New government regulation on digital check clearing is pushing the banking industry to the cutting edge -- which...
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pushes some information architects nearly over the edge.
The federal Check Clearing for the 21st Century Act, known as Check 21, is a new process that enables banks to create digital images as legal substitutes for original paper checks. Banks and other companies must comply with at least minimum standards, such as equipping their systems, to receive check images that bear special coding denoting them as valid substitutes.
This is all too familiar to information architects, who are being thrust into the role of analyzing systems and recommending changes that help their companies gain a competitive edge from the renewed emphasis on electronic check clearing.
"Organizations can't just hand this off to IT and say, 'Go do this,'" says Stessa Cohen, an analyst with Stamford, Conn.-based Gartner Inc. "They have to get their IT staff working with business units to determine what the business drivers are."
Cost savingsWhen you write a check to an individual or business, the paper is deposited in the recipient's bank. The bank clears the check by physically sending it back to your bank. If nothing else, using digital images ought to help banks reduce the enormous transportation costs they incur when shipping paper back and forth, experts say. Increased use of electronic tools for remote deposits should also help banks automate branches.
Check 21 does not require banks to offer electronic check-clearing services to customers, but simply to be able to receive them.
First Horizon Bank, based in Memphis, Tenn., views the regulation as an opportunity to drum up new business. The bank targets businesses and individuals that rely on digital images but whose banks are not yet ready to present checks electronically.
"We have customers all over Tennessee, but they also have relationships with banks in other states. I can tell them: 'Never mind those other banks. Here's a scanner: put it in your office, scan your [paper checks] and transmit them to us electronically. We'll recreate the paper checks and deposit them into your account," said Taylor J. Vaughan, senior vice president and manager of treasury.
"There is a real value proposition for us being able to get more remote check-processing business," he said.
The banking industry lobbied aggressively for the U.S. Congress to enact Check 21 as an enhancement to check processing. Done well, Check 21 implementation should help banks provide enhanced services to businesses, enabling them to better manage cash flow for specific needs.
Now that they got what they wanted, banks must produce.
"Companies will probably have greater opportunity to know quicker what is available to them in terms of paper checks," said Cohen. "The target for banks is to deliver this information integrated with other key information," including cash on hand, number of credit-card transactions and which checks might bounce, Cohen said.
Banks have captured and archived digital images of paper checks for years. That means they can use existing printers and scanners to comply with Check 21. Nonetheless, complying with Check 21 presents some obstacles to overcome.
Security is Job One
Security is, not surprisingly, one of the most difficult obstacles. The law aims to cut down on check fraud by helping banks to more quickly identify potential threats to data security and take steps to protect the data. That means computer systems must now be capable of presenting payments in three different formats: paper, digital images and electronic. The systems must also ensure sufficient image quality of any recreated checks.
Clearing checks electronically eliminates the security threat of physically hauling paper checks, while at the same time creating a "check-clearing process that is more transparent and auditable," Cohen said.
Information architects also must harden systems to prevent images from being altered or tampered with, says Cohen. Check 21 requires banks to limit access to images and securely store both original checks and digital copies in online archives.
First Horizon invested about $5 million to equip its information architecture to comply with Check 21. That includes in-house client software, written in Visual Basic, to handle remote capture of deposits for corporate clients, one of the chief features of Check 21. Files are transmitted electronically by customers to the bank's Memphis servers, which validate the files and print out any necessary "image replacement documents" or paper checks.
First Horizon subsequently sold the rights to the application to Software Earnings Inc., a Memphis-based software company. "We sold it primarily for the support we would get out of a professional software organization," said Vaughan.
To store its images, First Horizon uses archival services provided by Viewpointe, founded in 2000 by IBM, Bank of America, J.P. Morgan Chase & Co.
Aside from banks, Check 21 interests physicians' practices, insurers and other businesses that rely heavily on paper checks. Conversely, companies that process a small number of checks may want to spend their IT resources elsewhere. A study by the Federal Reserve Board shows that electronic payments in the U.S. exceeded the number made by paper check for the first time ever in 2003.
"The technical problem is that the number of checks (being written) is declining about 9% to 10% a year, while the number of electronic payments is increasing about 25% a year," said Cohen. "Your IT people and your business people really need to examine the feasibility of making this investment."