In the absence of clear-cut legal standards on how to assign the potential liability involved with exchanging electronic checks, the Electronic Check Clearing House Organization (ECCHO), a bank-owned, not-for-profit industry advocacy and educational organization, has created a rule set for electronic check presentment and image exchange. Dallas-based ECCHO's members hold about 60 percent of U.S. deposits.
The ECCHO rule set aims to fill in the legal and regulatory gaps that exist regarding electronic checks and image exchange. Whether one looks in the Uniform Commercial Code (UCC), Regulation CC, Regulation J or Check 21, the existing law lacks the certainty needed for financial institutions to conduct business with a sufficient degree of confidence, according to David Walker, president, ECCHO.
To mitigate the present legal uncertainty, banks and image exchange networks have adopted the ECCHO rule set to govern their electronic check and image exchange transactions. "The primary purpose of the rules is the allocation of liability between the parties," explains Walker. "Without that agreement up front, if you have a dispute and you go to court, the court is free to make whatever decisions they deem appropriate."
Indeed, given the concept of "consequential damages," in which banks may be held responsible for damages resulting from an error, the liability involved with handling a check can far exceed the check amount. For example, suppose an individual writes a check to cover a home insurance premium. If, due to bank error, the check doesn't reach the insurance company and the coverage lapses, then the bank could be held liable for the value of the home were it to burn down. "Part of the intent of the rules is to minimize that kind of exposure," notes Walker. "Not that we've taken away consequential damage risk - it's there. We just assign where it falls."
The leading electronic check and image exchange intermediaries have rapidly adopted the ECCHO rule set. Most recently, Endpoint Exchange Network (EEN), operated by CheckClear, an Oklahoma City-based subsidiary of Metavante (Milwaukee), signed a sponsorship agreement with ECCHO. Other ECCHO-sponsoring organizations include Viewpointe, Southern Financial Exchange, SVPCO, EDS, Fiserv and AFS.
The ECCHO rule set does not get into the physical details of how an image moves through the system. "Buying into the rules coverage doesn't commit you to how you process, which organizations you select as your processors, what software you use, what network you use or how you settle," says Walker. "All of those things are really outside of the provisions in the ECCHO rules."
Pump Up the Volume
Mark Craig, general manager of CheckClear, expects the adoption of the ECCHO rule set to help EEN gain volume for its image exchange network. The prospect of having to use multiple private-sector rule sets had been inhibiting the demand for image exchange among larger banks, Craig explains. "ECCHO does help us with that," he says. "It just makes it a technical equation instead of a legal equation."
Now that EEN has adopted the same rule set as other exchanges, it is in a position to build interchange capability with the image exchange networks serving the largest U.S. financial institutions. "We've just expanded our footprint to Tier 1 banks," adds Craig. "What we'll see this year is interoperability between the different exchange networks, which will accelerate growth even faster."