Contrary to the impression many recent media reports created, new federal legislation does not require banks to replace paper check processing with electronic images. Eventually that is the goal. However, for the foreseeable future, compliance is only voluntary.
The Consumer Checking Account Fairness Act, known as Check 21, merely requires banks to treat any substitute checks they receive as a real check. So who exactly reaps the benefits from Check 21?
Not necessarily consumers. The new law does not require banks to process deposited checks any more quickly than they do now. Thus, consumers will not gain fast access to cash or the ability to pay bills in a timely manner just yet.
However, the recent legislation passed by Congress will redress imbalances between the speed of withdrawals under Check 21 and the slower speed of crediting deposits. During this transition period, banks can wait until a full switch from paper to electronic transactions is financially feasible.
What this means for most consumers is that “the float,” as auditors call it, will continue. Consumers in most cases can still issue checks in advance of depositing funds to cover the check.
In most cases, it still takes banks several days to transfer funds to pay the check. The consumer gains the advantage of several days’ grace while the banks process the paper trail.
As the Check 21 law took effect recently, media accounts hyped the idea that banks would begin conducting business electronically, so money delivery would take place much more quickly.
“Not so,” Ed Herman, director of Global Payments Portfolio for EDS, told the E-Commerce Times. “Some banks do image sharing, but most banks still send paper checks for processing. It is a very efficient process.”
EDS provides applications and business process services. It also provides IT transformation services.
The Check 21 legislation lets banks use the replacement images of checks to process the money exchange right away. Banks now do not have to wait for paper checks to be transported and delivered before the transaction can be completed.
“The Holy Grail for banks is to go to direct image exchange,” Herman said.
However, in order for all banks to meet that goal, intensive changes in long-established banking procedures are needed. In short, banks need to integrate many separate business systems and processing machinery to get all banks talking to each other electronically.
The challenge, Herman said, is legacy integration. Banks have a long history of doing business with equipment that stretches back some 30 years.
So the challenge that banks face is not in following the new rules of Check 21 and the CCAF Act set by Congress. The challenge lies in transforming the old legacy bank systems and their ability to process information in real time and with each other.
This involves integrating the entire back office systems of each bank. That can involve 15 or 20 separate systems that need to be integrated.
“To accomplish this, banks will need procedural, coding and equipment changes. This will take several years to get banks to remap all their existing systems,” Herman said.
How quickly this process moves along will be determined by the size of the bank and its business plan, Herman believes.
Ultimately, he said it will take millions of dollars for the banking industry to transform from paper to electronic media. The size of the bank will determine the monetary footprint the changeover will cost.
For the typical banking operation that deals mostly in local checks and small dollar value checks, Herman said it is not yet worth the expense to go to electronic processing.
“That would be far too costly,” he said. “So banks are taking their time and being partial about what checks they process electronically.”
Interim Third Party Solution
One solution available to banks is transition services provided by companies such as EDS.
EDS acts as a middle man or interim step to banks caught up in the technology versus economy conflict that underlies the Check 21 process. The firm prints substitute checks and delivers them electronically to the closest locations.
Using this type of transition service helps banks still using legacy procedures to reduce the paper check float. It also helps banks to reduce transportation costs of check delivery.
“Thus, banks will touch actual checks fewer times than the existing legacy process requires,” Herman said.
According to Herman, many banks will continue to take their time in transitioning to full electronic image exchange of check transactions. The process will trickle down from the larger banks to the smaller ones.
“Banks, by nature, are not technology innovators,” Herman said.