Check 21 Enacted
Bankers are celebrating the enactment of the new law, known as the Check Clearing for the 21st Century Act, or Check 21 for short. October 28, 2003 signed into law.
November 04, 2003 23:08
Banks Rush to Embrace Digital Check Processing
By Frank Norton, The Post and Courier, Charleston, S.C.
Nov. 3--Banks hate them, fewer and fewer people are using them, and the cost of moving them from place to place is getting astronomical.
They're paper checks, and their days are numbered.
Sick and tired of moving billions of pieces of paper around the country, the banking industry has successfully lobbied Congress to pass a law, signed last week by President Bush, that will allow banks to stop sending customers' original checks back to them.
Signed checks will now be transformed into a digital image, the original will be destroyed, and the customer will receive only a printout of check numbers and amounts.
Bankers are celebrating the enactment of the new law, known as the Check Clearing for the 21st Century Act, or Check 21 for short. They say it will cut their costs, streamline transaction processing and protect the industry and consumers from delays caused by transportation interruptions.
"This isn't going to turn overnight, but there are efficiencies to be gained in the long term," said Nessa Feddis, senior federal counsel for the American Bankers Association, a leading industry group. "Ultimately, though, you won't have to fly planes, trains and automobiles to move checks across the country."
However, the changeover will not take place without costs, both financial and human.
Check-writing has been on the decline for some time. Businesses have been moving for years toward electronic fund transfers, and consumers increasingly are switching to the convenience of bank cards that allow credit or debit payments and cash withdrawals in a matter of seconds.
According to the Federal Reserve, the nation's largest check processor, the number of checks written last year was the lowest in more than a decade -- about 40 billion, down from 50 billion in 1995 and about 75 billion a year in the early '90s.
The downward trend is expected to continue at about 5 percent a year through 2006, and roughly 9 percent thereafter.
At the same time, however, the cost of sorting, routing and shipping checks keeps rising. It's a highly labor-intensive process that has become the second most expensive part of retail banking, behind running a branch network.
According to Celent Communications, a Boston-based research firm that tracks the financial services industry, banks in the United States spend between $6 billion and $8 billion annually on check processing and transportation, employing 50,000 people and running more than 300 check-clearing centers nationwide.
Check 21 changes all that by allowing all U.S. banks to process checks electronically, by making and sharing digital images of them rather than having to physically transport them between banks across the country. The new law eliminates checks as a proof of purchase for millions of Americans who still find security in retrieving their processed checks from the mailbox.
Banks and customers who still want a paper copy can request a "substitute check," or the legal equivalent of the original, which in most cases will be destroyed upon deposit.
Bob Davis, executive vice president of America's Community Bankers, a Washington-based group that represents smaller banks, said bankers large and small pushed hard for the bill because it will help them simplify operations and cut costs.
"From the very beginning, it was clear that this piece of legislation had strong support from all of the major banking trade associations," he said.
He said clearing checks electronically will help circumvent catastrophes such as natural disasters or terrorist attacks that can hold up the physical shipment of checks for weeks. For example, the Sept. 11, 2001 terrorist attacks caused costly delays in check-processing and payments by bringing the country's air-transport system to a halt. Natural disasters have done the same on a regional basis.
As for the cost of getting electronic image-sharing systems up and running, Davis said it should not be too bad. "Most banks I'm familiar with already use imaging for checks to varying degrees," he said. "There may be some front-end hardware and software costs, but once systems are fully up and running, banks should be able to make ongoing cost savings and pass those on to consumers."
Celent, on the other hand, predicts banks will spend nearly $2 billion on check imaging in 2005 alone. However, the firm also estimates that the industry will eventually save up to a third of its current operating expenditure of about $7 billion annually, or about $2.3 billion, and that about 83 percent of medium to large banks will have fully enabled image-sharing systems by 2006.
The ABA's Feddis said speedier processing times will reduce the risk of fraud and improve ATM service, as transactions will be recognized immediately rather having to wait for a physical confirmation.
According to check-processing experts, a typical check gets handled between 10 and 28 times before finishing its journey and landing back in the mailbox of the writer. With image sharing, that process should eventually disappear.
"I'm very excited about this happening, because I think it's something we've needed to do as an industry for a long time now," said Hugh Lane, president of Charleston-based Bank of South Carolina. "We've been doing imaging since the late '90s, and it has shown us that people can be productive doing things other than touching checks."
Alenka Grealish, manager of Celent's banking group, said many banks will initially set up partial image-sharing systems, expanding them gradually.
"Unlike other technologies where you can sit on the fence and let others experiment, there is not that room for discretion here," Grealish said. "It will be cost-prohibitive to remain one of the few banks that still want to ship paper around."
Grealish noted that there will also be a price paid in the elimination of jobs in processing and transporting checks.
"There are a lot of people working these jobs that are going to see their place of employment disappear," she said. "That's going to affect communities all over the country that have a lot of lower-skilled workers."
Steve Whitney, senior vice president at the Federal Reserve Bank of Boston, agreed, saying productivity gains from automation will reduce the need for manual handling and labor.
"Initially, we'll probably see a gradual implementation of this system without the displacement of too many jobs," he predicted. "But as financial players become more comfortable with the technology, we're certain to see a shaving of jobs -- and that's true with the automation of any labor-intensive function."
In many places, downsizing is happening already.
The Federal Reserve, for example, in February announced plans to reduce its check-processing costs by cutting about 400 jobs nationwide and the number of its check-processing locations from 45 to 32.
One of the locations to be closed is in Columbia, which next August will be rolled into the Fed's Charlotte district headquarters. The Columbia branch, which employs about 60 people, had about 100 workers five years ago.
Cost-cutting measures are expected to reduce the Fed's operating expenses for check services by about $60 million in 2005 and about $300 million over the next five years.
But while federal and private check-clearers face downsizing, other businesses expect a boom.
David Brasfield of Brasfield Technology, a Birmingham, Ala.-based software company that specializes in serving community banks, said he expects revenue to double next year as more and more banks sign on to imaging systems.
Posted by Craig at November 6, 2003 02:45 PM