The Internet will play a significant part in maximizing banks' gains from electronic check truncation - and so, therefore, will technology to minimize the security risks.
Truncation is just around the corner. The latest date in bills the House and Senate passed last month is the fourth quarter of 2004. Reconciled legislation is expected to reach the White House this month.
The legislation would enable banks to clear check transactions with the original check, a digital image of it, or a paper reproduction called an "image replacement document."
The big story here is float management. Since electronic transactions can clear in a day, depositing banks could capture trillions of dollars with the right technology. The acceleration of float capture can have deep implications for cash management, daily cash positions, and in some circumstances Regulation D reserve compliance.
Rick Kuhn of Carreker Corp. has written that the annual value of the float improvements exceeds $2 million per operations center. His report concentrated on large banks, but there's a bottom-line story to be found in every transaction that is optimized through check truncation.
The market will be served by shared check image archives and exchanges, operated by companies and consortiums such as SVPCo and Endpoint Exchange, or by large banks on behalf of smaller correspondent banks. Even the Federal Reserve is entering the fray with its FedImage service. Each of these offerings provides fabulous capabilities for banks to outsource their check image archives and to clear, settle, reconcile, and process returned items.
Several of the outsource players are offering managed private networks to connect banks to their services. This can be highly effective for transmitting the MICR data - the scanned-in data at the bottom of a check.
However, for sending actual images of checks, these network connections begin to get quite expensive. Also, for smaller banks a dedicated network connection to one or more archive services can get expensive.
I believe that the Internet will soon be used to augment or replace some of these private network connections.
Cost efficiencies will drive all banks to connect their branches to each other and their correspondent check processors over inexpensive Internet-protocol networks - or even public Internet connections. After all, there is little use in gaining the efficiencies of electronic truncation just to give away the savings to telecommunications companies for dedicated leased lines.
Internet bandwidth is scalable, and the Internet is available anywhere in the country with a local connection. The Internet will allow banks to connect to multiple services or directly to each other to exchange the data. And the use of standardized Internet protocols will allow banks to choose between a myriad of IP-based network providers and software providers, thus reducing cost and increasing flexibility.
Naturally, sending banking data over the Internet seems challenging. However, the reality is that banks already do it. Every day tens of thousands of corporate customers use the Internet to send payment instructions to their banks and receive bank balances and transaction statements from them.
A new generation of highly secure and reliable file transfer software products have emerged to address this market need. (My company is among the suppliers.) Securing the connections with strong encryption, tracking all transfers with digitally signed audit records, and authenticating connections with digital certificates can provide as much security or more than traditional private networks do.
Coincidentally, the bank that solves its security and Internet transfer challenges for check imaging does so for a number of other intrabank and interbank applications.
Check imaging opens up an opportunity in services that can be provided once a check is reduced to a digital object. Commercial clients may opt to take their entire statement electronically. Small businesses may like the idea of keeping all their transactional records in an application-service-provider-style service on the bank's servers accessible through a secured browser.
Secure check-image transfer over inexpensive Internet links, I believe, is a keystone technological advancement in the financial services industry. The savvy bank will plan today to first capture that fugitive float and then design the products and services that its increasingly tech-savvy commercial and consumer customers will appreciate - and pay for.
