Check truncation

by Phil Britt

   The Check Truncation Act could promote more check-to-electronic conversion and could prompt some higher ATM usage by consumers, but any effects on the ISO business probably won't be felt for a while, experts agree.
   The act itself, developed by the Federal Reserve, is expected to be discussed in the current session of Congress, but probably won't be enacted until sometime in 2003, according to Louise Roseman, a Federal Reserve Board Director.
   The Federal Reserve, which usually stays out of such activity, had a major hand in the drafting of the proposed law, Roseman said.
   The Check Truncation Act, if enacted, would allow for substitute checks that would be considered legal documents. Though these substitute checks would also be paper, the proposed law is expected to lead to increased use of electronic imaging and faster processing, according to Roseman. Images could be transmitted rather than paper, with the substitute checks printed only when necessary.
   "This would definitely nudge financial institutions, who don't do it already, into check imaging," said Mike Fenton, Director of Sales for Parascript, Niwot, Colo., a company that makes check recognition software.
   Though consumers who get their checks back now might grumble about truncation initially, they'll welcome it if they find it to be more convenient than the current system, Fenton added.
   The proposed law would also reduce or eliminate the need to transport checks from site to site. This became even more of a concern when planes were grounded following the Sept. 11 terrorist attacks. The Fed lost $75 billion in float each night because checks couldn't be processed, Roseman said.
   "We want to reduce the reliance on physical transportation," Roseman added. "The cost of physical transportation keeps going up while the cost of electronic transmission keeps coming down."
   Under the proposed law, substitute checks could be used as proof of payment. Imaging the original checks upon deposit would enable these substitute checks to be produced later in the payment process, with images being used until a paper copy is required. This would enable banks to truncate some or all checks and collect or return them electronically.
   The transmission of images and use of substitute checks would mean that deposits would no longer need to be cleared out of ATMs every night and would enable banks to extend the latest ATM deposit time each day.
   Under current law, deposits can't be processed and posted until the deposit envelope is opened to verify the amount. The law would likely promote the deployment of image-capable ATMs, enabling the customer to deposit checks, which would be immediately imaged, without an envelope. Some of these systems would provide the customer with a copy of the image on his deposit receipt.
   Whether this makes it more palatable for customers to use ATMs for deposits remains to be seen. It took nearly 20 years for consumers to accept ATMs for cash withdrawals, but the deposit use is still limited, mainly because customers don't like the idea of placing their checks in a "black box."
   While there's an economic incentive for cash dispensing ATMs, the current system provides no revenues for those machines to accept deposits. Therefore, while banks may want ATMs that accept deposits to alleviate lines in the branches, and to make their processes more efficient, the proposed law probably won't have much affect on the ISOs who provide ATMs, many of which are primarily cash dispensers.
   Consumers are very slow to change their habits.
   The proposed law isn't intended to replace check electronification via the ACH system, but instead, should be a complement to the ACH and other electronic payment processes, Roseman said.
   Some industry experts expect the proposed law to promote check truncation at the point-of-sale. If the check will be truncated anyway, doing so at the point-of-sale will save the merchant from check storage and other headaches from the current paper-based system, experts said.
   Fenton said the proposed law could prompt some merchants who don't accept checks now to take them in lieu of cash, or perhaps, rather than debit cards, particularly if it costs the merchant less to accept checks once truncation is in place.
   O.B. Rawls, President of Hypercom North America, Atlanta, Ga., calls the proposed law "the greatest thing since sliced bread."
   "Some merchants are already looking at ways to get imaging because it will help them process checks faster,"
   Rawls said. Rawls said that he expects the proposed law to provide opportunities for Hypercom as well. The company is working with RDM Corp., Waterloo, Ontario, to develop electronic check imaging products for the POS market.
   The proposed law provides ISOs with "all kinds of ways to make money from signature capture devices," Rawls added.
   The Check Truncation Act could provide more opportunities for ISOs because it will increase the ways merchants can accept payments, and they will need systems to handle each of the options. But merchants are unlikely to replace current systems due to the proposed law alone. They will want to make sure they're receiving added value from any new POS devices or services.
   With the advent of the Check Truncation Act, some merchants will be looking for check scanning systems that enable them to capture payer information for data mining purposes, Fenton added.
   Though many see check truncation as inevitable, Randall Sargent, CTO and founder of Creditwise, a Web and credit technology integration company based in Garden Grove, Calif., said the Check Truncation Act should not be passed.
   The act will lead to more fraud because check signatures will be examined less closely than they are today, Sargent explained. "There will be increasing use of automation. Different variations in signatures won't be looked at as closely."
   Hypercom's Rawls agreed that check fraud is on the rise, with much of the criminals changing to check fraud from credit card fraud as card fraud prevention measures strengthen.
   To combat this problem, Rawls recommended that merchants work with check guarantee companies.
   Therefore, Sargent said, the Check Truncation Act shouldn't become law until stronger fraud protection measures are added. With stronger anti-fraud language, the act would make a good law, according to Sargent.