected service for delivering check images to banks, it already had more than a dozen users — all small and midsize banks.
Most banks are expected to shift to image exchange networks eventually, through the Fed or through competing private systems. And a few major banks are clearing small numbers of checks electronically now.
But the first banks to actually use the Fed’s network, sending and receiving as many checks as they can electronically, are all much smaller.
One reason is simply that it is easier to install software at a few branches than at hundreds. But some bankers say a head start of several months can prove at least a temporary competitive advantage.
Eliot S. Robinson of Sterling National Bank, a unit of the $1.9 billion-asset Sterling Bancorp of New York, says image technology can help even up its fight with such giants as Citigroup Inc. and JPMorgan Chase & Co.
“We try to stay current because we’ve got all these competitors,” said Mr. Robinson, an executive vice president, in an interview last week in the bank’s fourth-floor operations center in lower Manhattan. “Right downstairs we’ve got Chase.”
Alenka Grealish, the manager of the banking group at the research and consulting firm Celent Communications LLC, said it is not surprising that small banks are among the first to use FedReceipt.
Big banks’ operations are much larger and much more complex, she said. “These small banks are sailing a dinghy,” Ms. Grealish said. “In the big bank, you’re turning a battleship.”
She predicted that major banks would start sending and receiving large numbers of checks over image exchange networks next year.
In fact, small banks have long been out in front when it comes to image technology. Many community banks were sending customers statements with images of their checks instead of the originals several years ago, before the big banks adopted the practice.
Of the three image networks besides the Fed’s, the two targeting big banks, Viewpointe Archive Services LLC and The Clearing House Payments Co. LLC’s SVPCO Image Payments Network, are still getting low volume.
By contrast, Metavante Corp.’s Endpoint Exchange Network — with 5,000 small and midsize bank customers, 3,500 of them now using the system — delivered 8 million images to paying banks in September, about 40% more than in June.
Fred Herr, a senior vice president at the Federal Reserve Bank of Atlanta’s retail payments office, said many small banks depend on a single vendor for imaging technology. When that vendor introduces a module to connect to the Fed’s system, the banks “can drop it in easily,” he said.
Big banks often use multiple software packages, so “the conversion curve is a bit harder — it’s a little more complicated of a technological shift,” Mr. Herr said.
FedReceipt went live in September, but was not formally announced until Oct. 28, the first anniversary of the effective date of the Check Clearing for the 21st Century Act.
In October, 14 customers received a total of 626,000 check images through the system. As of Nov. 10 there were 28 FedReceipt customers, and all of them are small and midsize companies, Mr. Herr said. He expects some major bank customers by the first quarter.
Perhaps the largest banking company to fully image-enable its check processing system is the $11.1 billion-asset BancorpSouth Inc. of Tupelo, Miss.
Jeffrey Jaggers, a senior vice president, said that all but one of its 19 routing numbers are ready to receive images through FedReceipt.
BancorpSouth also sends and receives check images through Endpoint and Viewpointe and in direct exchange with Cadence Bank of Starkville, Miss.
Mr. Jaggers said that BancorpSouth is using images to process just over 10% of its monthly check volume of about 12 million, and that the key to increasing that number is finding more image-ready banks.
“If you don’t have trading partners, you can’t get your volume up,” he said.
At the other end of the size spectrum, the $200 million-asset Premier Bank of Lenexa, Kan., uses image exchange for 100% of its checks, even those sent to other banks in the Kansas City area, where it has its four branches.
Mark Miller, an executive vice president at Premier, said that the business case is unique for his bank, a unit of the $1.8 billion-asset Sturm Financial Group Inc. of Denver. Premier does its processing for 100,000 incoming checks and 75,000 outgoing checks each month at a shared data center in Cheyenne, Wyo., he said, and sending the checks there electronically instead of by courier “makes a big difference.”
Aaron McPherson, the research manager of payments at the Financial Insights Inc. research firm of Framingham, Mass., said smaller banks are likely to retain their lead in image clearing, at least for a while.
“Small banks are either dealing with much smaller volumes of checks, so their IT cost is much less, or a lot of them use [third-party] core processors that are image-enabled, so they get it all at once,” he said.
Mr. Robinson of Sterling said that sending and receiving images not only saves his bank money on transportation but makes processing the checks much easier. “Normally it takes us 10 to 15 minutes to process 4,000 checks,” he said.
About half its check volume moves through the Fed, he said — about 5,000 to 6,000 checks incoming and about the same number outgoing. All are handled as images; the only image replacement documents that Sterling requires are for return items, and “that will probably go away in two more weeks,” when it starts using the Fed’s image service, FedReturn, for those he said.
Sterling also uses the Fed’s FedReceipt Plus service, which enables the central bank to convert paper checks bound for Sterling into images that are delivered electronically.
Sterling also clears about 3,500 to 4,500 local paper checks a day through the National Check Exchange (operated by The Clearing House), and has an arrangement to send about 1,000 to 1,500 checks per day to JPMorgan Chase electronically, and then send the actual paper items later.
In June, Sterling began using the Fed’s FedForward service for sending its own transit items to the Fed electronically. In August it began testing FedReceipt. It is using imaging software from Fidelity National Information Services Inc.
Mr. Robinson said his company, which specializes in small and midsize businesses and has 10 branches around New York, previously outsourced its check processing to Fiserv Inc. About three years ago it brought the work in-house, realizing that image processing could improve service and reduce costs, Mr. Robinson said.
“When the major banks in the city get ready for image, we’re ready,” he said.
