Several major banking companies are discussing testing an electronic check-clearing system that would combine imaging technology and the automated clearing house network.
Linking the two payment networks would let banks that have invested in imaging systems convert check images into ACH files to be sent to those that have not.
The concept is still in the very early stages, and there are significant technical and legal barriers to merging the two systems, such as how to notify consumers and how to make archived check images available on demand to paying banks. Still, there is strong momentum behind the idea, and one banker says that tests could start within three months.
Danne Buchanan, an executive vice president with Zions Bancorp. of Salt Lake City, summarized the problem with the current set-up: "With Check 21, we can convert all our items into images, but we can't reach all endpoints. With ACH, we can reach all endpoints, but not all items are eligible for conversion. Is there some way to make those systems converge?"
Bankers have been discussing the idea for about a year, and it has the support of some of the country's biggest financial companies, including Bank of America Corp. and the Federal Reserve banks, both of which joined Mr. Buchanan on a panel discussion last week at the Payments 2006 conference in San Diego.
Nacha, the electronic payments association, also supports the concept.
John G. Feldman, a senior vice president and the image transactions and payments executive with B of A, said the Charlotte company processes between 8 billion and 9 billion checks a year, second only to the Federal Reserve System. B of A was one of the early adopters of imaging technology, but because it takes in so many checks drawn on banks that cannot accept images, it can settle only about 7.5% of its volume electronically now, up from 2% at the end of last year.
Mr. Feldman expects that figure to reach 20% this year, mainly through its participation in The Clearing House Payments Co. LLC's SVPCO Image Payments Network and Viewpointe Archive Services LLC. However, those networks are used mainly by large banking companies, and he said an image-ACH connection would be "an opportunity for reaching community banks."
Every financial company in the country is connected to the ACH network. "We're talking about putting together pieces of the puzzle that are already there," Mr. Feldman said.
Patrick J. Moore, the product executive for domestic ACH and deposit services at JPMorgan Chase & Co., the industry's No. 1 ACH originating bank, said in an interview Tuesday, "If we can leverage the ACH rails to get to the rest of these financial institutions, we would be very interested in exploring that."
Though the details of the initiative have yet to be worked out, "we are looking to champion the idea as it makes its way through the planning process," he said.
Banks are already converting billions of checks into ACH payments every year, using several different payment formats approved by Nacha. However, only consumer checks - not business checks - are eligible for conversion under these rules.
Elliott C. McEntee, Nacha's president and chief executive, said in an interview Monday that there are several hurdles to merging the ACH and image systems. For starters, when a check is converted into an ACH payment, it becomes a new instrument, and the original check disappears from the payment stream, he said.
For that reason, all conversion formats require the check-writers to be notified, and that would be hard to do if the bank were converting the checks behind the scenes, he said. "There is no direct authorization between the check-writer and the payee."
The current rules, authorized under the Federal Reserve Board's Regulation E, specify that the conversion take place before a check is deposited, but the concept calls for banks to convert images into ACH payments after they have been deposited, Mr. McEntee said. "We would definitely need a new ACH rule, and we probably won't be able to use Reg E."
In addition, about a quarter of consumers still get some paper checks (or printouts of images) back in their monthly statements, he said. They do not receive checks that have been converted to ACH payments, though in theory the billers or merchants that are converting their checks have notified the customers of this.
But if an image-to-ACH conversion system cannot notify customers, they would still need to be provided with their checks, or printouts of the images, he said.
Though it might be possible to deliver image files across the ACH network, Mr. McEntee said doing so "would definitely create capacity problems," because the files are much larger than the ones that carry ACH payment data.
Mr. Feldman said that the various archives could provide images of customers' checks on demand to paying banks, even if the banks are not customers of those archives.
However, that idea brings its own problems. George Thomas, an executive vice president at The Clearing House, said there is no standardized system for archiving images, so creating a system that lets any bank demand access to images in any archive would be difficult.
Image-to-ACH conversion "sounds like a good idea, but it would be a huge effort to serve a declining industry," he said. "This is a nonstarter, not because it's not the right thing to do, but because it would just be too hard. It won't work across multiple archives."
Richard Oliver, an executive vice president with the Federal Reserve Bank of Atlanta and the manager of the system's Retail Payments Office, said banks would need a system that could determine which checks could be sent across image-exchange networks and which could be converted into ACH payments.
Though he recognized that this may be a tall order, "the early days of ACH were bumpy, too," he said.
During the panel discussion, Mr. McEntee asked the audience if they supported the concept, and almost every hand in the room went up. About half of the crowd agreed that such a system could be tested within a year, while a few said it could take as long as two years to get such a project off the ground.
Several people said the test almost certainly would involve only consumer checks.
Mr. McEntee said Monday that Nacha could come up with the rules, policies, and systems to support a pilot test of an image-ACH payment system by yearend.
However, in an interview Monday, Mr. Buchanan said that the bankers who have been talking with him want to move much faster, and that a pilot test be up and running within three months.
"The big banks and the Fed, the guys that are right in the middle of image exchange, are frustrated," he said. "This makes perfect sense. It's the best model out there."
