Check 21 Pushes Paper Checks Closer To Oblivion

Global Finance, Nov 2004 by Hawser, Anita

TREASURY & CASH MANAGEMENT

New legislation paves the way for the elimination of the 40 billion checks in circulation in the US today.

It has been likened to the stampede that surrounded Y2K as banks invested millions preparing their computer systems to counteract the social and economic impact of the Millennium Bug. The Check Clearing for the 21st Century Act (Check 21), which took effect October 28, requires paying banks to accept paper reproductions or a 'substitute' check created from images of the originals. The Act gives these substitute checks, also known as image replacement documents (IRDs), the same legal status as the original paper check.

Check 21 was enacted in response to the terrorist attacks of September 11, 2001, which brought the check processing system to a halt as checks could not be physically transported between banks. However, the longer-term ramifications of the legislation are far reaching in terms of the impact it will have on check processing volumes and reducing the costs associated with traditional check clearing, with some anticipating it will pave the way for electronic settlement of the 40 billion checks that are in circulation in the US today. "For banks it effectively changes everything associated with traditional back-shop processing of physical checks and virtually eliminates many of the processes needed to physically handle paper," states Jerry Suva, an analyst at TowerGroup. While Check 21 is not necessarily a global phenomenon, it does have implications for international companies as it applies to all USD checks drawn on domestic banks, including money orders, travelers and treasury checks. It is also likely to instigate a shake-up among the major US clearing banks, with the larger banks investing millions in check imaging technology so that they can not only receive substitute checks or IRDs but send them as well. For other banks, however, the cost of supporting the existing legacy check-processing infrastructure, while investing in new technology, may be too much to contemplate. And as paper check volumes continue to decline at a rate of 3% per year, some may decide to exit the check clearing business altogether and outsource it to a larger-scale provider.

Seamless Transition for Customers

For banks' customers, however, from October 28 it will be business as usual. "Compliance with Check 21 is an issue for the banks; the customer doesn't need to do anything," says Stephanie Sturgis-Griffin, senior vice president,Wells Fargo. The biggest change, she says, is those companies that disburse checks for payment may receive the IRD or 'substitute' check back in account statements or as returned items instead of the original check.

"From a collections perspective, there will be enhancements, as banks will be able to provide a more customized solution to clients with specialized needs," notes Jeff Oleske, director, Citigroup Global Transaction Services. Ultimately, Check 21 could pave the way for banks to provide customers with alternative and more efficient clearing mechanisms such as electronic check processing. JPMorgan is developing capabilities that will allow customers to send an electronic file into a bank instead of a check. If it is Account Receivables Conversion (ARC) compliant, it can be processed electronically as an ACH debit. However, Craig Vaream, vice president, senior product manager, check deposit services, JPMorgan Treasury Services, says this is unlikely to take ofFuntil check imaging volumes increase.

Oleskc believes the real benefits of Check 21 in ternis of promoting the use of electronic check deposits will only become apparent once full image exchange of checks is in place, eliminating paper from the process altogether. Although Check 21 promotes the use of check imaging, it does not specify that the paying bank needs to receive image files. All they need to accept is a paper reproduction or substitute of the original check.

However, those banks that have invested in full check imaging, which allows for the bilateral exchange of check images without having to make a substitute copy of the original paper check, maintain that IRDs do not facilitate the transition to full electronic check presentment. Citigroup's Oleske says that full image exchange will also remove a lot of cost of float within the system generally but that there was likely to be a three- to five-year time horizon before this occurred. Early next year JPMorgan will launch remote capture sites in Europe and Asia that will allow international customers of the bank to reduce the risks and costs associated with physically transporting checks to the US. "There are significant risk issues addressed by Check 21," explains Lisa Robins, senior vice president, global check deposit services, JPMorganTreasury Services. "There is also the opportunity to shorten check clearing timeframes and enhance the ability to forecast cash flows."

Instead of waiting for the check to be physically transported to the paying bank, full image exchange would speed up the clearing and processing of checks, allowing companies to more accurately predict cash flows and enhance working capital. Wells Fargo s Sturgis-Griffin anticipates that full image exchange will also enrich the information banks are able to provide around cash reporting. "Customers will be able to do more robust and richer downloads of information into their ERP systems," she predicts. "It will help not only in terms of cash forecasting but also in reducing the number of exceptions, which is the most expensive part of the transaction process."