By Linda Goodspeed
Most Connecticut banking officials expect the new check processing procedure known as Check 21 to have very little impact on the state’s banking industry when the act goes into effect in October.
“It’s not going to change the way we collect and process checks at all,” said Robin Fujio, vice president at Liberty Bank in Middletown.
“It’s really not going to make as many changes as some people think,” agreed Roy Balkus, senior vice president and CIO at Naugatuck Savings Bank.
The Check Clearing for the 21st Century Act (Check 21) was signed into law in October 2003. The Federal Reserve developed the new check clearing procedures following the Sept. 11, 2001 terrorist attacks that grounded U.S. air travel for several days, jeopardizing the nation’s normal check collection process. Under current law, institutions can present checks electronically, if they agree. Check 21 allows banks that have imaging technology to use it to reduce transportation costs and delays even when presenting checks to a paying bank that has not agreed to accept electronic presentment. Thus, under Check 21, instead of physically sending the original check back to the paying bank for payment, institutions can send an electronic image of the original check to a point near the paying bank that has the capability of converting the image to a paper “substitute check,” a new legal instrument created by the act. The substitute check is essentially a paper copy of the check created from the electronic image that must meet certain specified standards. The substitute check can be presented for payment at the paying bank.
“There’s a lot of confusion about Check 21 and what it does and doesn’t do,” said Fillis Stober, a partner at Tyler, Cooper & Alcorn in Hartford. “A lot of publicity about Check 21 makes it sound like it’s about sending electronic images. It’s not. Check 21 is not requiring any bank to accept an electronic image of a check for payment. It requires banks to accept a paper substitute check for payment. What consumers are receiving now with their statements—an image of a check—is not a substitute check. A substitute check is a paper form of an electronic image that is specifically constructed in a certain way to meet certain standards to allow it to be processed like an original check. For consumers who get their original checks back, if one or two have been converted to a substitute check, they’ll get the substitute check. For people who get copies of their checks, they might get a copy of a substitute check. Once people understand that Check 21 is about paper created from an image of paper, it’s really very easy to understand. It’s a much simpler concept than people realize.”
The regulations governing Check 21 are being promulgated now and are expected out later this spring with an effective date of Oct. 28, 2004. The regs will spell out in detail what banks and credit unions will have to do to create a substitute check from an electronic image.
Mark Damico, president of the Item Processing Group at Fiserv Inc., which processes about 5 billion checks every year for more than 7,000 banks and credit unions, said the company will be spending $4 million to $5 million in new software, printers with magnetic ink printing capability and other tools needed to create the new substitute checks. That amount is on top of several millions of dollars Fiserv has already invested in archival storage capability and building a network of more than 50 processing centers.
“We’ve already done the major investment,” Damico said. “Somebody coming from conventional check clearing to be able to take advantage of Check 21 has a substantial investment to make.”
Currently, Fiserv has more than 900 clients already imaging checks, and is “converting about one client per day,” Damico said. “We’ve had very fast growth here for some time. Generally, clients have been looking toward adopting image statements for a while. I think Check 21 has been a bit of a boost to that.”
Balkus said Naugatuck Savings Bank will start issuing image statements to customers in the next few months. “I think Check 21 will make the transition to image statements quicker. I expect the entire industry will be going this route.”
Educating Customers and Staff
Many bankers see education as the major challenge arising out of Check 21.
“Education on the consumer side is very important,” Balkus said. “Image statements are a benefit to us and to our customers. On the other hand, I’m sure that some customers will object to them. There will be some confusion about it. We’re looking at a couple of things that we can do – how to position ourselves so we can make the transition as painless as possible, and how to educate the consumer that this is the wave of the future.”
Liberty Bank already images checks for both its consumer and business customers. Nevertheless, Fujio said the bank this summer will also be doing customer education around Check 21.
“Our customers are already used to not getting their original checks back but there is still some education to do,” she said.
Liberty customers who currently receive image statements will continue to receive those statements as usual when Check 21 goes into effect, but the statements may contain images of substitute checks as well as originals. The few Liberty customers who still receive their original checks back will continue to receive the originals unless they have been converted to a substitute check in which case they will receive the substitute check back. In both cases, the substitute checks will look different.
“We need to explain why this document looks a little different,” Fujio said. “Why is it a different size? What are the legal words on it? What does it means to me as a customer? We see education as the biggest piece of Check 21. We’ll be doing some statement stuffers, some branch marketing materials, putting information on our Web site. That’s our summer project.”
Fujio said Liberty will be doing some internal staff education this summer as well around Check 21.
“We need to put internal procedures in place,” she said. “How do we document the substitute checks? How do we log them? How do we follow the paper trail back? We already have those processes in place and we’ll be piggybacking on those processes, changing the forms a tad, doing some internal training. In general, I don’t really see this as a big issue for the bank.”
Stober also said the impact of Check 21 on consumers is likely to be minimal, at least initially.
“Consumers will get a notice explaining what substitute checks are, that they’re not always going to get their original check back.”
She said Check 21 does contain several consumer protections that banking institutions need to follow. Although the act gives legal status to substitute checks, consumers still have a right to request their original check if they can show that not having the original check harms them in some way – for example, proving a forgery.
“Banks using substitute checks must make certain warranties to protect the consumer, to allow consumers to recover loss,” Stober said.
Check 21’s Impact
How much impact Check 21 is likely to have on banks themselves is also likely to be minimal, at least until the technology for converting checks into substitute checks becomes more widespread.
“We’re taking a wait and see approach to converting those items at presentation to see how the industry takes hold of it,” said Fujio.
Added Balkus: “I think there is a limited number of banks that see a practical advantage of converting checks at the place of presentation into an image. American Express, with millions of customers, may be able to take that check and convert it to an image and see the financial benefit of doing that. Naugatuck Savings Bank can’t leverage the technology across its much smaller customer base.”
“If banks choose to create substitute checks and invest in the technology to do that it could have a major impact on the industry,” Stober said. “If banks are just prepared to receive substitute checks, the basic check processing technology won’t have to change.”
On its Web site, the Federal Reserve says the purpose of Check 21 is “to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation.”
Stober is doubtful. “People predicted that Check 21 would streamline check processing and make it quicker because if checks were sent by image across the country it would take less time than sending them manually,” Stober said. “But Check 21 contains no mandate to use the image technology so the process won’t change.”
Stober said the Expedited Funds Availability Act, which essentially provides for two days to clear a local check and five days to clear a nonlocal check won’t shorten under Check 21.“Those rules on timing won’t change any time soon,” she said.
Check writing has been on the decline in recent years. According to a 2001 study by the Federal Reserve, paper check writing has been declining by about three percent a year.
“The number of checks that are cleared each year is declining,” said Damico at Fiserv. “But it’s been a slow decline. There are still in excess of 40 billion checks written in the U.S. each year.”
The number converted to substitute checks under Check 21 is likely to be a fraction of that number.