Area Banks Brace For Check 21 Act

The old saying “the check’s in the mail” may soon be replaced by “the check was e-mailed and your account’s been deducted.”

On a peak day, Bentonville-based Arvest Bank Group Inc. processes about 1 million paper checks from its 195 branches.

Arkansas National Bank of Bentonville averages about 20,000 checks every day.

Banks incur the expense of processing and clearing those checks as a normal cost of doing business — anywhere from 1.5 cents to 50 cents per check, according to one Federal Reserve Bank schedule. And many area bankers hope the Check Clearing for the 21st Century Act slated to go in to effect Oct. 28 will eventually save their institutions some coin.

But they’re not holding their breath. It’s more of a long-term proposition, they say, that’s been a long time coming.

The Act, commonly referred to as Check 21, doesn’t require banks to do anything other than accept a substitute piece of paper for any given check. But one underlying element of the Act that excites many tech-savvy bankers is that it means more and more checks have to be “imaged,” or photocopied, and an electronic file created to produce the substitute check.

Many banks already image checks, but so far, they haven’t been able to sort and send them to the Fed, or any other check clearing house, electronically.

It’s the first step in an evolution away from the dark ages of paper tonnage into the not-quite paperless 21st century of e-business, they said.

The Paper Chase

In 2000, the Federal Reserve Bank estimated that paper checks accounted for 60 percent of non-cash payments among consumers, businesses and government entities. About 42.5 billion checks were processed that year, down from about 49.5 billion in 1995, the Fed said.

The decline in check writing is probably due to the increase use of alternative methods of payment such as debit cards and payment conversions, said Steve Whitney, a senior vice president of retail payment at the Fed’s Boston office.

Some national retailers have started converting check payments into automated clearing house payments, he said. The cashier will run the check through a machine, and it’s converted into an electronic payment on the spot. Many times, the cashier will give the check back to the customer so there’s no paper in the system.

The Check 21 Act is an effort to cut down on the use of paper, which is costly to transport and handle.

Page 2 of the official Act, H.R. 1474, states the Act’s purpose:

• To facilitate check truncation by authorizing substitute checks.

• To foster innovation in the check collection system without mandating receipt of checks in electronic form.

• To improve the overall efficiency of the nation’s payments system.

A check substitute is a piece of paper that has an image of the front and back of the check, has a magnetic ink character recognition line printed on it and is required to include the statement: “This is a LEGAL COPY of your check. You can use it the same way you would use the original check.”

Essentially, as long as an image of a check exists, a legal substitute can be printed. Much like a photo can travel through e-mail, the check image can be sent to a normal central location such as the Federal Reserve Bank or another clearing house. The transaction can be processed as usual, and either a substitute check printed or the check image sent on to the paying bank.

Paying the banks on which a particular check is drawn is the only theoretical stumbling block.

Phil Porter, president of operations for Arvest, said not all banks are set up to accept check images, so they will require that a physical substitute check still be delivered so they can process it the old-fashioned way.

Of course, it goes both ways. Not all banks image checks to send to the clearing house.

But that will change with time. Eric Heimbach, group item processor with Arvest, said it will be at least two to three years before banks start to see a leveling off of electronic transfers versus paper checks. It will take that long for banks without the technology to jump on the bandwagon, Porter said.

Even if Arvest begins to send a lot of check images to the Fed, the bank will still have the fixed cost of physically transporting paper to the Fed’s Memphis facility.

Neither Porter nor Heimbach forsees a time when a bank can skip a check processing facility or having to pay a courier to handle the paper checks.

Until the industry shakes itself out, no one is willing to speculate how much money there is to save, or even if there will be any true per item savings.

t

E-volution

“It will provide us with a bridge to exchange check info electronically,” said Whitney.

“It’s going to take a while to get there.”

But in the meantime, he said, Check 21 will credit banks’ accounts quicker, giving them “positive float.”

As transactions speed up, it will help bank officials on both sides identify fraud quicker and hopefully reduce its impact on banks’ bottom lines, he said.

“There’s a long-term benefit in saving transportation costs,” Whitney said. “And immediate benefits in faster availability of funds and potential avoidance of fraud cost.”

Porter, who used to sit on the Fed’s Eighth District advisory board, said there has been talk of this legislation since about 1999, but it was slow coming about.

He and Heimbach said the flight suspension in the days after the terror attacks of Sept. 11, 2001, helped get the legislation in the works. Because the Fed depended on the actual checks to be in hand before they could clear them. Commerce slowed significantly to ground traffic and the Fed took a beating, they said.

With electronic transfers of files, that scenario would be a lot less likely, they said.

Each check image is about 25 kilobytes of electronic information, Heimbech said, making it easy enough to send and store. Arvest will store their check images for seven years and he said the bank’s system has about a 7.5 terabyte capacity, backing up daily and weekly at multiple sites.

Consumer Side

According to area bankers and the Fed’s Tolstoy-esque information on Check 21, the people who will see the most significant change on Oct. 28 are bank customers.

Theoretically, check clearing will speed up, lessening the “float” time a check writer has on their account. Of course, that will depend on how savvy both banks handling the transaction are.

Chris Carter, senior vice president of operations for ANB, said it’s conceivable a check could clear a customer’s bank quicker than a debit card transaction. As more and more banks are able to accept check images, the quicker paper transactions will clear accounts, he said.

The second blip for customers is that those who still get their checks back in their statements will have to settle for some substitutes.

Arvest, ANB and Community First Bank of Harrison all say they plan a customer awareness campaign in the November statements and have already trained frontline staff to help customers understand the Act.