Banks Tiptoe Towards IRDs

Opinion: Check 21, which went into effect at the end of October 2004, did not result in an immediate "flip of a switch," transforming every paper check in the U.S. into an electronic image. But why is implementation taking so long?

Banking is a conservative business, so it comes as no surprise that banks have moved slowly in adopting the provisions of Check 21.

Officially known as the Check Clearing Act for the 21st Century, Check 21 allows banks to exchange check images electronically rather than shipping paper thither and yon. Although the act doesnt require the electronic exchange of check images, also called IRDs (Image Replacement Documents), it instructs banks to honor those images when theyre presented in lieu of the pieces of paper.

Ideally, by giving digitally imaged and substitute checks the same legal status as paper checks, Check 21 could dramatically cut the volume of paper checks in circulation and improve the reliability and speed of checking transactions. Banking industry insiders estimate that transportation, float and other check processing costs could be cut by more than $2 billion annually.

But thats only if banks enable the technology that allows for IRD exchange. Check 21 did not result in an immediate "flip of a switch," transforming every paper check in the U.S. into an electronic image.

As consumers, we hoped that Check 21 would allow banks to deposit checks immediately and give us faster access to our cash. Some consumer groups feared that banks would use the speeded-up cash flow for their own nefarious purposes, keeping the current pace of deposit timing.

/zimages/7/28571.gifClick here to read more about consumer concerns about Check 21.

That fear led to the introduction late last fall of HR 5410, called the Consumer Checking Account Fairness Act (CCAFA), which would have required the Federal Reserve to exercise its authority to reduce the time banks can hold deposits to reflect the faster times checks clear under Check 21. The CCAFA was intended to "redress imbalances" between the speed of withdrawals under Check 21 and the slower speed of crediting deposits.

The CCAFA was introduced on Nov. 19, 2004, in the waning days of the 108th Congress. Congress did not pass the bill, therefore, like all other unapproved legislation, HR 5410 died when Congress adjourned. At this point, the CCAFA doesnt exist as a viable piece of legislation and is not under consideration in the Congress.

Thats not to say that a similar piece of legislation wont be reintroduced sometime during the 109th Congress. But it would address a problem that doesnt really exist today, since checks written on household accounts are not the ones being cleared faster through Check 21.

Check 21 was designed to encourage innovation. Banks are moving in a slow, deliberate fashion and are taking advantage of what Check 21 allows, but the industry did not see a gigantic stampede last Oct. 28, when the measure became law.

Banks by their very nature are conservative; the industry is not historically innovative due to the financial risks involved. Most of the banking products we rely on today have been around for 30 years. In line with their history, banks are moving slowly and deliberately on Check 21.

According to Ed Herman, director of EDS Global Payments Portfolio, the question banks are asking internally now is, "Where is it opportunistic for us to take advantage of the Check 21 law?" Banks have been very deliberate in stepping back and saying, "Were going to take advantage of what Check 21 allows, make sure it works the way that we want, and that everyone is comfortable with how its working."

Traditionally banks make money by accelerating collection on larger checks; they dont make money by accelerating collection on a $100 check. As banks have continued to improve the check clearing process and gotten better at fraud detection, using software that flags potentially fraudulent transactions, banks are getting more comfortable with giving some of their customers faster access to deposited funds.

Herman says that banks are moving deliberately and cautiously into the 21st century, and are analyzing what makes sense for their business. "Its a game of economics," Herman said. "In the background, bank line managers are preparing and analyzing business cases to present to senior management to come up with a statement saying, We need to completely renovate our back office so we can use images instead of substitute checks. The IT people have to figure out how to use electronic data and infuse it into bank systems."

Some legacy back-office systems used by banks are not prepared to handle electronic image exchange, and banks will need to make significant investments to integrate image capability, according to Herman.

The IT departments of the banks have to make sure that the electronically imaged data is good, and that it can be integrated. IT managers are asking themselves, "Can we make our system more efficient and take it from batch to real-time?" At present, most computing functions in banking is done via batch processing, with overnight updates. To take advantage of the Check 21 legislation, they are now going to move to near-time (almost real-time) processing.

There is no single standard, and banks have all kinds of different security structures. When you try to integrate all these systems, youre looking at millions of dollars and a lot of security. It will take a lot of time—and quite a bit of money—to integrate more timely information into existing batch processes.

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