Image is everything

Banks are replacing paper-clogged, check-clearing systems with electronic-imaging networks, saving an estimated $2 billion annually.

With the labor-intensive and somewhat-antiquated system in place today at most banks, it can take anywhere from three days for a local check to 14 days for an out-of-state check to clear.

But a consortium of banks that handles about 60% of the nation’s checks is switching to a check-imaging network that’s expected to slash check-clearing times to less than 24 hours.

Not only is check imaging faster and more reliable than the old distribution method, but it also will save the banking industry an estimated $2.1 billion annually and go a long way toward reducing the estimated $21 billion lost through fraudulent checks schemes, according to Hank Farrar, president and CEO of Small Value Payments Company (SVPCo).

If you’ve ever wondered why your local bank puts a three- or five-day hold on a personal check that you deposit into your account, it all boils down to a slow and inefficient check-clearing network.

When you deposit a check, your bank doesn’t receive payment until the bank from which the check was written physically receives the check and processes it.

That means every bank has to sort the checks it takes in every day and deliver those checks to a clearinghouse. SVPCo, a New York clearinghouse owned by 22 of the nation’s largest banks, handles an estimated 100 million checks every business day.

In New York City, for example, SVPCo has two offices, where a messenger from a particular bank drops checks on the appropriate tables of member banks and picks up the boxes of checks other banks have left on his bank’s table.

Farrar adds, “Checks drawn on Wells Fargo [in San Francisco] will be put aboard a plane or be given to another bank that moves paper across the country.”

When checks finally are delivered to a bank’s data processing center, they are run through a reader/sorter machine, which captures the microdata at the bottom of the checks. Bank of America has to maintain 12 regional data processing centers with thousands of clerks who process payments.

Imaging to the rescue

Image technology will change this dramatically because paper will go through a reader/sorter only once, and the image of the check will be transmitted electronically to the appropriate bank over a private IP network, according to John Dunn, the SVPCo project manager.

Databases maintained by SVPCo and other check clearinghouses also will become central repositories for closed or dead-end checking accounts. If incoming checks cannot be matched to valid accounts, they could be checked promptly online against a fraudulent check database. It is hoped that early detection of bounced checks will save banks and customers considerable headaches and money.

Sterling Commerce, a subsidiary of SBC, is developing the software that will drive check imaging. “This is an 80/20 technology,” Farrar says. “Eighty percent already exists; 20% will be new.”

Among the new components is a distributed traffic agent (DTA) that will create check images for presentment and will capture the microdata that paying banks can use to automate the debit process. Sterling’s technology was selected because its VectorCapture and DirectConnect software has been in use by many of the top-tier banks and has a solid track record.

Digitizing checks

Several of the top-tier banks launched the move to check imaging several years ago, while SVPCo and the Federal Reserve Board worked on specifications for an industry-wide standard. Those details were incorporated in the Check Truncation Act that both houses of Congress approved June 30. Minor differences between the two versions are being resolved before the final draft is presented to President Bush for signature.

To help make this a universal process that also includes smaller banks, SVPCo is working with Fiserv, a Brookfield, Wis., outsourcer that acts as a clearinghouse and data processor for 1,700 community banks.

“Fiserv is going to make this solution very broad,” says Rian Maloney, vice president of imaging for Sterling Commerce. “Fiserv is going to look like one large bank, but it will have thousands and thousands of endpoints – branches. Consumers and companies will be able to view their online checking accounts and confirm the overnight clearance of checks they’ve deposited, regardless of where in the country those checks were presented. That’s all going to happen within 12 months.”

Building the imaging network

The DTA server that will move check images to other banks will run the Windows 2000 operating system and the SQL database, SVPCo’s Dunn says. All participating banks will run similar systems, except the community banks whose servers Fiserv will host.

For some smaller banks that will not be in a position to implement check imaging during the early stages of the rollout, SVPCo has created an image replacement document. According to the Check Truncation Act, all banks will have to honor either imaged check or the image replacement document instead of paper checks.

SVPCo’s banks slowly have been adding cameras to their reader/sorters over the past two years to automatically photograph the front and back of each check as it goes through the machine.

SVPCo is laying the foundation for a private IP network that will “allow everyone to leverage existing connections to a local hub that will connect to the SVPCo ‘cloud’ managed by a service provider,” Dunn says.

Bob Hunt, senior research analyst for the Tower Group, says the network will be put together very quickly. “It won’t be as complicated as most people think. What it needs is high-speed telecommunications. And since they’re not going out to customers via the Internet, the high-speed networks banks are tied into today will work just fine,”he says.

VPN software from Sterling Commerce will provide security for the network.

The plan calls for an eight-bank trial run in the fourth quarter of 2003, with the rollout to the remaining banks and the Fiserv group of community banks in the first quarter of next year.