A federal law is taking effect Oct. 28 that will encourage banks to use new
technologies and, within years, could revolutionize how checks are processed
across the United States, replacing a tide of paper with data transfers and
saving up to $2 billion.
Known in the industry as “Check 21,” the Check Clearing for the 21st Century Act requires all banks to accept so-called “substitute checks,” high-quality printouts of the scanned images of checks that have been destroyed by the depositing bank.
The idea behind the law is to encourage banks to use technology to cut back on the enormous amounts of paper they now exchange every day, and in the process make check-clearing faster, cheaper and safer from disruptions in the transportation system.
“If you think about banks across the country processing billions of pieces of paper, it’s kind of daunting,” said Len Goodman, a senior vice president and Check 21 point person at Sovereign Bank. “The industry had been looking for ways to make the process more efficient … (but) the real motivating force for this was, unfortunately, the events of 9-11, which shut down the check collection system across the country.”
The basic technology at Check 21’s core – high-resolution check scanning – is already widely used, including at Sovereign, other major banks in Rhode Island and nationwide. But for a check to clear, it still has to get sent by courier from bank to bank, or in most cases, to a Federal Reserve Bank processing center and then to the paying bank.
That’s even the case among banks that already communicate directly, as Citizens and Fleet do, said Bill Wray, chief information officer at Citizens. When you present a Fleet check at Citizens, Wray explained, Citizens will notify Fleet electronically (but without an image) of the amount of the check to expedite processing. The following day, the paper will be delivered to make it official and verify the transaction amount.
Multiply all this by tens of billions of checks, and it’s clear why industry leaders see such huge potential in Check 21. But at individual banks, at least those active in Rhode Island, the response is more muted.
Asked how Check 21 would affect their customers, Citizens, Sovereign, Bank Rhode Island and the Washington Trust Company all said in the immediate future, it barely will.
As required by the law, all four are notifying customers that Check 21 is going into effect, and that they might get a “substitute check” with their canceled checks (presuming they still get canceled checks), and they have special legal rights in the event of a bank error due to the use of a printout instead of the real check. And, of course, all the banks will accept the substitute checks they do receive.
But beyond that, the prevailing stance seems to be “wait and see.”
“Our focus is on making the customer happy, and we don’t generally think that (can be done) by making them part of a technology experiment,” said Citizens’ Wray.
“Nobody’s going to be going electronic immediately,” said Kenneth L. Senus, senior vice president for information technology and operations at BankRI. “Some may, but for the most part it’s not going to make a big impact.”
“We’re ready to adapt to it,” said Barbara J. Perino, senior vice president for operations and technology at Washington Trust, but “most of our customers are going to see very little impact at all.”
That doesn’t mean, however, that banks aren’t considering bigger changes.
“Clearly from our standpoint, it’s advantageous for us to take advantage of imaging,” Perino said. Added David Jardin, vice president for retail support services, “It’s all about how much can you do this year, how much can you do next year.”
The Fed clearly expects a decline in paper-check traffic, Jardin said, noting that the federal agency is closing its Boston check-processing center and consolidating New England operations in Windsor Locks, Conn.
As Jardin pointed out, however, Check 21 is only one factor in that move. A 2002 Fed study found the number of checks paid by U.S. banks fell from 49.5 billion in 1995 to 42.5 billion in 2000. And the volume of checks processed by the Fed has declined for four years in a row, to 15.81 billion in 2003, down 4.7 percent from 2002.
The Fed’s processing costs have also risen, from 4.5 cents per check in 2002 to 5.1 cents in 2003. Electronic transactions, meanwhile, cost 1.1 cents each in 2003.
But exchanging check images will also cost money, bank officials point out, and it’s still unclear what prices processing companies will be charging.
Sovereign business customers can already access images of their checks online. And within about a month, Wray said, Citizens customers will be able to do the same.
Check imaging “speeds up processing and service,” Wray said, so it makes a real positive impact on customers. “We think it’s great technology.”
