Many bankers take a dim view of substitute checks, the payment instrument that would be forged by the truncation legislation wending its way through Congress. They are perceived as expensive to create, hard to process, and ideally to be avoided.
But the one bank that is issuing substitute checks, Zions Bancorp, says its experience has been good.
"The simplistic view is that there is no business case" for them, said Danne Buchanan, an executive vice president at the Salt Lake City company. "I can absolutely show how to do a business case."
Picking up one day's float on a $1,000 mortgage payment coming in to the bank, for example, offers a "huge value proposition," Mr. Buchanan said. And because substitute checks are presented directly to receiving banks instead of through the Federal Reserve, clearing costs can be cut considerably, he said. "Often, clearing fees alone cost more" than the substitute check.
Mr. Buchanan also disputes the notion that substitute checks mean poor quality. "We've cleared against hundreds of thousands of substitute checks, and you can't tell the difference," he said. In one test Zions ran 100,000 substitute checks through processing machines and had three rejects, he said.
Substitute checks, which would be given legal weight under the Check Collection for the 21st Century Act, or Check 21, are paper printouts of check images. Also known as image replacement documents, they would carry the same legal status as original checks if the legislation passes, and would be processed very much the way regular checks are, except they would be transported electronically.
Since creating an image in the first place is such a task, some may rightly question why anyone would want to reverse the process by transforming an image back into a paper document. Basically, the answer is that the substitute check would exist to bridge old and new technology.
The substitution system ensures that no bank has to change its processing routines if it does not want to. If the law changes, banks doing imaging would have to accommodate those that are not by sending them substitute checks. They would produce them through software they install in-house or by contracting with processors or clearing houses in the business of producing substitute checks.
A main benefit of substitute checks is that they would eliminate nonelectronic transportation costs. An East Coast bank, for example, could send an electronic file of substitute checks to a processor on the West Coast, which would transform the images into paper and deliver them to the receiving bank.
Current law requires that banks secure agreements with one another to present and return electronic items. Getting rid of that tangle, and letting banks use images even when dealing with banks that lack electronic capability, paves the way for stronger industry acceptance of imaging.
Most bankers say the only thing substitute checks are good for is doing away with standard transportation costs. But Mr. Buchanan at Zions said there are other elements to the business case, including faster float times, lower clearing costs, and streamlined front-end operations.
John Lettko, the chief executive officer of Viewpointe Archive Services LLC, has seen many of Zions' substitute checks come through the check archive and said they have never presented a problem. "The documents are so good you can't tell them apart," he said.
Zions, which has been issuing substitute checks since June 2001, sends them to business partners of its corporate customers that cannot receive remittance information electronically. It also sends them to a handful of its credit card customers who do not want to receive information electronically.
It issues the checks through a software system it developed called NetDeposit, which produces electronic payments in the form of substitute checks, accounts receivable conversions, or check presentments, depending on the needs of the payer and payee. Zions is selling the system to other institutions and has one money-center bank testing it, Mr. Buchanan said.
The skepticism seems to stem from poor familiarity with the economics and logistics of producing substitute checks. The industry has gotten proficient at flying paper around the country, and some bankers fear that inserting substitute checks could disrupt the process.
Mary Ellen Baker, the managing director of consumer technology and operations at FleetBoston Financial Corp., said she did not know much about their costs, only "enough to know we don't want to do substitute checks."
Carol Malicki, a senior vice president and strategic migration leader in Wachovia Corp.'s payments business, noted that when Check 21 was proposed there was no business case associated with substitute checks. "We had to estimate their cost without knowing what the requirements would be," she said.
Wachovia has "no feeling" for the percentage of substitute checks that it will have to produce, a cost factor that will depend on how the regulations ultimately are written, Ms. Malicki said. If only 10% of the Charlotte company's outgoing volume were substitute checks, it would probably send those items to a clearing house or processor to handle, she said. If the volume were 40%, Wachovia would be more inclined to originate substitute checks in-house, she said.
David Walker, the executive director of Electronic Check Clearing House Organization in Dallas, put the cost of creating and processing substitute checks in the range of two to 2.5 cents apiece, versus about 1 cent for regular checks. He pointed to a number of potential costs of substitute checks.
First there is the paper, which has to be high-quality stock. Then there is printing, which involves regular ink for the body of the check and magnetic ink for the character-recognition line. Moreover, substitute checks will probably be laser-printed, which tends to create processing problems because the chemicals used can leech, causing toner to overlap or checks to stick together.
"Most of us think it's pretty expensive," Mr. Walker said.
The industry's hope, of course, is that substitute checks will not be a concern for long. Eventually they will be phased out, said Robert Hunt, a senior analyst at TowerGroup. "They may be a pain in the neck," he said. "But they may be what the industry needs to get through a transition phase."
