Digital duplicates - Banks prepare for digital images of checks

Monday, June 7, 2004

The federal government has dealt another blow to technophobes who still resist electronic banking.

Last October, President George W. Bush signed into law the Check Clearing for the 21st Century Act, which will give substitute checks -- digital images of checks -- the same legal standing as the original paper check. Although local bankers are downplaying the immediate impact the act, known as Check 21, will have on consumers, they agree that it will facilitate a much larger industry move away from paper checks.

When it goes into effect on Oct. 28, Check 21 is expected to speed up the check payment process and help banks cut back on the cost of processing and transporting paper checks. It will do so by allowing banks to stop the circulation of the original check and replace it with an electronic equivalent, much like changing a letter into an e-mail.

Many local banks have for years been processing images of paid checks and distributing them to customers with their statements. Consumers get six or eight miniature photocopied images of those checks per standard-sized page. All that Check 21 will change in that respect is the appearance of those images, giving them a standard format with specific information such as date paid, certification number and routing numbers specially denoted.

Martha Rollet, vice president of the Bank of Missouri, said the biggest difference consumers will notice as a result of Check 21 is the increased speed at which their checks will clear. Before, a check from her bank that was cashed in California would take about four days to make its way back to Cape Girardeau. With Check 21, it will be possible for that same check to clear on the same day, she said.

Another subtle change for consumers will be added security against loss, said Roger Tolliver, president of Commerce Bank in Cape Girardeau. If the validity of a substitute check is called into question when the original check has been destroyed and a better copy can't be found, the customer's account must be credited and the bank that created the original image will cover the loss.

While banks are the ones most likely to see an immediate impact from Check 21, even those institutions may not notice a dramatic change.

Banks that do not already distribute images in lieu of the actual checks with their statements will not be required to by law. The Federal Reserve Board has said that Check 21 does not require banks to accept checks in electronic form, nor does it require banks to create substitute checks.

Charles Daniel, president of First State Community Bank in Cape Girardeau, said the reason is that it would be too expensive to require all banks to immediately comply. Bigger banks are more likely to jump in, he said, while smaller banks are more likely to dip in a toe at first.

Daniel said that Check 21 will immediately help bigger banks like Bank of America and Wells Fargo that spend tremendous amounts of money transporting paper checks to and from the Federal Reserve and other banks. But as far as First State Community, which he terms a medium-size bank, Check 21 is really just a starting point. He said that for his bank, the act will institute a dual system with a balance between paper and electronic checks.

Over time, as banks move more toward use of the substitute check and it becomes more cost effective for smaller banks, use of the paper check will diminish.

Time and money

Even though Check 21 isn't mandatory, the general push toward electronic handling of checks that the act is ushering in will cost banks time and money. First of all, the act requires all banks to send notification of Check 21 and its impact to current clients and provide that information to new customers. It will also call for an update to the banks' software so they can handle the change in check image format, and employee training to educate workers about the changes Check 21 will bring on.

Rollet estimates that her company will spend anywhere from $5,000 to $10,000 to update their check image provider to the new format and set up equipment for the transfer of the electronic checks. She said that those banks seeking to install a check imaging system will be the ones most affected. When her bank purchased its system three years ago, the cost was $100,000, though she said that price has likely gone down over the years.

Tolliver said Commerce Bank hasn't yet tallied up the estimated cost for instituting Check 21 operational and data processing changes. He said his bank will also have to upgrade and in some instances replace ATMs. Though the changes are bound to cause some wrinkles at first, Tolliver said that in the long run, the change is in the best interest of the industry.

Daniel agrees.

"This is really just their first stab at this," Daniel said. "But it's the direction that the industry is heading in."

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