Now that the Check 21 era has begun, the most frequently asked question is whether financial institutions are truly committed to image exchange.
Judging by recent developments, the answer is unequivocally yes.
Steady progress in the adoption of image exchange is happening across a broad cross-section of the financial services industry, from large and mid-tier institutions to credit unions and community banks. This is particularly noteworthy given that the migration to image exchange represents the most complicated and most expensive change since MICR-technology was developed.
Consider the following developments in just the past few months:
- In April, National City Bank and Union Bank of California successfully conducted a two-way exchange of all the items cleared using each institution's routing and transit numbers. This exchange was via the SVPCO Check Image Exchange Network, the nation's largest image exchange network currently used by nine of the biggest banks and processors in the U.S. National City and Union Bank are planning to ramp up volume significantly in 2005.
- In March, several financial institutions began to send image exchange information and IRD print instructions to the Federal Reserve Banks using SVPCO's peer-to-peer image network. The sending banks included Wells Fargo Bank N.A., KeyBank and JPMorgan Chase. This marked the first image-based check clearing between public and private-sector operators. The Fed's involvement will jumpstart image exchange by enabling thousands of banks clearing through the Fed to take advantage of the Image Exchange Network's inherent efficiencies " and to eliminate the significant transportation costs of physically sending checks.
- In May, SVPCO banks will terminate the air courier service that has moved checks from West Coast banks to the East Coast for the past 20 years. The end of this cooperative arrangement will further motivate institutions to embrace image exchange because a smaller number of banks will have to absorb a greater share of the courier service cost.
- Over the past few months, each of The Clearing House's 19 owner banks has developed plans to take full advantage of image exchange. Seven are already implemented and will be looking for additional partners. The remaining twelve have committed to implement, with the vast majority likely to be connected to the Image Exchange Network by the end of the year in some capacity. SVPCO banks represent 58% of U.S. commercial bank deposits and over 60% of the checks in the U.S. This kind of critical mass will likely lead to accelerated growth in 2006.
- In the next few months, SVPCO will be reaching out to integrate other image exchange providers such as Endpoint Exchange, which can bring additional volume to the Image Exchange Network. The strategic objective is to create an agnostic platform that has electronic linkages to facilitate industry wide image exchange from any source.
These milestones are in addition to the dozens of important initiatives being rolled out by vendors and other technology providers to facilitate image exchange for financial institutions of all sizes. These separate activities are propelling the adoption of image exchange across the country.
This Year Implementation, Next Year Volume
As momentum accelerates, it's important to keep a realistic timeline in mind because the magnitude of change is so significant. It's simply impossible to rapidly transform a paper-centric payments infrastructure that has been the bedrock of the financial services industry for almost 50 years.
Despite assertions that Check 21 would rapidly lead to image exchange, institutions need time to ensure that payments are processed with the same degree of reliability and accuracy as is standard operating procedure today. As a practical matter, that implementation process can take many months of preparation and testing before institutions can send images via the Image Exchange Network. There is no room for failure because any degradation in the quality of payments processing would trigger a customer rebellion and derail the momentum.
The path to full image exchange begins with Image Replacement Documents (IRDs), or substitute checks. IRDs are legally valid copies of paper checks that are transmitted electronically, printed remotely and handled the traditional way " via ground transportation and then run through check sorters.
IRDs enable banks to gain benefits from the electronic transfer of print instructions, without the need for a bank to be fully image exchange-enabled. As institutions master the process of sending images, the next step will be conquering the complexities of receiving images. Receiving images, will take somewhat longer to achieve, but the growing cost savings from image exchange will provide the stimulus for financial institutions to overcome the complexities. The elimination of all paper " original items and IRDs " will make the transformation complete.
As a result, 2006 will be marked by two distinct trends: 1) institutions already image-enabled will start processing large volumes of check images, and; 2) those institutions that have proceeded more deliberately should be close to finishing the implementation process and will begin limited exchanges. In 2007, we expect to see a critical mass of institutions both sending and receiving image exchange files. As always, the more competitive institutions will move quickly because the cost savings are so compelling.
In short, there is an unstoppable tide of momentum for image exchange. Sooner, rather than later, institutions will be significantly reducing costs and improving efficiency.
Susan Long is Senior Vice President of SVPCO - Electronic Clearing Services of The Clearing House Payments Company L.L.C.