A Check 21 Reality Check

by Santiago Patiño

October 2004 came and went. Check 21 officially became the law of the land. The banking industry finally achieved the long awaited ability to exchange images of checks instead of actual pieces of paper. Vendors “delighted” us with lengthy presentations for new software and hardware that would enable the capture of live teller work and the “real time” posting of transactions to customer accounts based on branch activity instead of processing in the back office.

For all the newness of Check 21, I’m experiencing a bit of déjà vu. Remember Image POD processing with prime pass at a remote site? That technology was available in the 1990s, but the high price tag of integrating existing teller applications kept most banks away. It was also difficult to cost justify migration, since the physical checks still had to be transported to the processing center for subsequent encoding and cash letter preparation.

Check 21 has ushered in an era of the image cash letter and presents major marketing and re-engineering opportunities for banks of all sizes. Have the promises been fulfilled since the passage of Check 21 more than a year ago? Let’s review some promises from actual glossy brochures and PowerPoint presentations that highlighted the benefits of adopting the “new” technology. Notwithstanding my knee jerk reactions at that time (in italics), they included:

• Huge reductions in courier costs and less reliance on the transportation of items from the branch to the processing center (True, unless you were already doing only one messenger stop per branch because of low branch volume)
• Faster access to images for corporate customers (True, if you had the infrastructure to support this service)
• Later cut-off times and improved funds availability (True… maybe…let’s talk)
• Faster response to customer inquires using access to image archives (True, if you didn’t already have any check imaging in your bank before)
• Implementation with minimal impact to branch operations and systems (Yeah, right!)
• Minimal training (You gotta love it!)
• Back counter scanning complements a teller solution for large deposits (if you were already processing in a POD environment, this means more work for the branch personnel)
• Earlier identification of fraudulent items (if you already had positive pay and integrated fraud detection)
• New revenue opportunities from image-based services (Yes, but highly competitive)

Like most new technological advances, a tremendous amount of planning and development needed to be completed and much of it was virgin territory for all involved. When Check 21 went into effect, all the rules had not yet been worked out:

• first day vs. second day processes

imaged incoming and outgoing return items

• how to avoid duplicate postings
• fraud detection
• standards (or lack thereof) relative to image quality
• associated legal liabilities

Where Are We Today?
So now, 16 months later, where are we? Here’s my take:

1. The exchange of check images is a definite reality and reported monthly image exchange volumes continue to increase.
2. The major exchanges (the Federal ReserveEndpoint Exchange Network are actively in business and some prices are beginning to come down. The Fed will continue to raise prices for paper transactions while lowering electronic clearing transactions.
3. Most of the legal issues relative to bi-lateral clearing agreements have been resolved.
4. Image quality concerns (standards) have been worked out.
5. Use of IRDs (Image Replacement Documents) is increasing for the “image challenged institutions.” A recent BAI TransPay study predicts that the predominance of IRDs will peak in 2007 and decline thereafter as image exchange really takes hold.
6. The vast majority of check images is not being captured at the branch, but rather continues to be captured in the centralized check processing centers.
7. Remote deposit capture is heating up very quickly.
8. A rising rate environment is strengthening the business case for increasing funds availability from Check 21.

The Challenges of Branch Capture
Why has branch capture not taken off? First, the integration of branch image capture into the online teller systems is not an easy hurdle to clear. In most cases, it requires a total rewrite or outright replacement of the current teller and proof systems. It’s a very expensive proposition. In addition, the courier savings have not materialized for most banks, since they still need to run messengers to the branches daily for inter-office mail. Finally, for many banks that have piloted solutions, issues remain relative to storing the physical checks that were converted to images. Most branches do not have excess and secure floor space, which means that, at least periodically, the physical checks must be transported to a central location. Other impediments to branch capture adoption have included the following:

1. Transporting images requires increased telecom horsepower (band-width), which is expensive.
2. Customer service can be negatively impacted in branches that operate in a Proof of Deposit (POD) platform. In the old days (yesterday) the POD teller would simply validate the customer deposit slip and off it went to the back office. In the new environment, customers must wait in front of the teller while their deposits are imaged, captured and reconciled.
3. To address speed at the teller line, some banks implemented “back counter” solutions. In this mode, deposits containing more than “x” checks are provided with provisional credit. Later in the day, the transactions are processed via a back counter device that captures the image of the checks, creates the upload of transaction data to the application systems, and ensures that debits equal credits. Doesn’t it sound like the teller is becoming part of the Item Processing Division? Hopefully, there’s an offsetting expense reduction in the back office.

Branch Capture is actually happening… but very slowly. Remote branches and locations often impacted by inclement weather seem like the best targets for pilot implementations.

Remote Image Item Capture Rolls
Even hotter right now than branch capture is the roll-out of remote image capture installations. On almost a daily basis, you can read press releases announcing another installation of image capture equipment in the offices of corporate and business customers. This technology is for big and small businesses. Doctors, lawyers, as well as major corporations are being introduced to the value of not having to visit the branch to make their daily deposits. Large lockbox users are no longer dependent on multiple local banks to expedite funds availability. Using one bank as their entry into the clearing network, they avoid the need for multiple banking relationships and the associated costs of deposit concentration methodologies. Think of CVS, Target, and all the other biggies.

Remote capture applications allow for the expansion of a bank’s footprint, without the need to construct additional brick and mortar facilities. This also opens the door for any bank, large or small, to drastically improve its ability to service corporate customers beyond once traditional geographical boundaries.

Deposit cut-off times may be extended and improved funds availability may be assigned (if you want … or if customers demand it). The possibilities are endless for those brave enough to adopt these technologies.

While hurdles and challenges exist in leveraging new Check 21 opportunities, the time to dig deeper into these benefits is now.

In closing, I’d like to leave you with two thoughts near and dear to my heart. Now is the perfect time for any bank that is still sending cancelled paper checks to its depositors to cease and desist. Better still; don’t bother to send a paper image of the paid items either. And, while you’re at it, can we once and for all get rid of any remaining savings passbooks? (I just couldn’t resist!!!)
-sp