Check 21's Impact on Cash Management Product Offerings
The Check 21 Act facilitates check truncation by providing legal equivalence to a substitute check (also referred to as image replacement document). This marks a shot in the arm for the entire banking industry in the United States to counter the increasing cost per unit of check processing as a result of declining check volumes. The lawmakers’ vision about the Act is loud and clear: ‘Fostering innovation’. It is not just the legal equivalence of substitute check that makes Check 21 a milestone in the history of payment processing, but the avalanche of creative steps being taken to foster the innovation makes it comparable to the MICR revolution of 1956. Exchange of a check image instead of a physical paper check is an immediate innovation accompanying the concept of the substitute check. The Check 21 Act does not address the exchange of check images. It will be governed by an agreement signed by the parties involved in such an exchange.
The possibility of image exchange has an impact on various functions in a bank, from operations to IT and from legal services to product services. And cash management services are no exception to this. The cash management offerings for corporate customers will undergo transition as Check 21 is implemented in October 2004. The transition will happen gradually as various innovative ideas make their way into the clearing process and eventually mature. This article elaborates how the prime cash management offerings will get transformed post Check 21, especially due to the possibility of image exchange.
Some of the prime cash management products and services offered by banks to its corporate customers in the United States are:
The lockbox is a product that is popular among billers (cable TV, utility companies, telephone companies etc.) for collecting the remittances. The checks posted with these remittances are collected using regional post boxes that typically have unique ZIP codes, for faster mail processing. These checks are cleared either via the traditional clearing process or are truncated by initiating an ACH debit. The use of lockbox helps to reduce mail float and also helps to make funds available more quickly for the corporate customers.
It is certain that the check imaging and, more importantly, image exchange will reduce the postal delays involved in the process of check clearing, thereby reducing the clearing float. Also image exchange will prove to be an alternative to the existing check truncation using ACH debit. It also will be more pervasive than ACH debit, which allows truncation of only consumer checks and not corporate checks, money orders, etc.
It is estimated that the day-two clearing will gradually reduce with an increase in same-day clearing as the exchange of images becomes widely accepted. As a result, the average clearing time will fall, improving the availability of funds for the bank. It will be up to the individual banks to decide what share of the benefits they pass on to their customers. The challenge for product developers in the banks will be to estimate the savings correctly and price the product optimally to pass on a share of savings to their customers to remain competitive.
The other aspect of the lockbox offering is the unique zip code based mail processing, which helps in reducing the mail float remains unaltered even in the post Check 21 scenario.
The positive pay offering helps corporate customers counter the check fraud. The corporate customer sends a file to the bank containing the information about the checks issued. Using these details, the bank verifies the checks presented against various accounts of the corporate. If any of the checks does not match, it is reported to the corporate and researched further. Typically a list of exceptions is notified in the morning and a response from the corporate is expected within a few hours. There are multiple variants of this offering currently prevalent in the industry. Reverse Positive Pay is one such variant, in which the bank sends a file containing the details of checks to be cleared during the day. The corporate carries out the verification and subsequently reports the exceptions, if any, to the bank. Positive pay products are available with reconcilement and payee match options as well.
Theses options already leverage the image processing techniques to extract certain information attributes from the check image. Payee name is one such attribute. Post Check 21, it is likely that the payer bank may receive a substitute check instead of the physical paper check. As the Act does not specify any standard for digitization and imaging, the quality of image for substitute check is entirely dependent on the financial institute, which converts the paper check into an image. Due to this, the payer bank loses control over the image quality of the check, which happens to be a competitive advantage for one bank over the other. As image exchange matures, standards will further evolve to result in better quality images. Such features as payee match will then be extended for medium and small companies as well.
The controlled disbursement product is designed for corporate customers to optimize their cash. It utilizes the information about daily cash requirements effectively to manage the cash position. The banks provide summary information containing the current day’s disbursement total by early morning. This helps the corporate customers to either fund the account or mobilize excess cash for better investment. This service takes advantage of the fact that paper checks presented for payment reach the bank in a batch as a single shipment, each day typically by 10am EST. This is the time by which the bank informs its corporate customers about the amount needed in their account for clearing the outstanding checks for the day.
Controlled disbursement is affected by Check 21 to a great extent, as it is critically dependent on time. The cut-off times may vary as image exchange replaces the physical check delivery. It is also possible that the checks can be presented electronically, several times a day, leading to intra-day clearing. This means multiple cut-off times during a day. It is certain that the offering needs to be transformed from its current form and the evolving changes in the clearing process will drive this transformation.
Information reporting services typically offer a variety of products such as balance reports, account analysis, check research and account reconciliation. The image exchange will help strengthening the reporting services, as the check-image will now be made available on-line. As mentioned earlier, the payer bank currently digitizes the paper check into an electronic image to offer an online view to its customers. Post Check 21 it may not be the case. This will force the payer bank to provide the customers with the check-image as received. This may hamper the quality of the image depending on how the check gets truncated and the payer bank will not have any control over it. The other impact of image exchange will lead to better availability of the check-images. This will improve the communication between the corporate and the bank regarding the check research and adjustment functionality.
Image exchange will have an impact on some other aspects as well. The fraud management will have positive as well as negative impact. The check-image can be secured using certain image processing techniques such as watermark information, barcode embedding etc. However, losing the touch and feel of a physical check will make it difficult for experts to identify handwriting styles, pen pressure etc.
The transportation cost cuts will definitely lead to savings in the processing costs. However, the additional infrastructure and technology costs need to be properly estimated while arriving at an ROI for the entire check-imaging initiative. The expectations from corporate customers will have to be managed while revisiting product pricing. The corporate customers will have to be educated to know about the entire picture behind the pricing model. Though it appears that the banks will enjoy more collection float income due to image exchange, it is important to know that the reduction in disbursement float income will compensate for the same.
Check 21 is facilitating exchange of check images. The payment processing is going through a phase of innovation. The changes to various cash management products are imperative in this regard. However, the fine print of these changes will become evident as the image exchange process matures. Check 21 has created an atmosphere conducive to new and innovative ideas. But it is the implementation of these ideas that will truly drive the post Check 21 era.