January 07, 2003

The end of the check-clearing paper trail is getting closer.The Small Value Payments Company (SVPCo) has uncorked plans for a service that will enable banks to stop moving paper checks around the country and start sending electronic data and check images instead.

Testing on the check electronification service, called Image Exchange, is scheduled to begin next year.

"Our goal is to truncate the check and just move images," said Hank Farrar, president and chief operating officer at SVPCo. "We are going to spend the next year building the infrastructure and network to allow this to happen."

The project has the essential ingredient of critical mass: SVPCo member banks process about 60 percent of the nation's checks. With Image Exchange, said Farrar, "our goal is to get to 100 percent."

Initial testing on the system, which will be operated by SVPCo's Electronic Clearing Services (ECS), will focus on check returns. Live exchanges are expected to take place the first quarter of 2004.

Eight member banks have already agreed to participate: KeyBank, JP Morgan Chase, Bank of America, Wells Fargo, U.S. Bancorp, Wachovia, Bank One, and Comerica. All 21 SVPCo member banks will ultimately get involved, as will other financial institutions and third-party processors such as Electronic Data Systems and Fiserv.

All banks are welcome to participate, provided they possess the necessary core infrastructure, according to Farrar.

"This is an open system. We want it to be interoperable with the Federal Reserve," he said.

The banking industry could save $2.1 billion annually by using Image Exchange, SVPCo estimates. The benefits, Farrar said, are "very heavily weighted toward hard-dollar operational savings," such as lower transportation costs and fewer reader/sorters.

"The business case for Image Exchange and the investment that needs to be made is compelling, even in today's tight-money environment," he continued. "You can save money immediately-and you cannot say that about a lot of things."

But achieving those savings depends on Congress passing the Check Clearing for the 21st Century Act, which would end the requirement that checks be physically exchanged. "To make Image Exchange work and get the value, you need the Check Clearing for the 21st Century Act," Farrar said.

The check-clearing legislation introduced in the most recent Congress will need to be reintroduced once the new legislative session convenes, according to Grant Cole, a Baltimore-based senior vice president at Bank of America, adding that the proposal has bipartisan support.

"I do not think there is a lot of politics in the Check Clearing Act. We still have a very good chance of getting the bill passed by the summer," Cole said.

Financial institutions that wish to reap the benefits of Image Exchange need to start planning now. "Just saying that you have image archiving and image processing does not mean you have all the applications in place," said Farrar.

Banks also must develop new processes for tasks such as signature verification, he added. "Transmitting is the least complicated part of the problem."

Still, despite the myriad of challenges, Farrar is optimistic.

"If the Check Clearing for the 21st Century Act is passed and our project goes live, I think we will see a fairly quick evolution."