he infrastructure appears to be falling into place for banks and retailers to accelerate the transition of the traditional check from paper to a digital image. With this transition comes a host of new revenue opportunities for everyone in the payments business.

According to a recent report in American Banker¹, Charter One Bank in Cleveland has become the first bank to offer customers Web-based access to canceled checks using a new technology offering from the Federal Reserve, known as FedImage. Customers will be able to access check images 24/7 and even print or e-mail copies via the bank's new offering.

The significance of this announcement for the ISO community is that it signals that banks, with assistance from their local Fed offices, are prepared to accept images as replacements for paper checks and to share their internal savings with the consumer in the form of increased convenience and free access to their check images if and when they need to.

With more than 20% of all checks written in this country presented at POS, this development represents another major step toward electronic check conversion (ECC).

The Role Played by Image in Electronic Check Conversion

ECC is the process where a consumer presents a check for a purchase, the retailer passes the document through a reader and an authorization triggers a receipt that, when signed, is given to the consumer along with the canceled check. The funds are typically transferred from the consumer's account to the retailer's account via the Automated Clearinghouse system (ACH).

Visa recently announced a similar POS check services program, except that in most cases the funds move over ATM networks. For banks that are not participants in the new Visa POS Check program, funds are sent via the ACH.

The National Automated Clearinghouse Association (NACHA) predicts that there will be 200 million consumer checks settled via ECC this year, up more than 60% from last year. A few months ago, Wal-Mart announced that it would be expanding its ECC pilot across its network of stores. This should make a huge dent in Wal-Mart's check processing; this year alone, the retailing giant expects to see one billion checks presented at its checkout lines. All indications are that ECC is destined to become as common as a card swipe at checkout counters across the country.

When consumers walk away with their checks, they are taking with them all of the information traditionally used to collect returned checks, which total an estimated $12 billion each year. The National Retail Federation estimates that retailers lose half of this amount to a combination of NSF and check fraud but are able to collect the other half (about $6 billion) because of the name and address information on the returned check. Under ECC, the only way a retailer can collect return items is by capturing images of the checks during the acceptance process.

There is another reason why the image is important, and this is where the Federal Reserve comes back into the picture. Following the September 11th attack last year, the Fed was forced to pump huge sums of money into the banking system when banks were unable to move checks stranded on runways while the airports were closed. This prompted the Fed to draft legislation that was introduced into Congress before the year was out.

The legislation, known as the Check Truncation Act (CTA), was the subject of Congressional hearings in September 2002. The CTA seeks to authorize banks to exchange check images as a legal alternative to paper checks.

This legislation has gotten backed up in the House and Senate by the war on terrorism and by the corporate-fraud scandals.

Why Banks Are Eager To Convert Checks to Image

The Federal Reserve, anticipating the passage of CTA, began building out a network of large check-image archives for use by its small bank and credit union clients. The Fed has branded this service FedImage.

The largest banks in the country also have been anticipating this change, and they too have been building large storage facilities (singularly or in cooperation with other banks) for all of the checks they expect to be converting to images - at the rate of tens of millions of items a day.

Viewpointe is one such venture, put together by Bank of America, Chase Manhattan and IBM. On the Viewpointe Web site², these banks have explained why they made this investment:

• Enhanced Customer Service: Check images can be protected behind secure computer firewalls and yet be made available to the first-point-of-contact employee to quickly research a customer's request. With passwords and secure sessions, consumers can retrieve their own check images via the Internet, ATM or branch lobby kiosks.

• New Source of Income: Businesses are expected to pay for having their checks stored for them. When an image is needed, a fee is charged for exception retrievals to resolve disputes with vendors or support tax filings.

• Lower Operating Costs: Less paper and faster processing will produce productivity and float reductions. Another major savings will be eliminating the transportation costs spent today to move hundreds of millions of checks around the country.

• Reduced Fraud: Faster settlement times will result in quicker return notification. This in turn will translate into faster reaction time to fraud. Also, by taking the paper check out of the system and giving the customer back their check or truncating the item at the bank where it is deposited, the opportunities for check tampering are greatly reduced.

ECC offers merchants significant benefits, such as not having to make that daily trip to the bank for check deposits, improved cash flow, reduced fraud and lower return-item fees - not to mention the quicker close-outs for each shift as their clerks no longer need to reconcile checks within their receipts.

We need to remember that each time a retailer accepts a check and puts it into their register, there is no incremental revenue stream for the ISO or processor.

Replace that model with the ECC alternative and you begin to understand the new set of revenue streams that become available to the industry. Not only is there the initial terminal upgrade because of the check imager capability, but new authorization and settlement services become available - plus the opportunity to sell turnkey check guarantee services. When the check is turned electronic, the next logical service to be offered is to outsource settlement of all payments other than cash at a blended rate that is less than what the retailer is now paying to settle credit card transactions.

Based upon the most recent Green Sheet research, checks as a payment method are still twice as likely to be used as plastic. Think of the potential incremental revenue this represents for the industry as these paper items turn electronic. And that day is moving closer as banks like Charter One begin extending free online check-imaging services to their customers.

1 "Charter One Bank Introduces Online Check Imaging," American Banker, August 29, 2002 Page 1.
2 www.viewpointearchive.com