"Don't Count Out the Check"
By Clint Swift
ECCHO's David Walker, a leader in check electronification,
argues that the banking industry should use imaging technology
to capitalize on the strengths of the paper check and extend its
life as a bank-centric payment system.
Conventional wisdom holds that the paper check
is rapidly becoming passé. Yet David Walker, president
and CEO of the Electronic Check Clearing House Organization (ECCHO),
seeks to turn that kind of thinking on its head.
Consider the possibility, Walker says, that
the trend toward electronic transactions may help prolong the
life of the check by making it more efficient. "With technology
and the elimination of legal barriers, we can separate the physical
paper check from the legal instrument that is the check and greatly
expand the capabilities of the check as a payment method."
Walker notes that checks can be processed more
quickly than Automated Clearing House (ACH) debits with the use
of electronic check presentment (ECP) or imaging technology and
that no other payments method carries as much data. As opposed
to representing the potential to render the check obsolete, Walker
says, ECP and imaging can "make the check system more efficient."
Walker is widely credited as having played a
leading role in formulating and communicating banking's perspective
on Check 21 while the legislation was being formed in conference
rooms on Capitol Hill. He was one of only four individuals, outside
White House staff and the congressional delegation, invited to
be in the Oval Office when the bill was signed.
Walker's views on the check might be expected,
given the origins of his organization. ECCHO was formed in 1990
to encourage ECP and now seeks to foster image exchange. The Dallas-based,
not-for-profit, national clearinghouse grew out of a check electronification
project at nearby Carreker Corp., and Carreker President and CEO
J.D. Denny Carreker was ECCHO's first executive director.
Today, ECCHO is involved in three primary activities:
rules development, education about ECP and industry advocacy,
especially at the federal level. But it is rules that explain
ECCHO's day-to-day impact in an industry slowly but surely transforming
check processing to rely on exchange of digital images. Ample
legislation and case law govern the exchange of paper checks,
but no law addresses image exchange. That leaves financial institutions
that exchange check images exposed to an unknown and potentially
large financial risk. ECCHO's rules provide a multilateral legal
framework for check exchange among its members and other organizations
that license them.
ECCHO is owned by 19 member banks, ranging from
trillion-dollar J.P. Morgan Chase & Co., New York, to $10
billion Frost National Bank, San Antonio. More than 40 organizations,
including clearing houses, regional ACH associations, consulting
companies, technology companies and banking trade associations,
recognize ECCHO as the provider of ECP and image exchange rules
in the U.S.
Walker provided his views on the future of the
check during a recent interview with Banking Strategies.
Banking Strategies: What major hurdles will
you try to help the financial industry overcome as it steps up
its participation in check image exchange?
Walker: One of the challenges is educating the
industry that banks engaging in image exchanges need new legal
protections. The ones used in traditional paper check exchanges
will not suffice.
For example, for image exchanges, there is no
law to allocate liability among the parties. While this risk is
potentially very large, it can be minimized through exchange agreements.
Under the Uniform Commercial Code, the best option for agreements
is clearing house rules. ECCHO is the only national clearing house
with an existing, comprehensive set of image exchange rules.
A second challenge is promoting the check as
a long-term, viable payment system as the result of recent changes
in law and economics. We're going to spend a lot of time educating
everyone as to why the check is important, why it isn't dead,
and why banks may not want it to die.
A third is promoting the development of new
products and services that are check-based and that use technology
for the benefit of the customer. Given that everyone has thought
of the check so narrowly for so long and that the evolution of
the check has been constrained by law, there is much creative
work to be done. That work has already begun, as evidenced by
banks beginning to discuss their customers' capture of check images
and subsequent electronic deposit of those images.
Banking Strategies: In your list of challenges,
you put risk first. Please elaborate on the importance of that
Walker: Without legal coverage, the risk of
exchanging check images is indeterminately large. Compare that
with the paper check, which is a payment method that constitutes
a legal instrument as defined by law.
In your mind, picture a stack of all the paper
documents that comprise paper-check law. Start with the Uniform
Commercial Code (UCC) from all 50 states. Then add Reg CC and
Reg J, for when checks go through the Fed, and Reg E. On top of
that stack, add all documents from the thousands of litigations
that have occurred over centuries. In the check world, at least
one case from 17th Century England is frequently cited in the
assignment of responsibility for check authorization. That stack
of legal documents would extend well above your head.
Now, beside that stack, pile all the statutory,
regulatory and case law documents that support, validate or authorize
the exchange of check images. There is no paper in that stack.
Nothing in the law currently tells you how to allocate risk, liabilities
and responsibilities when you exchange check images.
In traditional paper check law, banks
usually the paying banks take on the risk of consequential
damages. The assignment of the risk of consequential damages in
the paper check world is well established. A common example of
the risk of consequential damages is when a relatively small check
for an insurance premium is not correctly paid and the insurance
coverage lapses. The insured event then occurs and the bank becomes
responsible for the value of insured property and other expenses
in an amount far greater than that of the check.
