UBB supporters told to adapt as payments system evolves

Northwestern Financial Review, Dec 1-Dec 14, 2004 by Hilgert, Jackie

The day after the Check Clearing for the 21st Century Act went into effect, the consensus of approximately 100 Upper Midwest community bankers was the transition was a non-event.

That conclusion was drawn as Viveca Ware, director of payment policy at the Independent Community Bankers of America, addressed the opportunities and inherent risks that accompany Check 21. She was speaking Oct. 29 in Minneapolis at the second annual gathering of United Bankers' Bank standard bearers. In the presentation, Ware teamed with David Walker, president and CEO of the Electronic Check Clearing House Organization (ECCHO).

"Check 21 is now a reality, and contrary to media expectation, all banks did not flip a switch to the detriment of consumers," Ware said. The negative spin on consumers losing float has proliferated, Ware added, encouraging bankers to be proactive in reaching out to local media. "Tell them what you're doing to implement Check 21."

In the yearlong run up to the October 28 changeover, vendors have been pushing technology and telling bankers they need to be ready, Ware said. Prior to Check 21, check clearing had been limited by the law - not by technology. In an informal poll of the room, the majority of bankers responded they'd made no changes at their institutions to prepare for Check 21's day of reckoning.

But that should change, Ware said. The economics of the payments system's evolution will demand it.

ECCHO's Walker explained how reconverting banks potentially are at risk in the check conversion process. Reconverting banks make the warranties and indemnification that carries forward to the paying bank and eventually to the customer, he said. The problem is, he said, the bank of first deposit, which can also be a nonbank entity, is where the image is actually captured. "The reconverting bank warranties what someone else created," he explained. "There's no control."

To avoid risk, Walker suggests bilateral agreements that push warranties and indemnification back to the collecting bank. "The best option for bilateral agreements is to use clearinghouse rules that bind all the parties with an interest in the transaction exchanged under those rules," he said.

There currently are no laws in place that cover check image exchanges, Walker cautioned. "Would you want to take one exchange when there are no laws in place, without having a consistent bilateral agreement in place?"

Ware cautioned bankers not to blindly accept a third party's assurance that all the necessary agreements are set up. "Ask questions and be certain you are protected," she said.

Addressing the evolution of the payments, Ware also said the industry needs to keep itself at the heart of the payments system and work collectively to assure the system's safety and soundness. As check volume declines and banks begin to adopt the image exchange system, the economics of check clearing will change - and bankers need to adapt.

Approaching the steady decline in check volume and consequent per item cost increases, bankers are left with few options other than to adapt to technology-driven changes in the payments system, Walker said. It's not feasible, as a collecting bank, to convert all checks to ACH or debit cards or credit cards. Nor is it feasible to just stop accepting checks - or worse - do nothing and watch per item costs skyrocket, he said. The outlook isn't much better for paying banks, he explained. "You can't stop accepting check presentments, check cash letters, or convince customers to abandon checks," Walker said. Traditional options to offset costs include raising fees on checking services, accelerate collections, reduce return write-offs, and reduce staff, he said. "If you do nothing, you'll be faced with increased costs," he warned.

"Your best option to manage cost per item is to use electronics to enhance check payments," Walker offered. "Use the technology to speed up the process. Use technology to capture the information. Use technology to improve the overall check collection process."

By Jackie Hilgert