Largest Overhaul Of Check Processing In 50 Years In Sight
Congress is expected to pass legislation that would expand the use of electronic images of checks, saving banks billions of dollars.
The process by which banks clear and settle billions of checks is about to get its biggest overhaul in 50 years, thanks to legislation making its way through Congress. The Check Clearing for the 21st Century Act, Check 21 for short, would expand banks' ability to exchange electronic images of checks instead of the paper originals, saving them billions in transportation and related costs.
Today, banks can only exchange check images through bilateral or multilateral agreements. Check 21 eliminates the need for such agreements, freeing banks to transmit images at will.
Spurred by intense lobbying from the financial-services industry, the House passed the bill unanimously earlier this month, and the Senate is expected to follow shortly. "We're optimistic it will move before the July 4 recess," says a spokesperson for the Independent Community Bankers of America, a trade group for smaller banks.
The legislation is testimony to the paper check's popularity in the face of newer forms of payment, such as debit cards and automatic payroll deposits. Check volume has been declining; about 40 billion checks were written last year versus 50 billion in 1995, according to the Federal Reserve. But checks still account for 60% of all noncash retail payments.
Until a few years ago, check processing had changed little since the 1950s, when banks introduced magnetic-ink encoding. But technological advances such as image-capture devices and high-speed telecommunications lines have opened the door to storing and exchanging check images.
SVPCo, a bank-owned New York provider of electronic-payment services, has revealed plans to host an image-exchange service starting next year. The service is intended to let SVPCo's member banks, which process more than 60% of the nation's checks, exchange images not only with each other, but with nonmember banks.
Under current law, neither SVPCo nor its member banks can force a nonmember bank to accept electronic images. Small banks that can't afford imaging systems end up forcing larger banks to continue the costly practice of hiring air couriers to transport bundles of checks across the country.
Small banks, for their part, have pointed out that the Federal Reserve, their main provider of check-processing services, is scaling back operations. In February, the Fed said it planned to reduce the number of processing centers it operates from 45 to 32. With the Fed reducing what are in effect government-subsidized services, smaller banks are being left to fend for themselves.
The Check 21 law circumvents this problem through a device called the substitute check, a paper facsimile that's the legal equivalent of an original paper check. For example, suppose Citibank wishes to transmit a check image to a bank in Utah, but the Utah bank isn't equipped to receive images. Citibank would instead transmit the image to a processing site in Utah, which would print out the image as a substitute check and ship it to the Utah bank. From then on, the process would go on exactly as it had in the past. The use of these substitute checks lets Citibank cut its check transportation costs, while the Utah bank is spared having to invest in imaging technology.
It's not clear yet who will build the remote processing sites or how much they'll cost. But, according to SVPCo, banks stand to achieve a net savings of $2.1 billion a year through the use of substitute checks.
The Independent Community Bankers Association, a trade group for smaller banks, hailed Check 21 as "a balanced bill that [allows] banks, on a bank-by-bank basis, to embrace electronic check processing." The association says the law provides ample protections for banks and consumers in the event a dispute arises over the use of substitute checks.
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