There's good news and bad news in federal banking legislation that goes into effect Oct. 28. General consensus is that the Check Clearing for the 21st Century Act - better known as Check 21 - is good news for banks, but not for consumers. And for business entities, analysts see a little of each.
Although the law doesn't require banks to abandon the practice of processing paper checks, it creates a new legal document called a substitute check. Substitute checks will make it possible for banks to speed digital drafts through cyberspace, dramatically reducing processing costs and virtually eliminating the time it takes for a check to clear.
Dallas-based Carreker Corp., which provides consulting and software services to the banking industry, projected that banks nationwide could cut expenses by $2 billion per year under the new law. About $250 million of that savings could come from reduced transportation expenses alone, because banks that choose electronic clearing would no longer have to physically send checks to the issuing bank. Carreker estimated that individual banks could cut the cost of their check operations by 25 percent or more.
Check imaging is driven by the need to decrease the cost, reduce the risk and modernize check clearing for both financial institutions and their customers, said Mark Craig, general manager of Oklahoma City-based CheckClear. The state of Hawaii, where checks must be physically transported between islands by plane for bank clearing, provides a perfect example of why traditional check- clearing is not cost-efficient.
According to the Federal Reserve, the cost to process a single check was 5.1 cents in 2003, up 13.3 percent from the 2002 average of 4.5 cents. And despite the online payments and debit card transactions putting a dent in check-writing habits, Americans still use a lot of checks. According to the Federal Reserve, there were 42.5 billion checks written in 2000, 7 billion fewer than were written in 1995. The Federal Reserve estimated that the number could drop to 37.5 billion this year.
Using a model bank, consulting and systems integration firm BearingPoint estimated that a 2,000-branch bank with assets of $160 billion would have to spend $64.2 million on hardware, software and implementation costs to convert to image-based check clearing. In the model, that money would be recovered in cost savings in just 17 months. Five years after conversion, the bank's return on the investment would be 70 percent.
And that's just from what the bank would save on check processing. The bigger savings comes from eliminating much of the time that funds remain uncollected while a paper check clears, usually referred to as the float. Carreker's Rick Kuhn concluded that significant amounts of non-earning assets would be removed from the balance sheets of banks across the country. Kuhn found that a small handful of the nation's largest banks could expect to see more than $1 billion in non-earning assets disappear from those balance sheets, while midsize banks would realize an average reduction of about $60 million.
That translates to an investment opportunity of $1.9 million per bank, Kuhn wrote.
Paring down the float is also expected to be a boon for companies that receive a lot of payments by check, especially big retailers. Terminals are available that will allow merchants to scan a check and deposit it electronically without ever taking a batch of paper checks to a bank. Better still for the merchant, the check could be cleared in a matter of moments rather than days, improving cash flow.
Merchants are also expected to benefit by a reduction in check fraud brought about by speedier processing. …