Without judicial guidance, it is unknown on
what basis courts might resolve disputes regarding check image
exchanges. They could decide to assign consequential damages in
different scenarios and to different parties than traditionally
occur in the paper-check world, thus increasing the risk and the
cost of loss-avoidance litigation.
This is where agreements come in. ECCHO rules
are agreements between exchanging banks and, as such, provide
direction for judges as to how to resolve disputes. ECCHO's rules
are intended to support every vendor's image exchange scenarios.
The objective is to maximize the number of banks exchanging check
images. ECCHO works with Viewpointe, Fiserv, The Clearing House
(SVPCO), Metavante and many other vendors so banks are free to
select any vendor that best fits their situation under a common
set of rules.
Banking Strategies: Last December, Leonard Heckwolf,
retiring as chairman of NACHA, the Electronic Payments Association,
was quoted as saying that accounts receivables conversion (ARC)
is just an interim strategy and that "the endgame is to persuade
consumers and corporations to issue electronic payments instead
of writing checks." Does that make the paper check just an
interim strategy, too?
Walker: The endgame will be dictated by the
customers and by economics. If customers want to write checks,
then the banking system should implement products and services
that support that choice in ways that fit the banks' overall strategies.
As we update our way of thinking about checks, checks may very
well continue to play a significant part in those strategies.
For too long, we have thought of checks as pieces
of paper. With technology and the elimination of legal barriers,
we can separate the physical paper check from the legal instrument
that is the check and greatly expand the capabilities of the check
as a payment method.
The check has served us well; now we have the
opportunity to eliminate those aspects that serve us less well.
When transitioning the instrument, the economics are changed radically
with reduced labor costs and better use of technology and stronger
ties to customers. Strategies such as ARC tend to reduce customer
ties with the bank and strengthen ties with non-banks. I say let's
transition the medium, not the instrument.
Banking Strategies: What's the distinction you're
making between the medium and the instrument?
Walker: We've been stuck way too long with the
traditional thought that "check" means a piece of paper;
that check products and services are limited by what can be done
with that paper; that there's so much cost associated with paper
that our only choice is to get rid of it; and that getting rid
of the paper means getting rid of checks. Of course, that line
of thinking has been supported by physical and legal barriers
that prevented the check from evolving with changing needs.
Until December 1999, the attorneys tell me,
it was illegal to return an unpaid check electronically, even
under agreements. Also, there were concerns among banks that they
couldn't be the only bank truncating checks or they would lose
customers to their competitors across the street who would promise
to return paid checks to their customers. But Check 21 eliminates
that psychological barrier and allows banks to make a unilateral
decision to truncate checks, replacing them where needed with
substitute checks. No one wants a large volume of (relatively
expensive) substitute checks. So if you have the image technology
in place to capture the information to create substitute checks,
why not create a better payment system by getting everybody on
accelerated implementation schedules to exchange check images?
Banking Strategies: What else has happened to
change the potential of the check?
Walker: There have been several changes in the
law, each of which eliminates an important barrier to the use
of technology to improve the check. Not the least of these are
the Uniform Electronic Transactions Act (UETA) and the Federal
E-sign Act. These validate that electronic records, including
images of checks, are just as good as the original documents.
Other important accelerators are the rising
interest rates that increase the financial impact of delayed and
accelerated collection and returns, the declining check volume
and increasing cost per item, the increasing market demand for
image deposits from bank customers, the closure of many Fed processing
centers, the Fed's price increases to clear paper checks and the
Fed's new products that position the Fed as a key facilitator
in the transition to electronics.
The Fed actively supports image exchange. They
now offer services to receive checks and replace them with substitute
checks and also to receive check images and deliver them as images,
when possible, and as substitute checks otherwise.
These accelerators act to significantly raise
expectations that checks will be truncated and that checks will
be exchanged using image technology. By changing expectations,
many more banks will determine that the check is viable long-term
and that their best option to control cost and enhance product
revenue is to transition the medium not the instrument.
Banking Strategies: So, there's still a strategic
role for checks today and at least for the short-term?
Walker: If technology were used to separate
the paper from the payment instrument and eliminate or reduce
significantly the cost of the hardware, people, facilities and
transportation, where's the incentive to get rid of it? Particularly
if it's faster than the other available alternatives and offers
information richness that none of the other payment types have?
Banking Strategies: Checks are faster than electronic
Walker: Yes. Let's compare check and ACH as
an example. The electronic ACH system is designed to be float
neutral, not float-less. As a float-neutral system, ACH transactions
are future-dated to allow all of the parties an opportunity to
post them on the same day. Under the ACH rules, the earliest that
most ACH transactions can be posted is the next business day after
origination. Checks, on the other hand, suffer no such restrictions
and can be collected as fast as they can be presented.
