Dynamic Change in the US Payments Landscape
The payments landscape is currently undergoing revolutionary changes for both US companies and the financial services providers who serve them. Checks are declining, ACH use is steadily rising, new payments technologies continue to develop and the regulatory environment continues to shift. At the same time, both old and new payment systems co-exist in an environment buffeted by new compliance requirements, increased fraud risks, and constant customer demands for better service and cost efficiency.
Many US banks, however, are encumbered with siloed payment infrastructures, which have separate processing entities for each payment method. These silos make it difficult to provide clients with the flexibility, security and single payments view needed to most effectively manage their funds.
One solution to this problem is for banks and corporates to work together towards more enterprise-wide payments processing. Technology is rapidly emerging that will enable banks to create new, innovative services through methods such as the Applied Operational Intelligence approach – a complete view of customer transactions linked to efficient and scalable payments systems with the supporting business intelligence needed to drive both profitability and performance.
Two of those recent technological developments are check image processing and check conversion. Both developments serve to break down legacy payments silos and streamline the payments process, but they achieve those common goals in very different ways.
The first key development was the advent of check image processing and this was initiated by Check 21 (the Check Clearing for the 21st Century Act). Under its broadest interpretation, every bank in the US must be prepared to receive and process image replacement documents (IRDs) the same way they would with regular paper checks.
While Check 21 has significantly altered the flows, processes and economics of check processing, compliance with Check 21 has made it more expensive to support redefined processes, to incorporate imaging and digital conversion into those processes and to integrate imaging technologies. This has increased cost per check processing in the short term, which in turn has created an incentive for corporate customers to seek out less expensive payments instruments.
While image processing has altered the payments landscape,the implementation of Check 21 has alsoopened up remote deposit capture (RDC) as a new cash management option for corporations. RDC solutions consist of an image scanner and software for preparing and sending the deposit electronically to the bank. According to industry analyst firm, Aite Group, nearly 5% of US corporations use RDC today, and this number is expected to rise.
The benefits of RDC can be substantial. Banks will no longer need to transport high volumes of paper checks, and corporates gain a clearer view of their cash flows by gaining the flexibility to make payments throughout the day. The earlier a corporation can make a deposit, the more accurate an availability schedule will be because the bank has more time to process and clear the items.
The second important advancement in the US payments industry is check conversion. US companies who utilize wholesale lockboxes to receive consumer payments have been able to convert those paper checks into ACH transactions for several years. On 16 March 2007, the usage of check conversion will expand dramatically when companies can begin using a new technology called back office conversion entry (BOC). This new technology allows for checks presented at the point of purchase to be converted to ACH debits during back-office processing.
In addition, BOC will allow financial institutions to convert eligible checks received in image files to ACH debits. The primary advantage of BOC over traditional check processing is quicker access to funds and the reduction of bank-check fees and returned-item losses. It also presents banks with the opportunity to mitigate some of the internal costs associated with back-office check image processing. While the ability to convert even more retail checks into ACH transactions is what receives the most attention for BOC, it may be this secondary use of BOC that may ultimately be more important to US banks longer-term.
Invariably, the advent of new technologies breeds new complexities. Within the US payments landscape these progressive changes will place even greater emphasis on three key issues for banks and corporates to manage: mitigating payments fraud risk, effectively converging back-office payments systems and the successful deployment of that newly combined payments infrastructure.
The lack of an enterprise-wide view of a bank’s or company’s payments system, as well as the supporting business intelligence behind it, is a big concern as new payments methods emerge. Fraud attacks are also becoming more sophisticated, often crossing multiple fraud and payment categories. As a result, many banks feel compelled to move towards an enterprise approach.
Banks can leverage the greater availability of technology in several ways to strengthen their payments fraud protection and risk management efforts:
Check 21 and Check Conversion both provide unique opportunities for banks and companies to take advantage of new payments technologies, such as corporate deposit taking or remote capture. These developments are breaking down the decades-old silos between payment types and are making the process more cost-efficient. As it does so, however, banks must be mindful of the potential effects on their back-office systems and processes.
Rigid batch schedules make it nearly impossible to offer faster processing cycles for paper checks. But with electronic imaging, corporate customers might be willing to pay more for a service that enables more rapid decision-making, just as they currently pay for specialized lockbox services.
ACH and account reconciliation package software (ARP) designed to detect check fraud is another area that needs to be examined. In the past, ACH and ARP applications operated independently within a bank. But greater integration is needed to pass electronic, converted check data from the ACH application to the ARP system.
It’s important that converted items can be sent to an ARP application immediately. This is because many banks have direct inquiry into their ARP application from the teller platform, offering additional fraud protection on commercial accounts. Only with this level of integration can banks trust that items are matched correctly and processed through the established positive pay channels. Once BOC enables checks presented at the teller window to be converted, care must be taken to ensure that all existing teller-based fraud tools are maintained.
For banks, replacing checks without losing customers or investing in multiple payment-processing systems represents a significant business and operational challenge. But the costs and benefits of operating separate systems for paper check processing, image processing, IRD, ACH and debit systems simply don’t add up.
Banks appear to have just two options. They can stop processing paper checks and live with customer dissatisfaction and possible loss of business. Or they can take advantage of the solutions available in the market to converge all processes – paper checks, IRD and ACH – into an enterprise-wide process with a single set of business rules. Convergent systems could continually re-balance processing assets to match traffic volume in the different channels, leaving the market free to determine the rate of transition from paper to electronic.
A possible solution to this challenge is Check-ACH coalition, which emerged in May 2006. The coalition’s aim is to combine the best of both check imaging and ACH to create greater efficiencies and prompt check conversion.
With system convergence, a check image captured at inception could be converted into an ACH payment. When a customer needs a copy, the image can be retrieved and downloaded from a centralized check image archive.
The Check-ACH coalition maximizes banks’ existing investment in the ACH infrastructure, while minimizing the need for end-to-end image exchange solutions at every bank. It would also increase imaging uptake, creating higher image volumes and lower transactional costs. In addition, it would not force the hand of the banking community or its customers. It presents an infrastructure based on greater electronic payments, but also one in which banks and their customers have a choice: ACH or image.
This is an exciting time in the US payments industry as new regulations and new technologies come into play that will soon change how US banks and corporations view the flow of funds. As those changes occur, however, it is vital that all parties are vigilant to ensure that these positive changes take place without negatively impacting other parts of the existing infrastructure.
Whether dealing with the reality of today or the potential for tomorrow, the bottom line is that the benefit for most banks and corporates lies in the possibility of Check 21 and check conversion working in conjunction to help electronify their payment processes. Side by side, Check 21 and check conversion can allow organizations to reap the unique benefits of both payment processes.