It’s very rare that we get to use the words “check processing” and “exciting” in the same sentence, but this is one of those rare times. The banking industry is at the crossroads of what could prove to be one of the largest changes to the back office since MICR-encoding (Magnetic Ink Character Recognition, those odd-looking figures on the bottom of checks and deposit slips) was invented and the “back office” itself began.
The news, of course, is the Check Clearing for the 21st Century Act, a piece of legislation signed into law in October 2003 by President Bush. The law, often referred to by the shorthand name of Check 21, originally was proposed by the Federal Reserve System as a method to encourage innovation in check processing.
In short, the law allows banks to use Image Replacement Documents (IRDs), or substitute checks, to clear checks. “Clear” simply means getting the dollar amount to the bank the item is drawn on, so it can be debited against the correct account. Check 21 allows the use of a media (electronic, digital, etc.) other than the actual transportation of the paper document.
The Federal Reserve hopes this interim step will provide the spark for banks to convert their systems so they can clear all transactions using only images, thus reducing the massive flow of paper that now accompanies check processing – not to mention the amount of time it takes. In the United States billionsof paper checks have to be physically transported (by car, truck or air) back to the bank on which they were drawn. To further illustrate the logistics, 600 to 800 checks weighs one pound. Therefore, a billion checks weigh roughly 715 tons.
The basics of Check 21 are quite simple. Congress gave the banking industry one year to prepare for the actual implementation of the law. Once the year is up – on October 28, 2004 – banks will be allowed to capture an image of any check and then present image replacement documents – without prior agreements – to the paying banks for actual clearing. In addition, the law requires an expedited re-credit process to the customer if he or she can substantiate a claim for loss because the original check was truncated and converted to the allowed substitute item.
One part of the law is key: No paying or depository bank will be required to create an Image Replacement Document. However, all banks must prepare for the possibility of receiving them.
Understanding the law is the easy part for banks. Getting ready for its implementation will require a bit more work. One major focus should be the education of businesses and consumers. The reason may seem obvious, but here it is: People love their checks. Despite the growth of the Internet and various forms of electronic payments, paper checks continue to dominate the payments landscape. So, any change to checks should be taken very seriously. This means that everyone must be informed about IRDs and also about the possibility that float will be reduced (another potential huge benefit to the payments system). They also need to know about the process for making a claim if the payment of a substitute check creates a loss. The look and content of bank statements will also be affected as banks adopt this new technology.
On the benefits side, imaging can do much more than create efficiencies in a bank’s back office. Many bank customers already enjoy being able to view images of their checks online. In addition, imaging can dramatically increase the speed of check research.
Those of us old enough to recall the change in credit card statements, when the original signed copy of the charge slip was no longer returned with the statement, realize that acceptance will eventually occur in the brave new world of electronic check processing..