The law, which takes effect Oct. 28, will allow banks to exchange check images electronically rather than shipping physical checks all over the country as they do now. It doesnt require the electronic exchange of check images, also called IRDs (Image Replacement Documents), but many banks are gearing up because the act will save them significant amounts of money.
According to analysts at Accenture, a global management consulting, technology services and outsourcing company, banks process more than 40 billion checks annually, which represents a significant portion of their revenue and profits. Fees generated from check processing can comprise as much as 50 percent of a banks total fee income.
By giving digitally imaged and substitute checks the same legal status as paper checks, Check 21 will dramatically cut the volume of paper checks in circulation, improve reliability and speed, and eventually reduce transportation, float and other check processing costs by more than $2 billion annually industrywide.
Industry insiders believe that more efficient check processing also will lead to lower fraud costs, with the savings likely to be passed on to customers. In the short term, many banks will see their check processing costs rise as they invest in both digital and paper processing systems; in the long term, those costs will drop significantly.
Accenture analysts said they think the industry should not fear a scary Halloween scenario, resulting from masses of bounced checks due to suddenly reduced float times. "Check 21 is not a flip of the switch event," said Richard Winston, a Dallas-based partner in the Financial Services group of Accenture and leader of Accentures Check 21 practice.
"Few banks will be immediately equipped" to handle digital checks on a broad scale, so the industry adoption of electronic exchange of checks will take years, thereby minimizing the float problem." At present, about 85 percent of checks clear the day after theyre deposited because they are written locally.
A key concern among consumer groups as well as banks is the potential for fraud. Several firms have stepped up to provide solutions to banks to prevent fraud. One is Mitek Systems Inc., which has created ImageScore, an image quality analysis solution designed specifically for financial institutions.
ImageScore analyzes scanned images of checks to verify the quality of a check image. Additionally, it ensures that the image is an acceptable payment instrument for financial institutions and verifies that the image conforms to the quality and usability criteria defined by the X9.37 standards committee.
A major problem banks face in the Check 21 environment is the loss of transaction data if the paper check is destroyed before the information is accurately captured as an electronic image. ImageScore is designed to prevent this problem by verifying that the image accurately represents the original paper document.
The solution identifies and flags potential flaws while conducting several levels of tests for each data item, including verifying whether the data items are present as well as performing OCR/ICR (optical character recognition/intelligent character recognition) tests.
Harland Financial Solutions, a provider of technology for financial institutions, intends to incorporate the ImageScore technology into its image-based item processing solution, CheckQuest.
"As Check 21 grows near, it has become even more important that we have a solid image-exchange strategy in place," said Bill Zayas, senior vice president and general manager of bank core systems at Harland. "We are planning to integrate ImageScore into our CheckQuest item processing solution to ensure that the images being sent and received by us and our partners are usable and of the highest quality."
In addition to the quality tests, ImageScore can analyze the usability of an image. It can accurately identify whether a data field is missing, such as signature, date, payment information and CAR (the courtesy amount on the check). As a result, banks are able to avoid financial liability caused by passing along unusable images, as well as to avoid delays with presentment, clearing and settlement caused by illegible information on check images.
Another Mitek product is its FraudProtect System (FPS), an automated system that helps community and midsized banks detect counterfeit checks and signature forgeries. These banks use the FPS to make timely "pay or no pay" decisions. A version based on paper checks is currently in use.
In the electronic image exchange world, manual check-fraud detection will be more difficult. FraudProtect System focuses its attention on the image of the original check within the IRD as it searches for stock variations or signature irregularities. The reduced size of the check image in the IRD will not affect the operation of the system.
FPS addresses two common types of fraud: signature forgery and counterfeit checks. The system identifies potential signature forgery with patent-pending technology that compares a persons signature against a reference check and assesses the likelihood that the person who signed the check is the same person who had signed the reference checks. Counterfeit checks are identified by FPS by matching certain check stock features.
Inspecting checks visually is very labor-intensive. The FraudProtect System installed in one computer can analyze two to four checks per second. As a result, Mitek recommends that a bank analyze all checks presented, instead of focusing only on high-value checks.
During tests, the FraudProtect System processed more than 8,000 checks per hour when run on a computer with dual Intel Pentium 4 (2.4 GHz) CPUs and 2 GB of RAM running Windows Server 2003 and SQL Server 2000 (SP3). The test configuration ran the application on the same machine as the SQL database.
The systems speed during unattended operation will depend on factors such as the average number of reference items in accounts, the power of the computer and, possibly, the network speed. The overall time to complete a days run will depend upon the speed and number of reviewers.
The FraudProtect System runs on Windows 2000, Windows 2003 and Windows XP Professional. It requires Microsoft SQL Server 2000 or above, with licensing for each concurrent user who will access FPS.