Industry unites behind proposed check legislation

Today, Jun 2003 by Buchanan, Danne

Flexibility, Choice and Interoperability are Keys to Universal Check Electronification

Rarely do all banking and financial trade associations agree on a given topic. An exception is the subject of legislation for electronic check truncation. As envisioned in the Federal Reserve Board's proposal currently in the House and Senate under Check 21 and CTA respectively, the banking industry is unequivocally united.

Banking industry groups across the board endorse the proposed new legislation to sanction check images or "substitute checks." They agree that electronification of checks will produce significant cost savings, efficiencies, new conveniences, and a host of systemic benefits to the payment system for both consumers and financial institutions.

Regardless of when legislation is passed and law enacted, the removal, or truncation, of paper checks from clearing, processing and settlement activities continues to grow. This is being demonstrated today in retail stores and in lockbox operations where checks are being converted to AGH transactions. Successful Image Replacement Document programs such as Zions Bancorporation's two-year IRD initiative have proven the value propositions by streamlining internal operations and reducing costs in float, clearing fees and transportation. Simultaneously, breakthrough innovations in back-office image-enabled processes are paving the way for Image Exchange to take full advantage of CTA and Check 21 passage.

Fueling the momentum for adoption is a growing recognition that check electronification is critical for financial institutions to remain competitive in the payments value chain. As an increasing number of ROI models prove, there's a strong business case for electronic check payments to deliver enhanced risk management, lower payment collection costs, earlier availability of funds, streamlined operational processes and greater customer satisfaction.

REQUIREMENTS FOR SUCCESSFUL MIGRATION TO ELECTRONIFICATION

Though passage of legislation can facilitate electronic check processing to progress in a more orderly, efficient manner, I believe that the successful migration to and universal adoption of check electronification will depend primarily on those technology and business models that embrace flexibility, choice and interoperability.

Processing methods must provide the flexibility to adapt to electronic check clearing over time without interfering with the existing paper check process, as well as offer choice between emerging electronic payment methods and channels.

Today ACH, IRDs and Image Exchange all have the potential as optimum payment channels for electronic check processing. However, users should not be limited to one clearing method or be compelled to remain with one chosen payment strategy. Businesses should be able to take advantage of every clearing channel's strengths down to the item level. IRDs may be the best choice for checks where the improved float is greater than the cost of the IRD and/or when an organization would like to keep the item within check law. Conversely, ACH may be a better option when improved float is less than the cost of the IRD and/or risk Is low. Technology systems that provide choice and flexibility will enable institutions to optimize the way payments are cleared, settled and collected based on their individual tolerance for cost and risk.

Providing choice and flexibility underscores the need for interoperability and open systems in order to integrate with any image software and with any image vendor for back-end processing. The need for "file agnostic" systems that support multiple input and output file formats for unlimited destinations are essential to take advantage of each payment channel. The interoperability of an "open system" can realize the promise of an end-to-end Image Exchange channel that incorporates Day 2 image processing capabilities for exceptions and returns.

As legislation is passed and law enacted, flexibility, choice and interoperability of technology systems and payment models are vital if the industry is to work together to realize the full promise of check electronification today and in the future.

Danne Buchanan is CEO of NetDeposit, Inc., a provider of payment products and services for electronic check processing and optimized clearing and settlement. He recently testified before the Senate Banking Committee supporting passage of the Check Truncation Act. He can be reached at 801-273-6066 or info@net-deposit.com.