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Check 21: Analyzing the benefits of check image exchange

Check 21 went into effect in October 2004, but adoption of Check 21 technology has been slow. Designed to simplify check processing, increase business efficiency and decrease cost for FIs, Check 21 is only just beginning to gain ground.

February 28, 2006

What once was just an idea has become a reality.

The Check Clearing for the 21st Century (Check 21) Act, which became effective October 2004, is designed to simplify check processing through the nation's Federal Reserve Bank system and, in turn, increase business efficiency and decrease cost for financial institutions. Convenience is achieved when electronic check images are transmitted across the country in minutes, versus the traditional delivery of the physical paper checks, which can take several hours up to several days.

Since 2004, however, the full implementation and realization of Check 21's potential has fallen far short of expectations, and is only now beginning to gain ground.

Costs of Check 21: The misconception

Jerry Rempe

Check 21 is a proven benefit to check processing, but most banks are not yet realizing all the advantages. Like many new technologies, adoption and industry-wide acceptance are always a concern. Check scanning technology has caught on in some markets, such as merchant capture, but financial institutions have been slow to embrace Check 21 as a beneficial technology and customer service philosophy.

The banking industry is infamous for its reluctance to embrace new technology, whether individual FIs fear network security issues or want to assure cost savings up front. Every bank is unique in how a new technology is chosen, integrated and then evaluated. Most benefits are realized and measured in day-to-day operations, requiring a thorough analysis of processes and possible cost benefits in order to justify the electronic movement of check items.

Areas that banks should analyze:

• How much time, labor and resources are currently dedicated to paper check processing, secure transportation and storage?
• What efficiencies can be realized by eliminating courier costs through the implementation of Check 21 technology?
• What new and added benefits can a bank bring to its customers by being Check 21 technology-enabled?
• When can a true return on investment be realized?

Every component of analysis, from courier costs and gas prices to delivery speed, float improvements and savings in staff and equipment, need to be analyzed and assigned a specific value so the savings can clearly be recognized.

Community banks rise to occasion

Early adoption of new technology has typically come from larger FIs paving the way. Conventional wisdom expected community to reject Check 21 as too expensive to implement - only following suit once the act was more widely accepted and affordable.

The truth, however, is just the opposite.

Larger asset-sized banks have to do more to justify their use of Check 21 technology. For example, clearing a check faster brings more value to a bank. Different components, such as speed of delivery and reduction of float, need to be assigned a value and factored into decision-making.

Since the cost of moving paper checks electronically can be more or equal to keeping checks paper-based, some banks may opt to use Check 21 technology only for their higher dollar checks.

As Peter Lucas pointed out in "What's Next for Image Exchange?" (Digital Transactions, January/February 2006), only 3 percent of the more than 16 billion transit checks are being processed electronically. Furthermore, the bulk of check volume does not come from high dollar amount checks.

What's Important Smaller FIs are more likely to readily adopt Check 21 tech. Adoption and implementation of Check 21 is expected to take off in mid to late '06 and early '07. Check 21 tech can signifcantly reduce check-processsing and associated costs.

With the cumulative expenditures of courier services, increased gas prices, check processing costs and the price of printing image-replacement documents (IRDs), implementing check imaging technology has proven more economical for community banks than first thought.

According to the 2005 Community Bank Technology Survey conducted by the Independent Community Bankers of America, 71 percent of community banks are using check-imaging applications.

What was once perceived as a technology with the potential to financially strain community banks has now proven to be very beneficial. Where larger banks have previously set the marching line for adopting new technology, community banks are setting the precedent for accepting and implementing Check 21 technology.

Because of the inconsistent and fragmented use of Check 21 technology across different FIs, its full benefits have yet to be realized. With many banks not yet adopting Check 21 technology, even those check images that are initially processed and sent electronically may wind up as substitute paper checks again in the form of IRDs.

Out with the old …

Despite the slower acceptance of Check 21 technology across all FIs, check imaging and processing technology will not remain stagnant. It will continue to become increasingly visible with changes in the industry.

Lucas writes, "the payoffs from Check 21 technology, once end-to-end image exchange is widely accepted, will have networks exchanging more than 100 million images per month."

In the interim, banks must continually analyze their key components to determine the right time to begin processing checks electronically.

There is a comfort level attached to processing paper-based checks that hinders complete acceptance of check imaging technology. But with each rise in the cost of gas, courier services, maintenance and labor, Check 21 technology will become more accepted. And as more financial institutions start using Check 21 technology, the per-item cost of paper-based checks will increase.

Not only does Check21 hold inherent benefits to FIs, but the adoption of check-imaging technology also brings a more open market for image exchange - not only among FIs, but also with their customers.

For example, check-imaging technology is being increasingly implemented by merchants to eliminate the time and expense of physically delivering deposits to the bank. Remote deposit capture makes multiple deposits in one day to any FI in the United States via the Internet.

Remotedepositcapture.com, an independent authority on remote deposit capture owned and operated by Parsippany, N.J.-based Blue Mountain Enterprises LLC, predicts Check 21 technology will boom in 2006. As more FIs miss out on customer service opportunities and cost saving efficiencies, the "wait and see" period will eventually come to a close.

- Jerry Rempe is senior vice president of operations for Hutchinson, Kan.-based DCI, a provider of full-service bank technology and processing solutions to the financial industry.