As we approach Oct. 28, the date that the Check Clearing for the 21st Century Act goes into effect, are banks and their customers ready for the changes it holds?
The reality is that the infrastructure for “checkless” banking isnt quite in place yet. Theres a great deal to be done on the technology—and many bilateral agreements must be made—before banks can take that step.
The act authorizes the creation of a new instrument, an IRD (image replacement document). An IRD is a substitute check that has been imaged from the original paper version presented to the clearing bank. It has the same legal status for proof of payment as an original check.
Until now, the law did not allow for the electronic conversion of business checks which, according to EDS, total more than 60 percent of the value of all checks written. Check 21 provides for that electronic conversion.
On the customer side, Consumers Union, which publishes Consumer Reports, has published its list of seven policies to mitigate what it considers the “adverse impacts” on consumers of Check 21.
Fear? Uncertainty? Doubt? Sounds like another day at the office.
In essence, Check 21 is another one of those favorite tools of government bodies: an unfunded mandate. Its not a bad idea, really, to encourage the banking industrys use of image technology to make the check-payment system more efficient and to lower check-processing costs. But theres no direct plan to get us from where we are today to where the government would like us to be on Oct. 28.
Implementing Check 21 will require investment in storage equipment, secure networks and a lot of software development. Who will pay for the changes?
Banks themselves will end up footing the bill, but they could reap the benefits of faster clearing of large checks. Large banks are reportedly jumping into the marketplace since they want to accelerate collection of the big checks written out of state. They also want to cut their courier costs.
Most people think of electronic banking as ATMs, credit cards and online bill-paying, but theyre totally different animals when compared with electronic images of checks. Credit card processing is well ahead of checks because those transactions are already electronic. Credit card companies have been doing this for years.
The laws that govern the physical exchange of checks are quite complex. Today, banks still get together and exchange checks, and as a result, many pilots who work for courier services still have full-time jobs.
The terrorist attacks of 9/11 provided the impetus behind Check 21. Tons of paper checks were sitting on planes, and they sat, uncleared, on the ground for days. Checks are a commodity where technology can be used to cut costs, and provide business continuity as well.
One of the big hurdles is the whole archiving issue, which is partially practical and partially emotional. Most physical checks will be destroyed. This is part of the technology quagmire, though, as the exact process hasnt been mandated. Every bank can handle original paper checks on its own. Some banking officials think the original will be destroyed within three days of presentation at some point in the not-too-distant future.
Ed Herman, the director of global payments portfolio at EDS, says his company is working with the majority of the top 25 banks in the country to solve the major Check 21 issues. EDS has been involved in check processing for more than 30 years, and Herman says a large portion of EDS overall business is from an outsourcing perspective.
“People dont know were performing these activities behind the scenes,” Herman says. “Banks dont want to tell their customers, By the way, were outsourcing your check processing.”
In reality, banks dont have to do much to comply with the legislation. They just have to accept the IRD as legal tender in lieu of an original check. They dont have to be able to create IRDs–they just have to accept them. “People think the legislation is forcing banks to do a lot of different things but its really not,” Herman says.
The reason banks are going to want to comply is to reduce overall costs of clearing checks. By being able to capture the image of the check at the earliest point in the process, banks can avoid putting checks on planes and shipping them around, which will reduce courier costs and reduce float.
By capturing a check as an image and transmitting it across the country, you can clear it one to two days faster than is possible today. The third reason to get with the Check 21 Act is the ability to reduce fraud. If its a bad check, a bank will know about it in one day, rather than two to four days as they do now. “Fraud prevention is a huge opportunity,” Herman says with certainty.
But Check 21 does open the door to other types of fraud. The crooks out there are undoubtedly looking for ways to get their hands on digital images of checks. When you digitize, you lose security features such as watermarks.
Banks have systems in place today that look at certain patterns of behavior. Digitizing images will help accelerate the ability to pick up on fraud. The biggest check frauds happen when crooks use the same check number over and over, using different payees and trying to clear through different banks. Fraud purveyors will still find ways to take advantage, but theyll be challenged.
Today, a crook might try to make a deposit with a fraudulent check. A fraud artist knows exactly how long it takes to clear a bad check, so the crook takes the money out before it clears. Once Check 21 is implemented fully, the banks will know in one day that its a bad check, so the hold time is much shorter.
Well continue to analyze Check 21 issues as the act is implemented.