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On
October 28, 2003, President G.W.Bush signed the Check Clearing in the
Twenty-First Century Act - Check
21 - and brought years of
dreaming about a check-less payment system a little closer to reality.
Check
21 won’t eliminate checks, but it will dramatically reduce the payment
system’s volume of paper checks. Many believe
Check 21 will produce the
most significant financial payment system changes in the last 50 years. It
will have an impact on all financial institutions, and, with an effective
date of late 2004, you will have to move quickly to implement compliance
plans.
It’s
estimated the current check payment system costs the U.S. economy
approximately $120 billion per year, which, by comparison, is equal to
one-quarter of the annual Social Security budget and one-third of annual new
car sales in America. Even though the total volume of checks written in the
U.S. has declined by up to 3% per year since the mid-1990s, no one predicts
significant reductions in the fixed costs associated with the current
payment system. In recent years, small groups of financial institutions have
attempted to voluntarily “electronify”
the system with mixed results. Now, Check 21 mandates fundamental changes in
the system to make it more efficient.
Using
electronic images & IRDs
Basically,
the goal of Check 21 is to eliminate the movement and handling of paper
checks by allowing institutions to either present paying institutions with a
check’s electronic image or use “substitute checks,” also known as
Image Replacement Documents (IRDs).
Electronic
images and IRDs are considered the legal equivalent of actual paper checks.
This allows the collecting institution to truncate checks, as well as the
associated processing costs. The law requires all paying institutions to
accept IRDs for payment, but it does not require them to accept electronic
images. Financial institutions that wish to exchange electronic images must
establish agreements to do so that address image quality, return procedures,
etc.
Implications
Much
of Check 21’s impact will affect your back-office operations, though
customers also will be affected. For example, it will become more difficult
for customers to “play the float” that exists in the current payment
system. Though it may become impractical and expensive to return paper
checks and IRDs in customer statements, it may be possible to provide
customers online access to their checks’ images.
In
an environment where paper checks are replaced entirely by electronic
images, the cost savings and customer benefits could be quite substantial.
Couriers, labor, check-handling equipment and many errors will be
eliminated.
Institutions
that continue to process paper checks along with IRDs and some electronic
images could actually see costs increase significantly. The fixed cost of
processing paper checks will remain, while additional IRD- and image
processing costs also will be incurred. Your institution must
carefully consider Check 21’s long-term implications for these reasons, as
well as for your customers.
How
to prepare for Check 21
Many
Check 21 details must be resolved, and it’s unlikely it will revolutionize
the payment system overnight. However, all financial institutions should
prepare to accept IRDs for payment by late 2004.
In
many cases, this will require changes or upgrades to existing systems. Many
institutions will take advantage of this opportunity to implement image
technology, helping to reduce costs and beat the competition to market with
new image-based services. General recommendations to help you prepare for
Check 21 include:
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Learn
as much as possible about Check 21 and how it will fundamentally change many
long-standing banking practices.
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Develop your Check 21 strategy NOW; with less than 12 months to prepare,
initiate system upgrades as soon as possible.
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Ask your check-processing vendor or service provider and your clearing
house(s) about their Check 21 plans.
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Consider Check 21’s impact on customers and develop a plan to manage their
expectations.
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