Checkpoint for Check 21

Computerworld - This week, U.S. banks will reach the first mandated milestone on the way to what's arguably the biggest change in the way they process checks since the introduction of magnetic ink character recognition almost a half-century ago.

On Oct. 28, the Check Clearing for the 21st Century Act, or Check 21, will require that banks accept paper documents with check images and data related to transactions in lieu of original paper checks, which, once digitized, can then be destroyed.

The image replacement documents (IRD) will also allow banks to transmit check images electronically, eliminating the need to ship paper checks around the country for clearance and settlement.

The legislation doesn't force financial institutions to exchange IRDs electronically. However, most large banks are already well on their way to upgrading their front-end systems for electronic check-image capture and back-end processing systems in order to take advantage of the efficiencies that electronic IRD processing will create.

Check 21 was proposed to reduce paper handling, collection time, clearing expenses and fraud while improving fund availability and the collection of nonsufficient-fund items. But some institutions have raised concerns about the changes, primarily those related to the high cost of new systems and the increased potential for fraud. For example, IRDs lack security features that are available on paper checks, such as watermarks.

But there's no need for companies to panic because of the impending deadline, say many in the industry involved in orchestrating the transition.

"There are a lot of people who are all gloom and doom about what's going to happen on Oct. 28, but this is an evolutionary process that has got to fit together many pieces," says John Feldman, an image transactions executive in the technology and operations group of Bank of America Corp. in Charlotte, N.C. "I believe it'll be years before the industry reaches image exchange volume."

Bank of America has made investments in check-scanning devices and imaging technology and is evaluating whether to roll out that technology in its branches, automated teller machines and regional check-processing centers, says Feldman.

Nuts and Bolts

Most of the nation's top 50 banks have made significant investments in imaging technology, experts say, but they have yet to purchase systems to send check images to other banks or integrate back-end systems that will process check images. Individual banks will likely spend anywhere from $5 million to upgrade imaging software to $100 million to rip out entire back-end processing systems.

Most back-end bank systems are still mainframe-centric. They are made up of a collection of computers and software that developed over time and in many cases never evolved to handle image exchange, experts say.
There's also a lot of legacy code that needs to be upgraded to make use of the new check images that will be available, says Ed Herman, director of the payments portfolio at Electronic Data Systems Corp.
"There's a collection of back-end systems that would have to be upgraded, integrated, replaced," Herman says. "Over the past 60 or 70 years, [banks have] fine-tuned their paper processing systems. All that is now going to have to change, or at least be integrated differently."