Sprint or Marathon?

BAI Banking Strategies, March-April 2004
By Chris Costanzo

For its March-April 2004 edition BAI Banking Strategies wrote a series of articles focusing on the far-reaching effects of Check 21 on the financial services industry. Following are excerpts from the Sprint or Marathon article, which discusses different approaches small and large financial institutions are taking in preparing for Check 21.

Check 21 will require some action by all financial institutions, but the options and opportunities vary greatly depending on asset size.

Check 21, while not exactly dictating a transition, has unleashed forces that will almost certainly prompt a widespread migration from paper checks to electronic images over a period of years. But instead of an orderly passage, financial institutions likely face a bumpy ride as they sort through financial, technical and competitive issues.

For institutions of all sizes, there are important questions about cooperation and participation. To overcome thorny technical issues, intermediaries of all types and sizes will have to temper their competitive instincts and work together closely. And overall, the pace of the transition from paper to electronics will be strongly influenced by the degree of participation across the industry.

As stewards of the nation's payment system, the largest institutions have already spent several years preparing for Check 21. They monitored the progress of the legislation through the Congress and installed the cameras necessary for converting paper checks into electronic images. They also figured out how and where they are going to store and access the huge numbers of images they will be collecting. Some have even begun offering new image-based products, such as access to check images via the Internet.

Surprisingly, considering the dismal history of past cooperative efforts, large banks have accomplished much of this work by networking among themselves and through industry associations and joint ventures. Consider the Small Value Payments Co. LLC, which is emerging as a major force in the move to imaging. Eight of the 22 owner banks formed a group known as the "vanguard banks," which have set an aggressive time-table for initiating the exchange of images among themselves by mid year. KeyCorp, Cleveland, and San Francisco-based Wells Fargo & Co., for example, agreed to begin exchanging images by June; Chicago-based Bank One Corp. and J.P. Morgan Chase & Co., which recently announced plans to merge, agreed to do so by July.

Now, nearly every big bank is focused on the twin objectives of exchanging images and doing so in a Day Two environment that is fully electronic. Morgan Chase, for example, began reworking its Day Two operations in 2003 and expects to have it completely image enabled by the end of the first quarter of 2004, according to Tom McGuire, a senior vice president and the enterprise operations services executive.

SVPCo and Viewpointe, meanwhile, are working to ensure the compatibility of their image systems. That's important to the industry, because currently, electronic exchanges between SVPCo banks and Viewpointe banks do not work the same way.

SVPCo banks, for example, plan to exchange images much the same way they exchange paper today, by sending full electronic files from one bank to another. In this scenario, each bank must have its own image storage archive.

Viewpointe banks, on the other hand, will not actually exchange images. Rather, they will send them to the same central archive where the images can be accessed as needed, say to respond to a customer request.

There is one Check 21-related issue on which large banks and small banks face a common challenge. That is the need to communicate to customers and employees the changes they should expect when the law takes effect in October. Given that the changes affect nearly every employee as well as every corporate and retail customer, financial institutions will need to tread carefully. "You don't want to get between people and their money," says Steve Hill, the director of business development for Carreker Corp.'s global payments consulting division.

With big banks as the leaders, standard setters, and even providers of check imaging, and with small banks as the willing followers, it appears that the vast electronic network that will be necessary to finally get to a "check-less society" is at last falling into place. How speedily that day arrives depends on continued cooperation of banks of all sizes. "No bank is going to get very far down the road by clearing checks with itself," says C. Grant Cole, a senior vice president at Bank of America.