The number of banks deploying electronic check presentment (ECP) continues to grow as does the volume of items being processed.
That's good news for Hank Farrar, president and chief operating officer of the Small Value Payments Company (SVPCo), which has the national task of helping banks turn paper checks into electronic images and files. "A lot of banks that were sitting back watching this are now coming on board ready to join."
In July, SVPCo processed 42 million individual items worth $40 billion. That was up 92% over last July's figures, and the number is expected to skyrocket in the coming years as ECP hits its stride.
Daily volume transactions will grow from 2.8 million this year to 6.9 million by 2003 as more banks come online, estimates SVPCo, which is owned by the nation's largest banks. The company, which now provides service to 56 bank sites, plans to bring two more banks online shortly, Farrar said.
Americans write more than 68 billion checks annually, which must be transported, processed and returned, a costly and time-consuming procedure. Moreover, attempted check fraud exceeded $2.2 billion in 1999, while actual dollar losses were $679 million, according to the American Bankers Association. Big banks were hardest hit, accounting for 90% of the losses. The average 1999 loss was $1,518.
ECP can save the banking industry as much as $5 billion, said Farrar, and that's a conservative estimate.
"One of the key potential savings I see up front is the reduction of check fraud," said Patrick K. Barron, first vice president of the Federal Reserve Bank of Atlanta. By processing and returning items faster, he said, ECP will squeeze fraud out of the system.
The industry is on the cusp of an ECP boom, Barron said. "We will see significant growth between 2002-2005. Hopefully, we will begin to migrate away from paper."
Besides reduced write-offs caused by bad checks, benefits of ECP include reduced operational costs, elimination or modification of processing functions, and improved cash management for banks. "If you are able to collect the item faster, then that has a positive float impact," said David Walker, executive director of the non-profit, bank-owned Electronic Check Clearing House Organization (ECCHO), which promotes ECP.
Yet before banks can enjoy the cost savings of ECP, they have to spend more up-front for the technology and, in effect, create a dual system, featuring both electronics and paper. That's because the law still requires banks to return the original instrument. Until that rule is changed, operational cost savings will have to wait.
Think of it as ECP with paper to follow, which shaves a day off the time it takes to move money. ECP depositing banks start the funds collection process by capturing information from the MICR line at the bottom of checks and electronically transmitting that to the receiving or paying bank for posting the same day. Meanwhile, the depositing bank continues to process the paper, which it bundles up and transports to the receiving bank. The receiving bank processes the electronic information upon receipt and later reconciles the paper checks with the electronic items.
The goal is to eventually take a virtual snapshot of the checks and transport those electronically, eliminating the need to transport the paper. Consumers would then receive photocopies or images of their cancelled checks.
But a number of obstacles must be cleared for banks to reach that stage. First, the law must be changed to modify the rule requiring that the original instrument be presented. Draft legislation removing that requirement is wending its way through Congress.
Second, banks must invest in new software to allow for the ECP transactions and to capture and manage the check images. There's also an issue with network bandwidth and transmitting images.
The good news, Farrar said, is that software and long distance costs are declining. And bandwidth is increasing, allowing for the transmittal of more complex files.
Meanwhile, ECP has caught the attention of the senior management ranks at banks, including CEOs. "It make it easier when senior executives support it," said Farrar.
"There are more banks implementing ECP all the time," noted ECCHO's Walker.
Now that banks have gotten over the Y2K hurdle, interest in ECP is expanding, said Brian Black, managing director of operations and payments at Bank Administration Institute (BAI), which is hosting its seventh annual ECP Conference in October. "We're seeing more and more implementation. It's trickling down. It's not just the big banks any more. We're seeing mid-tier organizations taking it seriously."