The Check Clearing for the 21st Century Act, passed by Congress last year and set to go into effect Oct. 28, allows banks to substitute electronic images of cancelled checks for the actual pieces of paper. The legislation is regarded as an important landmark on the road to eliminating paper in favor of fully electronic transactions.
Federal legislation nicknamed Check 21 will bring business to tech companies as banks buy hardware and software for the increasing use of electronic imaging to store checks.
The expensive but inevitable replacement of paper with imaging technology--Check 21 is just one step--will benefit companies that provide imaging technology and outsourcing services.
As a result,will spend an estimated $1.6 billion to $2 billion this year and next on technology to improve handling of paper checks, according to trade publication Bank Systems & Technology, even though paper checks are a dying business. Research firm TowerGroup estimates U.S. check transactions peaked in 1999 at 43 billion per year and have been declining 3 percent to 5 percent per year ever since, as part of a slow but inexorable shift to electronic transactions.
The further digitization of commerce has been a windfall for a handful of specialist technology providers, particularly those capable of taking over whole chunks of the check-handling process.
"There's a handful of vendors that are going to make a lot of money off this," Gartner analyst Avivah Litan said.Given the doomed future of paper checks, even large banks that normally insist on doing everything in-house are willing to look at outside options for Check 21 and related projects. "This is probably one of the most clear-cut cases I've ever seen for outsourcing," Litan said.
Likely winners include specialist firms dealing with particular parts of banking processes and generalists such as IBM and, whose broad technology and consulting portfolios fit the multifaceted nature of Check 21 challenges. "IBM is definitely making a fortune out of this," Litan said.
Where to begin?
Typical elements of a Check 21 project including buying or upgrading imaging equipment, an area that largely benefits IBM, whose check-sorting and capturing machines have been the industry standard for decades. "Almost every major bank you can name uses our high-speed reader-sorters equipped with image cameras," said David Weeshoff, check processing strategist for IBM.
"This is probably one of the most clear-cut cases I've ever seen for outsourcing."
--Gartner analyst Avivah Litan
on check imaging
While most large banks already do some version of check scanning, they may need to upgrade the equipment to achieve the high-resolution images needed for exchanging data with other banks.
Banks also have to consider how far down the chain they want to enable imaging. Equipping branch banks to capture check images can save on transportation and storage of paper checks, but will the savings justify the investment?
"The consistent vision is to capture images at the earliest point in the process," Weeshoff said, "but it's a complicated formula to figure out when and where it makes sense to invest in that."
John Feldman, head of image transactions and payment for, said the bank has already invested significantly in check imaging capability but is holding off on equipping branches until there's enough of a payoff. That call will depend on how quickly the banks with which Bank of America shares data become image-ready.
"We're going to look at the optimized mix on this, not just declare that we're going to put an imaging device at every teller window and ATM," Feldman said. "You don't want to miss opportunities, but you don't want to overbuild, either."
Bye bye paper
Saving checks as electronic images also requires investments for storage, records management and other functions. Oracle is capitalizing on such concerns to promote the ability of its to deal with structured and unstructured data, including the complex unstructured items check data would produce.
Oracle is collaborating with other technology companies to offer transaction packages that go beyond Check 21 requirements, said Andrea Klein, Oracle's vice president of financial services.
"We see it as a much bigger play than just Check 21," she said. "We see it as a whole retooling of the payment approach in financial institutions. They have the opportunity to say, 'We're living in a digital world now,' and really push things forward."
"We see software investment going beyond just kicking out bad checks and into business intelligence and risk management."
--Frank Liddy, Unisys
Check 21 also requires increased spending on security software. As fewer checks are examined by human eyes, image-handling software needs to become more sophisticated at spotting signs of potential fraud.
Frank Liddy, head of the banking group for IT services company Unisys, said antifraud systems are increasingly seen as an elemental part of the check-handling process and an area in which investment can boost business efficiency.
"The check-fraud solutions we really think have to be integrated right along with the rest of the system," Liddy said. "We see software investment going beyond just kicking out bad checks and into business intelligence and risk management."
"We think the fraud tools will evolve as image enablement increases and banks start sending files in an industrial-strength manner," added Bank of America's Feldman.
Banks also need consulting help to identify all areas of bank operations that might be affected by a Check 21 project. From reducing the time it takes to clear a check to cutting back on physical storage capacity, Check 21 requires banks to balance many, many considerations, Liddy said.
"We're doing continuing work with clients to identify the hundreds of processes that will be affected by Check 21," he said. "Check 21 may be a new event for the U.S., but check truncation has been happening in other parts of the world for years, and we've been a significant player there. That gives us a lot of expertise we can put to work here."
Among the factors banks may need help evaluating is the possibility of making money from check processing investments. Faster, more detailed processing of checks opens avenues for selling premium services, said Ed Moran, senior program manager for J&B Software, a specialist in transaction processing products.
"In the short term, banks are going to have incremental costs in going to Check 21," Moran said. "Part of our job is to help balance that out. We have to come up with new ideas to generate revenue for the bank, and there's a lot that can be done."
Larger banks in particular may look to make money from renting out excess check processing capacity to smaller banks that don't want to invest in new equipment.
Gary McKnight, executive vice president of Texas-based Frost National Bank, said his bank already sells a number of services to smaller banks, and the bank's investment in electronic transactions should just increase its outsourcing opportunities.
"I think the opportunity is pretty much the same as the paper world," he said. "If we end up with excess capacity on the electronic side, we're certainly going to look at offering that to other banks."
Checking the evolution
Weighing such considerations becomes even more complex when the bank takes a longer-term view, with the ultimate goal of eliminating paper checks altogether. The cost of processing each paper check becomes higher as volume goes down, so banks want to move as fast as possible to an all-electronic system. But factors ranging from regulatory requirements to customer habits mean paper checks will be around for a while.
The trick becomes investing just enough to move customers toward electronic transactions without getting ahead of the curve.
"This is an evolution, not a revolution," Bank of America's Feldman said. "It really takes industrywide adoption to make the process worthwhile, and I think banks are going to move at various speeds. That's why we're taking a very judicious view of how and when we invest."
IBM has tried to lead industry adoption of check imaging by spearheading the formation of Viewpointe Archive Services, a central clearinghouse for storing check images and exchanging them among participating banks. The archive already has more than 35 billion check images on file and has helped iron out many of the standardization issues around image exchange.
"The work that has to be done for the industry to realize the full potential of Check 21 is to get high volume of check exchange; you need to get a critical mass in the next few years," Weeshoff said. "We're trying our best to lead by example with Viewpointe in creating a very capable image exchange environment."
"U.S. bankers have an aversion to outsourcing critical functions, but Check 21 is different."
--Frank Liddy, Unisys
The solution for many banks has been to outsource check processing functions, allowing them to easily shift investment between paper and electronic functions as the market develops.
"I think on balance, U.S. bankers have an aversion to outsourcing critical functions, but Check 21 is different," Liddy said. "In an environment where volumes (of paper checks) are declining, banks stand to gain a lot of flexibility from outsourcing. There's a huge amount of infrastructure associated with the check-processing functions, and if you do everything in-house, you have to address what you're going to do with those assets as paper checks go away. You can't eBay that kind of stuff when you don't need it anymore."
For banks that can afford to keep most of the work in-house, however, Check 21 represents a sensible investment for the future, said Frost Bank's McKnight.
"It's been expensive--there's been some fairly large expenditures for this as far as hardware and software," he said. "But we're not doing anything that is stopping us at Check 21. All this technology is moving us in the direction of full image exchange. Check 21 is a very interim step to where we and the banking industry as a whole want to be."