Unexpected Rewards of Check 21 - Checks Are Really Going Away, But That's Just the Beginning
Like the Internet, which was initially received as a worldwide "huh?" and now dominates our daily lives, electronic check processing has slowly ramped up to today's tidal wave of activity. Check 21 is rocking the payments world.
Checks are going electronic. From the smallest credit union to the largest mega-bank, financial institutions are converting checks into images for processing. Last September, the Federal Reserve reported that 50% of its "forward items" were deposited as image cash letters rather than paper.
Image checks have certainly reduced processing and courier costs while increasing funds availability for credit unions and their members. Every cost savings estimate that COCC delivered prior to a credit union's Check 21 conversion has been exceeded.
Almost as an afterthought to Check 21, we have found that image processing reduces the credit union movement's impact on the environment. Fewer trucks shuttling between branches and check processing centers mean less fuel consumption.
Yet another afterthought of Check 21 is security. With all the attention paid to Internet fraud via phishing, pharming and other misspelled horrors, far more money gets filched from members' accounts as a result of check fraud than anything brewing on the Web.
Credit unions can reduce fraud simply by accelerating check processing. We experienced this first hand when a consumer attempted to deposit $11,000 in counterfeit money orders at one of COCC's client institutions. Branch personnel initially believed their check scanner had malfunctioned because it wasn't picking up the MICR. Then they realized there was no valid MICR to pick up. They stopped the transaction that same day.
Prior to image processing, the counterfeit money orders would have been bundled and couriered to the Federal Reserve where sorter equipment would most likely have detected the fraudulent MICR. But returning the counterfeit money orders would have taken weeks--plenty of time to unload the $11,000.
The speed of electronic check processing can disrupt criminal activity in other ways, too, such as electronic signature verification and online "lookup" services that flag checks drawn on accounts experiencing check fraud. While these security features have been available for some time, the conversion of paper checks to images at or near the teller window increases their effectiveness.
As credit unions adopt Remote Deposit Capture (RDC) and Back Office Conversion (BOC) technologies, they will experience even faster verification and funds collection. Eventually, the BOC technologies will be incorporated into teller systems for check verification and collection at the time of deposit. We have hurdles to overcome before that occurs, but think of how that might reduce the threat of fraudulent checks!
Further downstream from Check 21 are e-statements. Certainly, image statements are saving trees as well as postage dollars, and they are widely accepted by the public. But true green savings are in e-statements, which are no longer a hard sell. Our experience shows 5% minimum adoption, credit union wide, at service introduction. Several of our clients have reached 20 percent e-statement adoption after just one year.
Consumers are steadily increasing their use of convenient and cost-effective check and account statement viewing on-line as well as bill payment. Earlier this year, a study conducted by Harris Interactive and the Marketing Workshop showed that Internet-connected households are paying more of their bills online than by paper check.
Credit unions will do well to encourage widespread use of online services -- from image to bill pay. While many members still view the new online banking capabilities as potentially hazardous, the opposite is true, and these reluctant members need to be shown why.
Online banking increases security because members are validated and transactions are viewable as soon as they occur. Compare that with a monthly statement sitting in your member's mailbox from 10 a.m. (when it was delivered) to 6 p.m. when the member gets home from work, picking up the kids and shopping. Every crime needs opportunity -- here it is aplenty!
For Check 21's cost savings and reduction in carbon consumption to take full effect, credit unions need to boost e-statement adoption. It's not good enough for 50% of a credit union's members to adopt e-statements while continuing to receive paper statements (This occurred among Canadian credit unions in 2005).
Perhaps we don't need to go so far as the United Kingdom's Payments Council which is considering plans to phase out paper-based checks completely in favor of automated and card-based payments. Then again, we need to do so much more!
In the three years since Check 21 became effective, the payments landscape has changed dramatically. Back in 2003 when Check 21 was passed, proposals such as the one above seemed far-fetched. Today we know the check will die; it's just a matter of when.