Focusing on Image Quality
One of the most revolutionary features of the Check 21 environment is the development of new image-based depository services for corporations that receive check payments. These services enable a business to capture check images and MICR line information and then to deliver check deposits electronically to a Check 21-enabled banking service provider. The supporting technology can be provided through desktop scanners and imaging software. Alternatively, a business that employs an image-capture system, for processing mailed check remittances, can create electronic cash letters for transmission to its bank.
Already offered by several bank and non-bank providers, these new image corporate depository services should become more widely available in 2005. For any business thinking about moving to these new depository solutions, image quality assurance will be a key factor in evaluating product and service providers. In this article, we examine why image quality is critical in the Check 21 environment and how image quality assurance will be a major differentiating factor in the new corporate depository services coming to market.
Check 21, which went into effect in October 2004, introduced a new negotiable instrument called a substitute check. A substitute check is a paper reproduction of the original check that includes electronically captured images of the front and back of the original check and a reproduction of the original MICR line. A bank of first deposit can create substitute checks from the original deposited paper checks and then truncate the original items. This bank can then electronically transmit check images and MICR line information to a locale near the paying bank, where substitute checks can be printed and presented for payment.
By setting the stage for image-based processing of paper checks, Check 21 also implicitly encourages image-embedded banks to enter into bilateral contractural agreements with each other to present checks by purely electronic means or in “image exchange”. In the long run, banks will be able to clear checks more efficiently by eliminating physical transportation of the paper checks.
Image quality assurance is obviously a key aspect of Check 21. Under Check 21 regulations, a substitute check (or image replacement document) is considered the legal equivalent of the original check provided the substitute check accurately represents all of the information on the front and back of the original check at the time the original was truncated. Furthermore, the bank creating the substitute check (or the first bank that takes the substitute for deposit) must make certain that the image captured from the original check meets this legal equivalence requirement.
In establishing image exchange standards, the Financial Services Technology Consortium (FSTC) has been playing a leading role. The FSTC, of which Bank of America is a member, is made up of financial institutions, clearing houses, exchanges, and third-party service providers. In 2004, the FSTC launched an Image Quality and Usability Assurance Initiative to develop an interoperable set of terminology and metrics for check image exchange. In Phase I of this project, the FSTC identified 16 image defects that could result in a check image not being usable. These include such conditions as folded or torn document edge, excessive document skew, image too light, image too dark, image with horizontal streaks, and image out of focus. Such defects could affect the legibility and/or completeness of information digitally represented in a substitute check image. In Phase II of the project, the FSTC will establish image quality and usability metrics to be incorporated into the ANSI X9.100-180-2005 Specifications for Electronic Exchange of Check and Image Data. Phase II is scheduled to be completed in about 18 months.
Another key point to keep in mind is that current experience with imaging shows that most defective images are the fault of the source document (the original check) and are not caused by deficiencies in imaging technology. Checks with excessively dark or complex background patterns, intricate borders or logos, and other “noisy” design elements are more likely to result in unreadable images. Consequently financial institutions, check printers, and businesses that print their own checks need to promote the use of check designs that meet the image quality and usability requirements for image processing. The FSTC estimates that it will be 12-18 months before we see significant levels of image exchange check processing. That provides time for the gradual elimination of check stock designs that are not image friendly.
Image-based corporate depository services enable a business that receives check payments to capture check images and MICR line information and make deposits electronically by sending that data to its bank. One form of this service employs a desktop scanner with imaging software. The operator scans each check, keys in the dollar amount, and validates that the MICR line information has been captured correctly. When the entire deposit has been imaged, the information is transmitted to the bank. The client’s account is credited and the deposit is processed. Checks are cleared through the check clearing system using image replacement document processing or through the ACH using accounts receivable (ARC) check conversion for mailed consumer checks.
An electronic cash letter service for businesses – with in-house, image-based remittance processing operations – works in much the same way. Check images and MICR information captured by the corporate lockbox system are converted into image cash letter files that are transmitted directly to the bank. The bank credits the corporation’s account and clears the deposited items through the check clearing system or the ACH.
For businesses that receive significant volumes of check payments, these new image depository solutions may provide major benefits, including faster deposit processing, accelerated funds availability, and earlier notification of returned items. In case of disputes, the business has electronic access to check images and can also securely store the original checks for a period of time before destroying them. With either the remote deposit or electronic cash letter service, the corporate customer assumes responsibility for the destruction of truncated checks within the mandated timeframes so that they can’t be reintroduced into the check clearing system.
Both remote deposit and electronic cash letter services obviously depend on image quality assurance and processing controls help to ensure that there are no problems in downstream clearing. Here’s a checklist of some of the key image technology and processing issues to consider if you’re thinking about moving to an image depository service:
At Bank of America, we’re convinced that image technology will totally transform the way banks do business and the way businesses do their banking. Through our participation in the FSTC, we’re fully committed to assisting in the development of image quality standards and supporting the new image depository services that are becoming available to corporate customers. Look for more information on image quality and usability parameters in future issues of IdeasLab.
Note: This article does not constitute legal advice. If you have legal or business questions about Check 21 you should consult your legal and business advisors.