A four-month-old test of an electronic check-clearing system has worked well, participants said, though at least one bank is still searching for significant bottom-line benefits.
In the pilot, four Federal Reserve banks and two community banks in Minnesota are using a new type of automated clearing house message to settle check payments, rather than shipping regular paper checks between banks.
Banks nationwide are watching the test to see if it can revive check truncation.
The promising technology is rarely used, partly because banks have had a difficult time justifying the cost.
A Welcome Alternative
"It's a critical test," said James J. Hopes, the president of Chase Automated Clearing House Inc., New York, a unit of Chase Manhattan Corp. "If it works and gets expanded, then we'll have a very viable alternative" to passing paper checks between banks for settlement.
With check truncation, the flow of paper checks for settlement between banks is halted and the dollar amount, account, and bank identification codes are entered into an electronic message. The message is transmitted either over the automated clearing house system or directly from a Federal Reserve bank's computer to that of a receiving bank.
Financial institutions pay 2.5 to 4 cents per item to send paper checks through the normal settlement process, said Karen Lyter, assistant director of rules and operations at the National Automated Clearing House Association in Herndon, Va.
Both Sides Pay
With current truncation services, institutions pay 0.5 cent to 1.5 cents per item. The problem is that both sending and receiving institutions must pay settlement charges for check truncation, while, with paper checks, only the sending banks pay, said Mr. Hopes of Chase.
The new technology promises to lessen this barrier by slashing truncation charges to an average of 0.2 to 0.25 cent per item, Ms. Lyter said.
The service costs less because institutions can pay multiple checks in a single electronic message sent over the automated clearing house, based on a new standard called TRX.
The Federal Reserve banks of Cleveland, Kansas City, Minneapolis, and Richmond are participating in the pilot program.
So are Citizens State Bank, Waverly, Minn., with $20 million in assets, and Itasca State Bank, Grand Rapids, Minn., with assets of $33 million.
Coded for Processing
Four clients of the two community banks agreed to use check truncation services for rebate checks under $25 that they send out to consumers.
The firms signify that a check is eligible for truncation by placing the digit 3 in a prearranged space on the check's magnetic ink code.
The companies mail the checks to consumers, who deposit them in banks that process them through the normal system for clearing paper checks. If, in the clearing process, checks eligible for truncation flow to one of the Federal Reserve banks participating in the pilot, the Fed banks store and truncate the checks.
Ms. Lyter of the National Clearing House said that from the inception of the pilot on March 13, to July 3, more than 11,000 checks were truncated, nearly 5% of the eligible checks mailed out.
Participants in the pilot said a software glitch at the Federal Reserve halted truncation services for a couple of days in the first week of the pilot.
They added that return items now must be processed manually instead of electronically, a situation the banks are working to change.
But, on balance, the pilot participants said the new technology is sound.
"I think it's worked out remarkably well," said Joseph F. Keller, vice president of United Check Clearing Corp., Minneapolis, which provides check processing services to Citizens bank.
But, United Check Clearing has yet to see a payoff from the pilot, Mr. Keller said. He explained that check truncation could save United Check Clearing money by eliminating the need to run paper checks through sorting equipment, but the volume of truncated check payments received thus far, about 10,000 items, hasn't been large enough to generate substantive savings.
"Once we start getting 100,000 to 500,000 a month, then we'll be talking about some real savings," he said. "But we don't know when we're going to get there."