FRAMINGHAM, Mass. -- For any credit union that hasn't converted to exchanging check images, it may not be a matter of if anymore, but simply when.
Seven years into Check 21, almost two-thirds of all transit checks (those settled between separate banks and credit unions) are being imaged and, according to one leading analyst, as early as next year, paper check processing will no longer be viable for any but the largest of financial services organizations.
"The choice for financial institutions is stark," said Aaron McPherson of Financial Insights, an IDC Company. "Convert to image or get used to lower profits."
He adds, "Fortunately, most of the problems that surrounded image exchange in the early days have now been worked out and there are stable, proven options out there."
McPherson is the author of a new report from Financial Insights titled "U.S. Check 2007-2011 Transaction Forecast and Analysis: Image Takes Over."
In it he says, "The year 2006 saw a dramatic rise in image exchange volumes, putting to rest any doubt that image exchange is the future of check processing. At the same time, overall check volumes continued to decline, putting pressure on those financial institutions that had not converted to image to do so."
In fact, McPherson predicts, by the end of the forecast period in his report--2011--"image exchange will be effectively universal."
Looking at transactions by types, the Financial Insights report finds that consumer point-of-sale checks have seen the most rapid decline, due to increasing use of debit and credit cards, followed closely by business-to-consumer checks, which are being replaced by direct deposit.
"B2B checks have declined," McPherson said, "but at a slower rate because businesses are more dependent on the remittance data that accompany the check, which are not yet widely accepted in electronic form."
But, he adds, "as the unit costs of processing checks increases, the banks will pass this on to their business customers. These increased costs will make electronic payments relatively more attractive, which will cause businesses to switch at a faster rate."
He also noted that while the number of checks actually written drops, their average size will increase "because debit cards and online payments tend to draw from the lower-value check pool. For this reason, the total value of checks written does not decline as quickly as the number of checks written."
The Financial Insights analyst also says he expects the item processing business to become like the card processing business, with the largest financial institutions processing in-house and mid-market and smaller FIs outsourcing the work.
"This will accelerate the move to enterprise payments, as all of an institution's payment processing will now be able to be consolidated with one provider," McPherson said.
"Financial institutions should start thinking now about how they can build new services on top of consolidated payment systems, such as consolidated reporting for corporate customers and integrated trade documents," he said.
Meanwhile, on the vendor side, McPherson predicts growth to hit a ceiling soon as the market matures, especially for image exchanges. He said image networks should think about using the infrastructure they built to support new services such as health care payments, financial supply chain integration and payroll cards.
"Core processors will have an advantage," the Financial Insights analyst said, "as they already process other types of payments and will be able to consolidate their systems onto enterprise payments platforms.
"Therefore image exchange networks should consider merging with core processors or other networks to form universal payment processors."