Preparation for implementing the Check Clearing Act for the 21st Century (Check 21) has prompted many banks to invest in IT. Michael Noble, executive vice president of bank operations at Wells Fargo Bank, said that although there hasnt been a lot of noise surrounding the implementation of Check 21 so far, he expects that to change in 2005. "We have to defend our franchise," Noble said. "There are lots of profits to be had in handling payments of various types."
One challenge banks are dealing with, Noble said, is the gradual phasing out of checks as a way to make payments. "Banks have been predicting the death of checks since the 1960s, but now we see evidence that they really are going away," he said. "The paper volume of transactions is dropping significantly, while the total payment volume is increasing."
Noble estimated that there were 42.5 billion checks processed in 2000, which is dropping to approximately 37.9 billion in 2004. By 2007, he expects checks to drop to 31.1 billion. At the same time, the number of electronic payments is growing—from 30.7 billion in 2000 to 45.1 billion in 2004 to an estimated 60 billion in 2007. Losses in paper check volume are being more than made up by electronic transactions.
The shift to electronic transactions is changing how banks process payments. They are moving away from the current hub-and-spoke arrangements, necessary when moving physical checks from bank to bank, to a more distributed mode of processing. "Were capturing payments on the desktop rather than running paper checks through mainframes," Noble said. "Its a sea change in the banking industry."
William Randle, CEO of Synoran, a software and services firm that offers Web service technology to deliver payment information across the enterprise, said the next generation of payment processing will go much deeper than Check 21 requires. "The opportunity goes well beyond checks," said Randle, "Its about image capture and transfer. Its an opportunity brought on by legislation that can go much further."
Randle cited the $490 billion spent on IT across global financial services firms, and estimated that only 27 percent of that expenditure went toward new development in 2001. Operations and maintenance gobbled up 63 percent, while 10 percent was spent enhancing existing technology. Banks need to move from hard-wired payment processing to distributed processing modes, and they need to adopt strategic IT models that bring them a competitive advantage, Randle said. He strongly recommends that financial institutions rethink their IT spending to support the rapid pace of business change. "Business agility and time-to-market are more important than cost considerations," he said. "An optimal payment strategy can generate additional revenue."