Everyone agrees that check electronification—the much-discussed set of initiatives around turning paper checks into electronic transactions, which picked up steam with the passage of the Check 21 law—can add efficiency to corporate payments. No one can deny the value of check-electronification advantages such as faster funds availability and decreased transportation costs. Yet, the evolution toward full, industry-wide image exchange processing has been slow, with many hurdles to clear on the technological, legal and regulatory fronts.

Steady Decline in Paper Check Clearing
There are volumes of statistics and studies comparing paper checks to electronic payments. Lurking behind the data are not only new technologies, but cultural customs and mindset shifts reflecting human behavior.

Many people put their trust in writing checks that they can see and touch and are reluctant to change. There also maybe is a lingering mistrust of cyberspace. Yet the predominate data trend shows a slow but steady decline in paper check clearing and an increase over the next few years in electronic image exchange processing—banks processing checks using only their images.

In January 2006, SVPCO, the check processing division of the Clearing House, recorded 700,000 image exchange items a day representing $4 billion in average daily volume. By August 2006, these numbers had increased to 3.2 million items a day representing an average daily volume of $8.9 billion.

A study by Financial Insights forecasts a decrease in non-locally cleared paper transit items from just over 10 billion this year to just under eight billion by 2010. During that same time period, image exchanged items are expected to increase fourfold to nearly five billion items.

Conservative projections say full industry image exchange could save $2 billion on processing costs if all banks could clear and settle using electronic data rather than shipping and processing paper. This savings could be passed on to bank customers, so there is plenty of incentive for everyone to move the effort forward.

Playing Catch-Up with Technology
Since the 1990s, many banks, including Deutsche Bank, have invested in image technology, producing and storing images used primarily for inquiries, client research work and reprocessing purposes. But putting that image technology to work in exchanging and clearing check images as an industry standard has its own set of challenges:

1. Financial institutions and third-party processors will still have to clear paper checks, requiring maintenance of the current system.
    
2. Many banks can send check images but fewer have fully developed technology to receive and clear them efficiently. Images use more bandwidth than needed for the limited data currently exchanged via Automated Clearing House (ACH) files. And, while some checks do convert to ACH, payors may need and expect more detailed information when researching errors or fraud.
    
3. Legal and regulatory guidelines must play catch-up with technological capabilities. A body of rules for all institutions must be created, much as the industry has done for the mature paper check processing process. The rules for ARC (accounts receivable check conversion) are a good start, but checks are the only instrument fully covered by the Uniform Commercial Code (UCC).
    
4. Security and liability issues for fraudulent checks need resolution. Court cases have resulted from banks destroying an original check that was ultimately proved fraudulent.
    
5. Secure storage of images remains an issue. Industry groups have discussed creating a central image repository for use by all financial institutions, but the logistics, ownership and access questions have stymied progress on this idea.

These and other issues weigh in as financial institutions and other service providers develop proprietary image exchange systems. Many banks are relying on the capabilities of the ACH network to facilitate check electronification, with some specifically focusing on ARC and BOC as their lead effort. Meanwhile, some innovators are enhancing their lockbox capabilities to unburden customers with check deposit needs too large to be handled in-house via remote deposit.

The ultimate goal is to make an already "efficient" process—paper check clearing—more efficient. Costs for handling paper continue to rise but reengineering the process is taking more effort than most industry participants anticipated. Industry cooperation and patience may be the missing elements in the quest for a breakthrough that will leapfrog us, once and for all, into an era of paperless payments.