Banks circle the open seats in the check clearing game
People don't have to write checks anymore. But they do anyway.
Viable alternatives to the check already exist. Online, there's electronic bill-pay and person-to-person payments. At the point-of-sale, consumers can use credit, debit or cash. Still, in the United States at least, the checkbook remains king, and consumers and businesses will continue to use and accept paper checks for the present.
But even if customers cherish their old paper habits, banks won't have that luxury. Under the "Check 21" law, now working its way through Congress, any organization in the "chain of collection"-from the depository bank to the paying bank- may convert a paper check into a digital image, which would then be transmitted electronically to the paying bank, or reconstituted on paper as an "Image Replacement Document," or IRD. The IRD would then be presented to the paying bank in lieu of the original. Similarly, banks could return printed images of original checks to those customers requesting a paper trail.
Check 21's impact on the check clearing business will be profound, observers say.
"I truly believe that you'll see the payments industry change more in the next five years than you've seen in the last 20 years," said Danne Buchanan, executive vice president of e-commerce at Zions Bancorp, Salt Lake City, Utah.
Under Check 21, no financial institution would be forced to change its operations in order to accept IRDs, nor would banks have to create them.
"The beauty of it is you can pick and choose where to use it and how to use it, and what makes the most sense," said Buchanan. "Nobody says you have to do away with your traditional approach, nobody says you have to use IRDs."
Indeed, even if it otherwise ignored Check 21, a paying bank would stand to benefit from receiving crisp, new IRDs instead of weary originals.
"What we found with our pilots and what we continue to find in both the forward and the return side is that the quality of items are superior to a traditional check," said Buchanan. "It hasn't been run through five or six different 3890s, and it hasn't been handled and mauled.
"The reject rates are substantially lower than the traditional. There's nothing I need to change-I just put it up on my sorters like I did before and capture it."
Already, Check 21 has banks scrambling to determine how to reduce check clearing costs by converting original checks into electronic images and IRDs.
The law has stirred controversy, however. Banking industry groups have expressed concern with the law's provision for resolving disputes, such as a customer questioning an IRD's authenticity. After receiving a claim, banks would have ten business days to either produce the original check or credit the customer's account for an amount up to $2,500.
Ultimately, the biggest industry players plan to bypass the IRD as much as possible by exchanging check information and images among themselves. SVPCo, a bank-owned venture of 20 of the largest banks, operates an electronic check presentment venture that handles 3.4 million transactions per day, although many of those currently require the paper checks to follow the electronic data.
Anticipating the end of the paper exchange, SVPCo plans to launch an image exchange utility in early 2004. Eight "vanguard banks," comprising over half of the current electronic clearing volume, have already committed to participate in the image exchange.
"That's a big step in the ability to exchange images amongst financial institutions without the paper checks to follow," said Mitch Christensen, executive vice president, Wells Fargo Services Company, San Francisco.
The Federal Reserve is also expected to offer a wide range of check clearing services, including image capture and exchange. "So if I'm the Bank of Muskogee, I'd just send my courier straight down the toll road to the Fed in Oklahoma City," said J.D. (Denny) Carreker, CEO of Carreker, Dallas. "They'd capture it there in Oklahoma City and then fire it across the world."