Cover Story

by Keith Taylor

   There used to be a common phrase that went something like, "Pass the check, please." The developments in the financial industry and the legislation being considered in Congress could well change this language to, "Pass the image, please."
   The effort by the Federal Reserve to pass legislation known as the Check Truncation Act (CTA) is slowly but surely picking up speed. Fed Chairman, Alan Greenspan, personally recommended the legislation, which is currently seeking sponsorship in both the House and the Senate. The hope is the legislation will come up for subcommittee review and hearings by late 2002, with further movement in 2003.
   The proposed legislation will allow for a substitute check, either digital or paper, to be considered legal tender within the clearing system. The impact of the proposed CTA could well be one of the most crucial to hit the market since the preparations for Y2K. Its impact in the long-term will be widespread, reaching most consumers of financial services, financial institutions, bankcard resellers, automated teller machine (ATM) deployers, cash-in-transit operators, inde-pendent sales organizations (ISOs), businesses... all those who touch the banking industry across the United States.

Checks still have volume

   Just look at the numbers. Check writing in the U.S. continues to grow, despite those who project the demise of checks to the debit card. More than 49.6 billion checks are still written annually in the U.S, with $47.7 trillion in check payments processed each year. Unlike any other country in the world, checks written in the U.S. account for nearly 60 percent of all non-cash payments.
   The cost of processing checks is high; some estimate that it costs the U.S. financial system (and ultimately the consumer) up to $70 billion a year to process checks. It is clear that an improvement to the process can yield dramatic savings. A typical 'good' check is already handled at least 15 times in the current banking back-office system. Beyond the effect on businesses which write and process checks, financial institutions rack up substantial cost in courier fees needed to transport original checks, as well as personnel expense to verify check deposits. This is particularly true in the current ATM deposit-via-envelope scenario.

Where to capture?

   FI's are helping to drive the CTA by recognizing the inherent efficiencies in capturing a check image as early as possible in the processing cycle. Truncation has already begun. Louise Roseman, Director of the Division of Reserve Bank Operations and Payment Systems at the Federal Reserve Board, recently addressed an audience of more than 100 leading U.S. financial institution representatives at a seminar sponsored by NCR and the Electronic Funds Transfer Association (EFTA). According to Roseman, requests by FIs and retailers to capture images helped lead to the drafting of the legislation.
   The need for digital imaging became even more apparent last year when all planes were grounded following the events of 9/11. The Fed had to float an estimated $10 million a day in the days following due to the disruption in the clearing system. The float reached a level of $75 billion before the normal processing environment was restored.

I'll take that check

   There are several viable capture scenarios: distributed cap-ture at the ATM, bank branch or retail store back office; capture at a commercial customer's site or anywhere it improves the ability to serve customers. Checks can also be sent to a central location, as often the choice by high-volume process-ing operations.
   Allowing distributed capture can lower the cost of check processing, accelerate check clearing and position the bank for image-based check truncation.

Quality is paramount

   The bottom line to any image capture and truncation scenario,and all potentialities surrounding the proposed Check Truncation Act, is that of image quality. In its current draft form, the CTA states that if the quality of the scanned image or substitute paper check does not meet Fed requirements or is in any way debatable, the institution that first provided the substitute check will be liable. So, quality is, indeed, paramount.