Now consider: Many paper checks are currently
cleared on the same day that they are deposited through evening
exchanges around 9 p.m. Generally, if all of those same-day checks
were converted to ACH transactions, they would not clear for at
least one day and many would not make the application cut-off
on the deposit day and so would not be originated until the second
day, for clearance the third day. In this scenario, paper is much
faster than electronics.
By contrast, the application of electronic check
processing and image can accelerate the number of items that can
be cleared the same day with exchange cut-offs beyond 9 p.m. The
technology of check images can be much faster than either traditional
paper check collection or other electronic check conversion options
available to banks.
Banking Strategies: What is the information
richness that checks have but other payment types don't?
Walker: Look at all the information components
on the front and back of a check the drawer's name and
perhaps an address; the name and address of the bank on which
it is drawn, the drawer's signature, handwriting samples, dollar
amount, date, etc. The check may even have a note on the memo
line saying why the writer wrote the check. On the back of the
check are endorsements, dates and time stamps. There may also
be a stamp across the face of the check with additional information
about the invoice being paid or about the check writer that the
depositor might need to aid its collection process should the
check be returned unpaid.
Now imagine taking that same check and converting
it to an ACH transaction. Think of the information that would
appear on the customer's statement for that same transaction
the date; a short, often meaningless descriptor; and the amount.
There is value in information, and there is
a substantial difference in the amount of information in different
payment transactions. The check is the most information-intensive
payment mechanism we have. To the extent we can use the information
intensity of the check, banks may well be able to create valuable
new or improved products and services for their customers.
How might the additional information be used?
Ever look through your bank statement and notice some electronic
debits with unfamiliar descriptors? One very basic need for additional
information beyond the basic payment information is simply to
recognize the transaction. If you don't, you might question the
validity of the payment and spend a significant amount of time
researching the transaction and perhaps incurring charges from
your bank to research the question. If the transaction was a check
image, you will immediately recognize Store ABC, your signature
and any notes that you may have written on the memo line as a
reminder of why you wrote the check.
Overall, this topic has barely been considered.
I know retailers frequently write contact, approval information,
store identification, checker ID, etc., on the face of the check.
Insurance companies might write customer identification numbers;
airlines write flight number information, etc. Generally, information
on the check is used to manage risk and/or process. The endorsements
on the back of the check facilitate resolution of disputes, charge-backs
Banking Strategies: Then, checks are viable
Walker: Absolutely! Once checks using
check law become more electronic, the process savings are
essentially the same as for other electronic payment types, essentially
eliminating the cost differences between checks and other payments.
Consider: Check volume is declining and the cost per unit is climbing.
What options do banks have to avoid this spiral of diminishing
returns on check products and services? Can they convert every
check to an ACH transaction? Not without the agreement of their
Assume that banks cannot practically convert
all their checks to ACH transactions: What other options are there
to offset the impact of rising costs? Could they convert them
all to debit card or ATM or credit card transactions? No, because,
like the ACH, any truncation of the paper check requires customer
agreement. Even in the best of scenarios, they will probably never
get 100% customer agreement, and without 100% agreement they would
have to maintain the costs of dual payments processing systems
for checks and whatever other solution was implemented. An example
of this is lockbox processing that transformed a single process
checks to a multi-payments process involving ARC,
checks and demand drafts and, with Check 21, perhaps substitute
Is there a better option? Yes, make the check
system more efficient. Use electronics to eliminate processing
steps and costs and to accelerate the return of unpaid items.
Implement ECP and image exchange of all checks.
Banking Strategies: How long would that take?
Walker: Payment systems tend to evolve slowly.
But I believe the transition to image exchange will proceed much
more rapidly than most people anticipate. The creation of substitute
checks is ramping up, but no one anticipates that a very large
percentage of checks will ever become substitute checks and most
think that result would be undesirable.
The initial industry focus is almost exclusively
on replacing large-dollar, non-consumer checks with substitute
checks. As the large-dollar checks are removed from the normal
collection process, the remaining number of original checks to
be cleared conventionally will remain very large, but the value
of those remaining original checks will be relatively small.
The cost of rapid transportation, such as next
day, coast-to-coast jet delivery of checks, is covered by the
float value of those checks. Reduce the number of high-dollar
value checks in paper cash letters and the value will, at some
point, not cover the cost of transportation. When that occurs,
alternative collection methods will need to be selected. It is
likely that those alternatives will involve clearing the original
paper checks more slowly than the current methods and would potentially
be more costly on a per-item basis.
How will banks address this rising cost per
unit? Recently, two organizations made forecasts of the rate of
check volume transition. They predicted 20% to 30% of the volume
will be imaged by 2006 or 2007. If you assume that 80% of the
dollars are from 20% of the checks and that the larger-dollar
checks will be converted first, you can anticipate that once 80%
of the dollars are converted, the majority of the remaining volume
will follow rapidly, and I think more rapidly than either of the
Mr. Swift is a freelance writer based in San
Published online at the Banking Strategies blog.
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