News

Passage of Check 21 advances idea of check imaging at ATM

Both the House and the Senate recently approved legislation that may dramatically alter the way financial institutions process checks.

January 24, 2004

Both the House and the Senate recently approved legislation that most industry watchers expect to dramatically alter the way financial institutions process checks.

Ultimately, say some vendors, it may mean the adoption of imaging technology at ATMs.

(See related story Improving ATM deposits)

The House's Check Clearing for the 21st Century Act (nicknamed Check 21) and the Senate's Check Truncation Act will encourage check truncation (the replacement of a paper check with a digital image) earlier in the processing cycle by removing the need to transport the check itself.

"Probably the last time we saw a change of this magnitude was when the industry adopted the MICR (Magnetic Ink Character Recognition) line," said Louise Roseman, director of the Federal Reserve Board's Division of Reserve Bank Operations and Payment Systems, speaking to attendees of a recent, NCR-sponsored ATM Channel Planning Seminar in Washington, D.C.

The House passed Check 21 by a unanimous vote on June 1. The Senate passed the Check Truncation Act, also by a unanimous vote, on June 26.

Both acts -- which Roseman said are similar but not identical -- offer banks the option of creating "substitute" paper checks using a digital image. The substitutes, which will be the same size and carry the same data as original checks, can be exchanged with banks that lack the capability or the desire to receive images. Current law requires banks to physically present and return original checks.

"We're not mandating electronics," Roseman said. "Banks can still demand paper; the key is that it won't have to be the original check."

The Fed, which processes 40 percent of all checks in the United States, had championed the legislation since its introduction in late 2001, along with a number of financial industry trade associations, including the American Bankers Association, the Credit Union National Association and the Independent Community Bankers of America.

Now that both the House and Senate have signed off on the legislation, Roseman said the Fed must help clarify issues such as what kind of disclosure statements banks must provide to customers and how customer disputes will be handled.

She expects the law could be implemented by 2004's third quarter.

What's it mean for banks?

Andy Kurtz, a senior product manager for Wausau Financial Services (WFS), a reseller of NCR ATMs and check processing equipment manufactured by NCR, Unisys and Fuji, said that awareness of Check 21 is rising among financial institutions.

"They've gone from asking 'What is it?' to 'What's it going to mean for me internally?' They're starting to realize that even a small financial institution can streamline its processes based on existing technology and Check 21," Kurtz said. "Check 21 is going to allow them to implement imaging technology in new ways."

For instance, Kurtz said, his company is currently beta testing a product called Teller Proof that allows images to be captured at teller stations and sent directly for processing. This helps banks eliminate replicated steps such as the double entry of data that typically occurs in both the teller line and the back office, he said.

Octavio Marenzi, managing director of Celent Communications, predicted that banks will be able to cut their annual check processing costs by up to $7 billion with the widespread adoption of check imaging.

Celent has produced several reports related to check processing, including "The Check Stops Here: Moving Check Truncation to the ATM" and "Check Imaging: Moving to Prime Time and Beyond."

Following Check 21's adoption, Marenzi said Celent expects the nation's top 25 banks to be fully image enabled by 2006. Mid-size banks, with assets of $5 billion or more, will follow suit by 2008. Half of all small banks, with assets of $100 million or less, will also be image enabled by 2008, he said.

Adoption at the ATM?

However, he believes banks' adoption of imaging technologies will begin in their back-office processing operations, move to the branch and then, finally, to the ATM. "I think it will be some time before we'll see any large uptake at the ATM," Marenzi said.

While checks will be imaged at fewer than 5 percent of ATMs by 2006, he predicted the number could grow to 50 percent by 2010.

Rob Evans, director of industry marketing for NCR's Financial Solutions division, said that implementing check imaging at the ATM will make it affordable for banks to offer deposits at non-branch machines because daily pick-up of checks will no longer be required following the enactment of Check 21.

"The real upside is that it will be more affordable for them to provide full service to their customers at more machines," Evans said. "Using distributed image capture, they can manage down the costs to the point where they can be the good guys and provide service to their customers wherever they want it."

Because geographic proximity to a central check processing operation will become less important after the enactment of Check 21, Kurtz said banks will enjoy more freedom in where they locate deposit-taking ATMs. It will become more feasible for them to enter new markets with advanced-function ATMs rather than branches, for example.

While many customers who purchase ATMs from WFS choose to disable the deposit taking function, Kurtz believes that will change in the wake of Check 21. "The reason they don't offer deposits today is because it's such a pain for them. But there's no reason for them not to do it if the pain is taken away," he said.

Some bankers question whether it makes sense to add imaging technology -- an investment of at least $3,000 per ATM -- for what is not a very popular transaction. According to Celent's "Moving Check Truncation to the ATM" report, less than a third of ATM users make a deposit at least once a month, compared to 94 percent who withdraw cash.

But Evans believes that could change with customer-friendly initiatives made possible by check imaging, such as extended deadlines for deposit cut-offs. "I think this could be a real watershed," he said. "Customers may make it a point to go to the ATMs where they can get expedited credit for their funds."