Transition Time

Since it took effect on October 28, Check 21 has offered banks the option of transmitting check images to or near a paying bank and, if necessary, printing substitute checks (paper copies) for presentment — without an agreement in advance. Many observers believe this will unleash an unstoppable momentum for all-electronic processing.

"Looking down the road five to 10 years, the exchange of paper will all but go away," says Linda Garner, senior vice president, enterprise payments, at Minneapolis-based U.S. Bancorp. "Most banks will exchange and share images, and the process of printing a substitute check will be the exception."

Such estimates of how long it may take before check-image exchange is adopted widely are important because the return on investment in image exchange is based on what proportion of a bank's items are exchanged with partners that can receive and process electronic check images. Image exchange is to the direct advantage of
collecting banks because it cuts inter-bank courier cost, clearing fees, collection float, capture and return-item costs. It benefits paying banks directly by eliminating capture of in-clearings, reducing return-item cost and accelerating posting.

But it takes two to exchange. Huge image-ready sending banks need the nation's thousands of mid-tier banks, community banks and credit unions on the receiving end before they can obtain those payoffs.

"Until paying banks are able to receive electronic images, the depositing bank cannot achieve efficiencies from image exchange or share," Garner says. "In fact, if the depositing bank creates an image and sends a substitute check, the cost of processing that check increases significantly. The expedited clearing offsets this with large-dollar items, but for all others, the cost of processing the item actually increases."

Ray Gatland, image product development manager at Wachovia Corp., Charlotte, says a handful of large banks, including his, are actively working toward exchange pilots under the aegis of New York City-based SVPCo, a big-bank venture that provides electronic check clearing. "Other players will be helping to move that progress along in 2005," Gatland says. "Late in 2006, maybe early in 2007, you'll see a point of inflection in which volume is going to suddenly grow and we'll predominantly be in an image-exchange environment in the United States."

— Clint Swift