Check 21 The Myth. The Reality.

The Beginning:
When the Check 21 legislation was passed in 2003 with an implementation date of October 28, 2004, many expected a revolutionary change in the way check processing (and business) would be conducted.  Many seemed to believe a magical switch buried deep in the recesses of banking would be turned ON and the approximately 40 billion paper checks used annually in the US would be a thing of the past.

Check 21 took on mythic proportions with massive rewards and risks touted at every turn.  Consumer and watchdog groups talked of risks of criminal activity.  “Phishing” and the combination of on-line banking and on-line check images would lead to increasing identity theft, fraud, and other scams.  Check 21 would result in an electronic playground for the computer-adept criminal.

On the flip side, the trumpeted rewards included reduction of “float,” more rapid funds availability, drastic reductions in processing time and processing costs, as well as streamlining of back-office activities.  The faster conversion of checks into available funds raised another issue:  would banks make those funds available more rapidly to customers or simply hang onto them to for their own gain!

The Expectations:
In June/July 2004 timeframe, Wells Fargo and  “Treasury Risk Management” magazine conducted a survey on Check 21of CFOs, treasurers, and other cash managers.  These financial experts believed the most impact would be felt in these areas:

•    Check returns    •    Image access and retrieval
•    Controlled disbursements    •    Image positive pay
•    Depository services    •    Account reconciliations
•    Lockbox operations    •    Payee validation

These same respondents indicated the greatest operational benefits would be in these areas:

•    Faster funds availability    •    Lower processing costs
•    Greater processing efficiency    •    Reduced fraud

One of the most promising indicators was that 79% of those surveyed expected to move to electronic payments.

The Reality:
The reality of Check 21 is that there was no “big bang” moment.  A new universe was not created in an instant where all paper checks were magically (or electronically) transformed.  This is what we know as we reach the one-year anniversary of Check 21:
•    Approximately 1% of all Fed checks are converted
•    This 1% accounts for 10% of total dollar volume of checks
•    Remote location institutions are among the early adopters because it is less expensive than current logistics and processes
•    Implementation and conversion decisions are based on the tradeoff between the cost of conversion, the size of the check, and the impact of funds availability

Further Expectations:
•    Cost-per-conversion decreases will lead to increased implementation
•    Current estimate is that $2 billion in annual cost savings in transportation, float, and other check processing costs are expected as implementation increases
•    Interest rate increases which will offset conversion costs will undoubtedly speed implementation

Beyond Myth and Expectation, The Reality:
Operational Risks:
Operational risks – losses resulting from inadequate and failed processes, people, and systems – are the same with or without Check 21.  The processes and systems for addressing those risks differ from a “purely paper” system with one exception – forgery/fraud where the original document is needed to determine the “how” and “who” of the crime.

Because fraud and operational risks are still a major issue, the elements of improving check processing from the paper of the original transaction to the image capture and data security throughout the whole transaction process is hot-button issue for banks and customers.  Check 21 is ultimately expected to reduce risks by focusing resources on the issue.  As identity theft and other crimes increase, it is believed that the reduction of processing time will enable the detection of criminal activity sooner, thus limiting financial risk and exposure for both the customer and the financial institution.

Costs and Benefits:
The costs and the savings – cost per unit (check) – are changing.  As the use of paper checks declines, the cost for operating manual systems increases per transaction until such a point that there is a steppe function decline in operations (capacity reduction).  At the same time, the cost per conversion during the transition phase is also substantial due to the infrastructure investments for Check 21 and maintaining the existing paper system.

At the present time, the cost/benefit ratio of conversion has resulted in the implementation by those institutions (businesses and banks) where funds availability, interest rates, and processing time form a trifecta of benefit to justify being an early adopter.  As interest rates increase, funds availability will become a greater incentive to convert.

Somewhere Between Yesterday and Today:
At the dawn of 2005, JP Morgan Chase and “Treasury Risk Management” conducted another survey which included a check-up on Check 21 issues.  This survey indicated these are the top four challenges:

•    Process flow re-engineering    •    Fraud risk
•    Costs associated with implementing imaging technology    •    Quality of image captured

The top benefit of Check 21 is the consolidation of banking relationships.  Thirty-one percent of respondents saw NO BENEFITS.  Another cautionary element:  in the 2004 survey 79% of respondents expected to implement electronic payments.  In the February 2005 report, 68% of respondents had no plans to implement electronic image capture.

In the September issue of “Treasury Risk Management”, Wells Fargo and TRM published a third survey.  This survey looks at what has happened for respondents during this first year.
•    70% had little or no impact from Check 21
•    The treasury functions with the most impact were check return, controlled disbursements, and depository services.

The greatest benefits derived have been from faster funds availability and check processing efficiency.

Future Benefits:
Ultimately, the Check 21 conversion is expected to do the following:
•    Reduce costs    •    Provide faster access to funds
•    Reduce delays in fund collection    •    Improve customer information flow
•    Reduce risks from loss during transportation of documents    •    Reduce risks through innovation in original checks (built-in security tools in paper checks and on-line banking)
•    Reduce labor costs in the back-office (processing    •    Provide customers with faster access to cash

When and How:
Institutions will continue to make conversion decisions for collection and return of checks based on:
•    Technology investment decisions    •    Security of data and transmissions
•    Consumer expectations    •    Consumer communication requirements
•    Risk assumption from creating substitute checks    •    Fraud detection and prevention processes, systems, and tools

Future Innovations:
With the advent of Check 21, innovation is rampant.  From improvements in check paper with as many as eight security features to ATMs that incorporate imaging technology, the pace of innovation will continue to lower banks’ costs to deploy electronic check processing.

Corporate customers are also innovating with on-site image capture and electronic image transmissions.  The operational changes in their business operations include these:
•    Consolidation of banking services    •    Elimination of cash concentration services
•    Returned check and other exception processing    •    Lockbox image capture

Future Issues:
As with any other catalyst, Check 21 isn’t implemented overnight.  It is evolutionary rather an instantaneous.  The cost of conversion will continue to be a barrier for smaller entities which do not have the volume or dollar level to justify the investment under current cost structures.  Image capture capabilities and other technology enhancements will need continued improvement.  Costs will decline as technology becomes more mainstream.  As technology costs decline, more and more institutions and businesses will make the transition.  Check 21 will continue to motivate innovation and process redesign.

Bottom-line for Business and the Future:
Check 21 is an evolutionary process which will be adopted as costs of implementation decrease.  The reality is that as technology improves the process of change will become a part of everyday life.  ATMs with image capture and other conveniences will speed conversion through reduction of processing time, removing multiple “touches” in transactions, and making paperless the norm.  Time is on your side.

Copyright ©2005 F.O.C.U.S. Resource, Inc.

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