Every night, banks throughout the country load up the millions of checks they
receive and send them by planes, trains and trucks back to the banks they originated
from for clearance.
Starting this year, banks will be able to legally send them over the Internet highway instead.
“It is amazing that in this digital age, banks still transport millions of these pieces of paper every single night,” said Jennifer Lucas, spokeswoman for Viewpointe, a company that provides check and document image services. “Banks are spending $2.1 billion a year in operations to transport checks. It isn’t cost-effective.”
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Following the Sept. 11 terrorist attacks, when flights were grounded, banks couldn’t process checks they received, Lucas said. “That is when we really realized how vulnerable our current system is.”
In October, the Check Clearing for the 21st Century Act, or Check 21, was passed to make processing paper checks compatible with the electronic age. Under the law, which goes into effect on Oct. 28, checks being deposited can be scanned with an electronic system, and the image can legally be sent to the paying bank to clear it. The images will also be saved in a database repository that can be accessed through secure Web-based channels.
As of now, it is against the law for banks to clear checks this way.
“Banks will be able to process checks regardless of extreme weather conditions, transportation disruptions or other unforeseen circumstances, like Sept. 11. In time, businesses will be able to utilize check imaging at the point of sale and benefit from quicker processing,” said Barbara Perino, senior vice president of operations and technology for the Washington Trust Company in Westerly.
When the image is saved in a database, customers will have immediate access to it over the Internet.
“Right now, it takes between five and 10 days for a check to clear, and a lot can happen during that time,” Lucas said. “If a customer has a question about a check and they call their bank, the representative has to do some research and get back to them. With this system, the information will be right in front of them on the computer already.”
Fraudulent checks are also detected quicker with the system, saving banks money. Attempted check fraud at U.S. banks totaled $4.3 billion in 2001, while banks actually lost $698 million that year, according to the American Bankers Association.
Banks will likely choose one of two imaging models emerging as the primary choices for image exchange: Image Exchange with Image to Follow, where the data file is created and sent separately from the image, or Image Cash Letters, where a single file is sent with the data and images, according to information on Bankers Online.
Banks that don’t get the imaging systems to receive images from other banks will instead receive an “Image Replacement Document,” through the mail instead, Lucas said, though studies show IRD’s will be a temporary option.
A number of banks already use imaging, or “check truncation,” to digitally capture a check’s image, like Washington Trust, FleetBoston Financial and Bank of America, with written agreements from customers. Under the law, banks will be able to take images of checks without the customer’s permission, and can throw away the original checks once an image is created.
The “substitute checks” sent to customers as proof of purchase will be about the same size as a regular check and carry the same legal validity.
When Bank Rhode Island started taking images of checks a couple of years ago, only 1 percent of its customers choose to get their actual checks back instead of the copies, so few will actually notice a difference, according to Kenneth L. Senus, SVP/information technology and operations for BankRI.
Because the law does not require banks to use the imaging system, Senus said BankRI and others are still weighing the pros and cons of going electronic right away.
“We could start doing everything electronically right away, but if other banks we deal with can’t accept electronic images, we’ll still have to send them copies, and it will end up costing us more,” Senus said. “It would be great if everyone was electronic, and that is where this law is pushing us, but it is going to take five to 10 years before everyone uses it. Eventually, once everyone goes electronic, it will save money.”
All the top 25 U.S. banks are image-enabled, 80 percent of mid-size banks and more than 40 percent of small banks are expected to be by 2006, according to a study by Celent Communications.
“This is changing the way banks have handled checks for the past 50 years,” Lucas said. “As less and less paper checks are transported, the cost for a bank to charter a plane to transport fewer pieces of paper won’t be effective. Eventually, everyone will have to go electronic.”
Though smaller banks may be sluggish in investing in imaging technology, advocates of the system say the money invested will be re-paid in operational savings.
Even with the advent of online banking, more than 40 billion checks are still written each year: 32 percent written by businesses, and consumers write 51 percent, according to the ABA. Those in the banking industry say paper checks won’t disappear anytime soon.
“The structure of payment systems in the future will be determined by both industry improvements and consumer habits.”
