Transforming Paper Checks into Electronic Transactions

B y Gerard F. Milano, CEO, Western Payments Alliance

The Role of the Western Payments Alliance in a Digital World

Over the next few years, the automated clearinghouse (ACH) network is poised to prove a whole generation of prognosticators right as new payment options begin to eliminate a significant volume of paper checks.

The reason: Innovations such as RCK, point-of-sale technology and lockbox truncation - as well as customer-initiated transactions over the Internet and via wireless - are showing strong adoption rates after a long gestation period. These new systems are critical to the future of the global economy and will play an important role in reducing the more than 70 billion checks written annually in the United States.

Not only will these innovations significantly decrease costs, reduce fraud and improve risk and cash management, they also presage a new future of opportunity for developing payments systems. As electronic files come to replace paper checks, the rate of change within the payments system will accelerate to keep pace with a method of payment moving at the speed of light.

Unlike the past, these new systems are gaining traction today because they are succeeding in turning paper checks into digital files as close to the source and as quickly as possible. Western Payments Alliance members are actively implementing the infrastructure to eliminate checks before they are written or to shorten their expensive journey through the clearing and settlement process.

All of this is made possible by a powerful and propitious combination of new technology, evolving federal legislation, the consolidation of the financial services industry, new industry standards and changes in consumer behavior.

As important as these developments are, they also introduce an enormous amount of complexity into the payments system that early electronic payments were able to avoid. Direct deposit and automatic bill payment - the phenomenally successful ACH innovations that have laid the groundwork for this generation of payments options - are, in a sense, the lowest hanging fruit. They are among the least complicated ACH transactions because they involve the fewest variables.

The error rate on a direct deposit or automatic bill payment, once it has been set up, is extremely low because the payment flows down the same controlled path each time; the payments aren't dynamic by nature. In the event a problem does arise, Western Payments Alliance members have been able to resolve most problems without issue, and WesPay's customer service center has been available for the oddball exceptions.

With RCK, lockbox truncation and point-of-sale technology, complexity increases geometrically. These ACH transactions are not really batch processing items but frequently are unique transactions that require greater technologic and supervisory sophistication from the beginning of the transaction to the end. As these systems begin pouring billions of new electronic transactions into the ACH network, the error rate will be higher than the relatively low exception rate of paper checks.

As this occurs, what recourse will consumers, merchants and financial institutions have when electronic transactions are debited or credited to the wrong account? How does someone get hold of an electronic check inside the ACH network? What rules will govern these transactions? How will competing financial institutions interact cooperatively and efficiently in a world where ACH is increasingly the currency of choice?

Role of the Western Payments Alliance

As ACH transaction volume grows, the Western Payments Alliance takes on a new, more strategic role. One key objective in this new era is to serve as the bridge between the disparate processing platforms within financial institutions responsible for handling checks and electronic payments. Today, those organizations exist largely as independent silos, particularly at the largest depository institutions.

To help financial institutions succeed in the new payments landscape, WesPay is committed to the following strategic objectives:

+ Offer strong leadership for the direction of the payments industry.

+ Act as a primary advocacy group on rules that govern evolving check and ACH transactions, both regionally and nationally.

+ Train and educate a new generation of ACH leaders and personnel.

+ Serve as the trusted arbiter and contact point for ACH discrepancies for member institutions.

These considerations were the basis for the merger between the Western Payments Alliance and the Bankers Clearing House in December 2000. The boards of both organizations fundamentally understood the strategic shift away from separate processing of paper and electronics and toward a single, integrated payments system. Forward-looking institutions will seek to combine operations to accelerate the conversion of checks into electronic debits.

Other institutions will move more slowly. The Western Payments Alliance and Bankers Clearing House were natural partners by virtue of their successful track records working with financial institutions and in processing and settling large volumes of payments efficiently and inexpensively. The new Western Payments Alliance looks forward to serving both the early adopters of the new electronic payments and those who embrace change more slowly.

Since the merger was completed, these member benefits are starting to have a real impact. WesPay has succeeded in carefully merging its operations while continuing to deliver world-class service to its members. WesPay today remains focused on its core competencies of collecting, transporting, processing and settling checks and providing high-quality education and information on new payment initiatives.

At the same time, the synergy of the combined organization already has created added value for members. Innovations such as FraudBAN, which will provide a nationwide, online clearinghouse to prevent check fraud, are among the first technology solutions from the merged organization to seamlessly integrate paper checks and electronic payments.

Additionally, the combined organization is exerting more influence and leadership in such national forums as NACHA and its Electronic Check Council by leveraging the depth and experience of its combined volunteer leadership and professional management team.

In fact, WesPay expects to announce a special initiative with NACHA's Electronic Check Council in early 2002. These are just the beginning of a series of initiatives and successes that will become increasingly apparent as the organization evolves and executes its strategic plan.

WesPay's collective leadership believes that the next five years might well prove to be one of the most dynamic and productive periods in the history of electronic payments - as well as the most challenging. Many financial institutions will have to re-allocate the substantial resources currently devoted to check processing and make additional investments in electronic payments systems. That might not be easy.

Financial institutions will need to do much strategic planning and decision- making to transform large check-processing and payments systems into a single, integrated whole that is also capable of accommodating a growing amount of transaction volume.

In the end, the effort will be well worth it. The eventual systematic conversion of paper checks into electronic payments will eliminate check- processing centers, global transportation costs and all the operational expense in physically handling pieces of paper.

In the process, financial institutions will be able to serve their own customers better in a variety of ways while offering additional payment options that are more secure and more efficient. All through this transition, WesPay will be there for member institutions to take advantage of the long-awaited future that is finally arriving.