The number of check images that settle electronically is closing in on the number of images that must be converted back to paper.
Though banks convert millions of checks into images every month, more than half of them must be printed out as image replacement documents, because many companies cannot receive the files electronically.
In February, 78.4 million files traveled across the four main image systems, and 30% of them settled as images; the rest were printed out as IRDs, according to the Electronic Check Clearing House Organization, a Dallas standard-setting group.
In March, 37.9% of the 109.6 million images settled electronically.
Though volume is growing for both, the number of images being settled electronically is surging faster. David Walker, the president of Eccho, said in an interview Tuesday that he expects this trend to continue, and that electronic settlement will likely surpass IRD settlement soon, if it has not already done so.
"We're approaching" that point, he said, though "I can't tell you how quickly it will happen." (He expects to receive April data next week.)
Eccho bases its statistics on settlement figures provided by the Federal Reserve banks; The Clearing House Payments Co. LLC, which operates the SVPCO Image Payments Network; and the National Clearing House Association, a Dallas provider of settlement services for the nine large and midsize banking companies that use Viewpointe Archive Services LLC of Charlotte to share images. The NCHA also handles settlement for more than 3,000 financial companies that use the Endpoint Exchange Network operated by Metavante Corp., the technology subsidiary of the Milwaukee banking company Marshall & Ilsley Corp.
The growth of end-to-end image clearing is important, because IRDs are expensive. By some estimates, each one costs as much as 9 cents to produce.
Susan Long, a senior vice president at The Clearing House, of New York, said its banks crossed the 50% electronic-settlement threshold in April. In an interview Tuesday, she estimated that 53% of the images moving among the 13 banks that use the SVPCO network settled electronically in May.
SVPCO also transmits images to the Federal Reserve System, some of which are delivered to paying banks electronically through its FedReceipt service, and Ms. Long said that including these items would boost her network's May electronic settlement rate to 58.5%.
"Banks are obviously gearing up for clearing via image," she said. "Every month we see it going up. Now things are actually happening."
Eccho said more than 3,400 institutions, or 20.6% of the U.S. total, were sending or receiving check images in March, and that many more are likely to begin doing so in the near future.
Jeff Vetterick, the general manager of Endpoint Exchange, said more than 80% of images moving across his network settle electronically, but he projected that this figure may fall soon, because some of his customers are expected to increase their volume, so there will likely be more checks that cannot be delivered as images.
"They're willing to go full bore and give us 100% of their items, with the remainder being printed as substitute checks, as opposed to giving us just the image-exchangeable work," he said. "They're going to give us everything."
One of the main reasons there are so many IRDs in the system is that the Federal Reserve banks could not deliver images through FedReceipt until July 2005; it began accepting images through its FedForward service in late 2004, and the vast majority of the images it receives today must be converted into IRDs.
The Fed says it received 3.9 million images in April through FedForward but delivered only 721,000 images through FedReceipt.
At the Bank Administration Institute's TransPay Conference in Las Vegas last week, Fred Herr, a senior vice president in the Fed's retail payments office, said he expects the number of substitute checks produced by the Fed to continue to grow into the second half of 2007 or early 2008 before beginning to decline.
"The Fed's strategy is to electronify checks as soon as possible and to use whatever means to make that happen," Mr. Herr said. "We're predicting by late 2008 we're going to be over critical mass," with more than half of the nation's financial companies able to send and receive images.
Bob Meara, a senior analyst at the Boston research and consulting firm Celent LLC, said that electronic settlement's surpassing IRD settlement would be cause for the industry to celebrate.
That would be "a great day, because nobody liked this IRD thing, even though it served a very useful purpose," he said.
When image exchange began last year, the big banks were focusing on clearing high-dollar checks, Mr. Meara said.
"The business case for small banks is very straightforward, because of the funds availability advantages, which more than offset the comparably higher settlement fees," he said. As a result, an increasing share of all checks will be converted into images, and an ever-growing share of them will settled electronically. "All the dots are getting connected now."
