2007 : The Year of Image Exchange as Banks Accelerate Check Electronification

According to new research charting the adoption of Check 21 (The Check Clearing for the 21st Century Act), 2007 will be another significant year in the ongoing "electronification" of paper checks. TowerGroup expects monthly check image exchange volume to surpass paper check presentment volume by the end of 2007, to become the dominant method of check presentment in 2008.

Check 21, which went into effect in late 2004, created a new negotiable instrument known as a substitute check or image replacement document (IRD). Substitute checks are printed documents containing an image of the original check with data added for identification. Depositary banks capture an image of a check, transmit the image to a site near the paying bank, and have the image printed and delivered for presentment to the paying bank -- offering faster collection of funds from non-local checks, reducing transportation costs, and improving reliability.

Although Check 21 did not provide for the electronic exchange of check images, banks can agree to exchange electronic image-based cash letters for check presentment. Exchanging images of paid checks further reduces a bank's operational costs and speeds the check presentment process.

"Most U.S. banks have now implemented the software and processes to participate in check image exchange," said Robert Hunt, research director in the Retail Banking practice at TowerGroup and author of the research. "More important, the largest banks have completed limited volume processing and are now ramping up their image exchange transaction volume. Although factors such as ACH check conversion and electronic bill payment growth will impact the number of checks presented in 2008-09, it is clear that by 2009 paper check presentment volume will be minimal."

Highlights from the findings include:

- Following the introduction of Check 21, US banks concentrated their efforts on reducing check float by using substitute checks and introducing remote deposit products. The use of substitute checks for presentment grew rapidly throughout 2005, as financial institutions added check image capture and image cash letter capabilities.

- Although image exchange networks were available to facilitate image-based electronic presentments, a number of factors resulted in the bulk of image cash letters being converted to substitute checks rather than presented electronically, including: the need within many banks for new image-based exception item processing software to support image presentments; a difference in needs and expectations between consumer and commercial accounts; and a lack of definition around the legal liabilities and standards for check image exchange - a task undertaken by the Electronic Check Clearing Association (ECCHO), which developed the rules and check image standards for member banks.

- During 2006, large and midtier banks put the software and processes needed to receive image cash letters in place. These banks have generally increased the volume of incoming electronic cash letters at a measured pace to ensure the quality of the images received and the accuracy of their procedures.

"We see 2007 as the year of image exchange," said Hunt. "The growth of image exchange volume will accelerate throughout 2007 as more banks agree to receive image cash letters and those already receiving electronic presentments further increase their volume of incoming images. Exchange volume should exceed conventional check presentation volume in the fourth quarter of the year."