THE SHAPE OF CHECKS TO COME

It has been just short of a year since Check 21 became law and permitted banks to send check information electronically and use paper copies of digital check images as a legal substitute for the original. Today, check electronification products, such as the remote deposit scanners that EBSCO uses, are helping to change the B2B payment landscape. The Federal Reserve estimates that the majority of B2B transactions are still paid by check. By yearend, the Fed expects to process two million items a day through Check 21-enabled services. "We are poised for significant changes going forward," exclaims Fred Herr, senior vice president and head of the Check 21 initiative at the Federal Reserve Bank of Atlanta. "Check 21 [creates] a phenomenon like dominos. Once you push, there will be change."

Herr sees Check 21 and remote deposit capture as integral to this transformation of the payment system. Allowing the payee to choose electronic presentation speeds availability by one to two days and reduces cost. This makes large-value corporate checks an excellent candidate for remote capture. Herr contends that the more companies see their checks presented electronically, the more they also will be open to using other electronic payment alternatives, such as digital payments through the Automated Clearing House (ACH).

And that evolution towards the much-touted checkless economy has been taking hold in Corporate America. The Federal Reserve's most current payment survey indicates that for the first time B2B electronic payments exceed payment by check, which makes Check 21 just another step towards the inevitable demise of the paper check.

Until that day, however, most companies still need to deal with checks–and the gradual proliferation of check electronification. Andrew Sandiford, head of U.S. dollar check services for Deutsche Bank's Global Transaction Banking unit, describes the ascendance of check electronification as a three-step process. The first is the creation of electronic check presentment (ECP), which involves the ability of banks to exchange electronic check data–and in some cases images–with the original check to follow for settlement. The second is Check 21, which essentially eliminates the need to follow up with the original paper check. The third and final step will be a full check-image-exchange network. "Check 21 creates an environment that requires building out infrastructure to get us to more streamlined image exchange," Sandiford says. "It is almost a necessary evil."

Although bankers anticipated selective adoption of remote deposit by industries that rely heavily on checks, such as property management, Pete Wheeler, director of product consulting and industry strategy at Bank of America, says that adoption in fact has been much broader. "We started out with a profile in mind–companies with lots of offices spread across the country would obviously benefit," he says. "But we're seeing companies with only one office and one scanner all the way up to companies with 100 offices and scanners."

And the numbers show it. For example, the Bank of New York has 25 customers using remote deposit domestically and internationally, while Wells Fargo plans to have at least 500 customers on its system by the end of the year. "In my 30-year banking career, I've never seen a product with such tremendous enthusiasm even before it became available," says James Hicks, senior vice president and group executive for image technology at Wachovia. Hicks predicts remote deposit scanners will become "as typical in an office as a copy machine."

Banks–particularly those without extensive national networks–seem equally excited by potential new avenues for business. "Check 21 is an enormous opportunity to provide services in a way that we couldn't deliver them before," notes Danny Peltz, executive vice president of wholesale Internet and treasury solutions at Wells Fargo–a bank with a branch network concentrated on the West Coast. "We no longer need a physical distribution infrastructure and can enter markets and process checks both from an offensive and defensive strategy. Remote deposit capabilities are a natural extension of the bank's full-scale virtual platform for treasury services."

Even before working out all the kinks in remote deposit, many banks are devising bells and whistles to make image exchange more valuable to customers. Wells Fargo's Peltz says that the next step in the evolution of corporate solutions will be a focus on the ability to associate check images with more information. This includes coupon processing or capturing ancillary information to help with reconciliation. At the beginning of next year, Wells Fargo will have the ability to recognize characters on coupons and checks to allow for a virtual lockbox. In July, BofA launched a new image lockbox service that captures explanation of benefits (EOB) data to automate claims-to-payment matching for healthcare providers. The solution offers three expanded data-capture alternatives, all compliant with the Health Insurance Portability and Accountability Act (HIPAA). "Banks are thinking about all types of information associated with payments they could capture and permanently attach to transactions," says BofA's Wheeler. "The idea is not only to truncate checks, but to further automate the [collections] process for our clients."

KeyBank is working on a similar solution with client MaternOhio Management Services Inc., a privately held, midsize healthcare-services company. MaternOhio is using an image lockbox solution, developed by Key, to scan EOBs at the point of capture and then store images instead of paper. This enables the company to account in one place for an entire transaction in its practice and patient management systems–co-payment, insurance reimbursement and write-off based on the negotiated rate. The solution provides a HIPAA-compliant secure internal messaging system.

According to company CIO Paul Ketchum, 95% of EOBs come in paper form from insurance companies. Ketchum's goal is to reduce this volume to less than 10%. Ketchum is also working with KeyBank to implement a POP conversion capability in the medical offices. This would allow staff to scan patient check payments and then hand the cancelled instrument back to the patient for his records. Ketchum will integrate this later in the year with the lockbox solution as a way to remove more paper from the system. Ketchum says that using POP at the point of sale will give faster funds availability than Check 21 by one to two days.

MORE NEW TWISTS TO COME

In addition to expanded lockbox solutions provided to companies like MaternOhio, Key is developing a product for companies with their own in-house lockboxes. The solution, which will be available in the fourth quarter of 2005, enables companies to send an image transmission for deposit using their own image processing equipment rather than having to use hardware and software provided by Key. BofA and Deutsche Bank are rolling out similar solutions.

But despite client interest and bank enthusiasm, remote deposit solutions are still not fully tested or developed. Banks need to upgrade their own infrastructures to handle image exchange before they can build out solutions for customers. Bank of New York's Louis Arkenau, vice president in charge of deposit services, says that despite great collaboration among community banks, commercial banks and the Fed, the industry underestimated ramp-up time for image exchange. The Fed's Herr says it was really inflated expectations: "Too many people thought [image exchange] would be instant, but we are finding that it is evolutionary rather than revolutionary. We are still in early stages of the implementation. It will be another 18 to 24 months before we've deployed and refined technology and added significant volume."

The Fed predicts that the banking industry will reach critical mass for image exchange by 2007. By that time over 50% of financial institutions will be participating in end-to-end image clearing. "The Fed has long believed that the movement to electronic payments is positive–it improves systems efficiency and the flow of funds while decreasing risk," says Michele Braun, financial specialist in the payments studies group at the Federal Reserve Bank of New York. "But a number of these solutions are transition technologies and will transition at different rates. The emerging payment alternatives have gotten ahead of the services to support them." Braun cites positive pay as an example where banks must devise ways to work in a Check 21 processing environment. According to Braun, "The more banks can do, the more services they can offer. As services catch up, we'll see corporate treasurers making broader choices on how to route their payments and collections using a wide range of tools."