Are We There Yet?

Patricia A. Murphy
April, 2006
American Banker, Bank Technology News, and U.S. Banker

Following are excerpts from a special supplement titled “The Checkless eVolution: Payments in Transition” that appeared in American Banker, Bank Technology News, and U.S. Banker in April, 2006.

In banking, change is never swift.  Consider the change to electronic check exchange, also known as check image exchange.

It’s been nearly 20 years since the first glimmer of change, when executives representing some of the largest banks in the country banded together under the aegis of the Electronic Check Clearing House Organization (ECCHO) to push a concept known as electronic check presentment (ECP).  Spurred to action initially by new federal funds availability dictates – the Expedited funds availability Act of 1987 – and the consequent need to speed up check clearing and settlement times, the long-term goal was end-to-end electronics. 

The moment paper check entered the banking system, it would be truncated; the bags of checks trundled between financial institutions and other clearing agents replaced with digital image exchanges.  That at least, was the desired endgame. 

When the Check 21 Act was signed into law optimism grew.  But 18 months into life under Check 21, even the largest banks are swapping just small numbers of checks electronically, end-to-end.  More often than not electronic check files created by collecting banks are used to generate substitute (paper) checks for final presentment to paying banks.

“We’re still getting to critical mass,” said George Thomas, executive vice president of The Clearing House, which runs an image exchange network as part of its SVPCo unit.

“The work this year is in getting more partnerships established,” explained Jennifer Lucas, marketing director at Viewpointe Archive Services, a shared image archival and exchange service that handles work from some of the largest check-clearing institutions, including Bank of America, J.P. Morgan Chase and Zions.

After that, “adding more partnerships just gets easier,” Lucas said.

Thomas of SVPCo concurs.  “All the stars are aligned.  It’s just a matter now of getting each bank up” and exchanging electronic check files, he said.

The San Francisco-based research and consulting firm Celent LLC has predicted that 2006 will be a “breakthrough year” for check image exchange.  In a report published in January, Celent said it expects the share of inter-bank check clearings (so-called transit items) sent and received electronically will reach 18% by the end of this year.

Celent expects 2007 will bring the most growth, with 56% of transit checks cleared electronically, end to end.  By 2010, Celent is predicting nearly 90% of transit checks will be electronically cleared and settled.

Aaron McPherson, director of payments research at Financial Insights, Framingham, MA, estimates 34.1 billion checks cleared between banks in 2004.  By 2009, he’s forecasting 19.7 billion checks will clear through the banking system.

To put the various estimates into perspective, consider that last year financial institutions presented over 2 million checks electronically to Federal Reserve Bank offices for clearing, and of those, 90% printed as substitute checks for final presentment to paying banks.

“There’s a huge educational component to this that a lot of folks had not taken into account, said Suzette Massie, president of consulting at Carreker Corp., Dallas.