WEST PALM BEACH, Fla. – Corporate credit unions around the country say credit unions are coming at them from all angles hungry for information on Check 21 and one thing they're finding is confusion about what the law is and isn't and also when full image exchange will start to happen. The law goes into effect on Oct. 28, but the Fed has yet to finalize its rule. The proposed rule is out for comment until March 12, with corporates expecting the final rule by July. Check 21 allows for truncation at any point in the payment process. Of course truncation is nothing new for credit unions, they have been doing it for 30 years. The major immediate impact effect of Check 21 for CUs is the substitute check. A substitute check is for all purposes a copy of the original check. Credit unions will begin to see these substitute checks coming from their processors. These substitutes will come into play the most in terms of how checks are returned back to financials after they have been presented – an NSF is one example. The substitute check will eliminate some costly steps in this process, but corporates are stressing to their members that they will have to educate their staff on substitute checks so they can handle member inquiries. Members used to getting their checks back may scoff at anything less, though according to CUNA members request their original checks only .03% of the time. "An element to the consumer side is educating staff on what a substitute check is and what it looks like so when they see one they know what it is and they can accurately talk about it to a member who has never seen or heard of a substitute check," said Sheri Ledbetter, Director, Public Affairs for WesCorp. Ledbetter said the other major consumer impact of Check 21 is its re-credit language. This requires that consumers be protected from loss that may be associated with truncation. The credit union will be required to keep the member financially whole while investigations into the loss are taking place. But all the hype about Check 21 certainly isn't just about substitute checks and re-crediting, it's about the groundwork for image exchange. However, corporate leaders want CUs to know Check 21 isn't a mandate for image exchange. "The thing that's been coming out more in the trade press is they're trying to include electronic presentment in Check 21, they're trying to tie those two things together. Check 21 does not mandate electronically sending or receiving images, it encourages electronic presentment," said William Walby, president/CEO of CenCorp, which processes some 14 million items a month. "The credit unions, other than having a process able to accept substitute checks, really don't have to change anything on day one (of Check 21 going into effect)," said Walby. "You just have to make sure your processor can handle the substitute checks," said Walby. Laying Groundwork for Image Exchange Though Check 21 doesn't mandate image exchange, it does break down some barriers that could change check processing dramatically in the future. Many cite 9/11 as the real impetus for Check 21 as the grounding of planes delayed check processing for days, a severe hit to the financial system. A system that relied more on imaging and less on couriers would be safer in times of disaster. One of the big fears corporates have is that credit unions are going to go out and buy expensive image capturing hardware right away so they can participate in electronic image exchange. "As our account mangers are out visiting credit unions, they're learning that the credit unions are getting bombarded with imaging tech vendors, saying `you have to have this imaging equipment by Oct. 28.' That's of course wrong, the only thing a credit union has to do is send out a disclosure to members about substitute checks," said Drew Kishbaugh, AVP of Payment Services. The disclosure Kishbaugh refers to is mandated by the law and credit unions will have to provide them to members. Though CUs do not have to go out and purchase expensive imaging equipment to become compliant with Check 21 as some vendors are claiming, the equipment would help CUs truncate items at their own shops and potentially offer some cost savings in the future said Nancy Virkler, SVP of Operations for Empire. "Probably the only thing they may be able to take advantage of is capturing items at their branch and sending them over the telephone lines to a corporate to produce substitute checks," said Virkler. She stressed CUs have to do a business analysis to see if this is even cost effective or worth it at this early stage. Though the hardware could be had for just a few thousand dollars on the low end, credit unions would likely need costly high-speed phone lines (T1s), and in some cases T1s would even be too slow. At this point couriering items would likely be cheaper than transmitting, said Virkler. But if CUs did move to scanning their own items and found a cost-effective way to send image files to their corporate they would eventually be able to eliminate courier services and could benefit from settling more items on the same day. SunCorp President/CEO Eric Kenealy believes the Internet can help solve the telecommunication problem. "A better alternative to the T1 lines would be to transfer a file over a secure manner over the Net. We already have large pipelines to the Net. It's a more cost-effective effective alternative than renting expensive lines," said Kenealy. As for the scanning equipment CUs would need, corporates are urging CUs to take it slow and let them find the best solutions. "I see ads for some of these scanners that make it sound that if you buy these scanners you're all set up for imaging. Some of the feedback we've gotten from members is `we know you, we trust you, you find the vendors,' " said Paul Hixon, VP of Marketing for Corporate One. Hixon said Corporate One is close to choosing a product set. Hixon said Corporate One is amazed at the interest in Check 21 by CUs. It recently held 11 Check 21 seminars in Indiana and Ohio where some 700 credit union representatives participated. Are Corporates Ready? Though some corporates are making a bigger PR push out of being ready than others, all the corporates included in this story say they are ready for full-blown image exchange, the problem is the banking sector isn't. " I don't think the banking industry is ready today, but the nation's largest banks are gearing up to do it and it should ramp up fairly quickly after his year. But right off the bat on Oct. 28 I don't think you'll see a lot of volume of images," said Kenealy. Virkler said the hitch with image exchange from the processor side is it will only save them money if there's considerable volume, that's why Empire has contracted with SVPCo, a clearinghouse owned by 22 large U.S. banks. Other corporates have made similar deals, and any processor that wants to go to full image exchange will need such exchange agreements. WesCorp conducted an image exchange pilot with Endpoint from March to December with 800,000 images exchanged. It was a successful pilot, but it highlighted some problems with other institutions. One of the things WesCorp discovered are the problems Day 2 processing creates. Returns and exceptions processing requires handling checks the day after they are received by the processor, thus the term Day 2. "Day 2 seems to really be a big problem for some of the major financial institutions. They are not image-enabled in their back office shop for returns and adjustments," said Teresa Ward, Vice President, Item Processing Services for WesCorp. "In terms of efficiency, to really reap all the benefits you have to be fully electronic," she said. Kenealy's SunCorp also has tested the transmission of image files several times between its Salt Lake and Denver offices. It recently began processing for CUs in Nebraska, using electronic check presentment to process those files, which it believes will help them prepare for Check 21, said Kenealy. With ECP, everything but the images is transmitted. "We'll make the jump to images when they're ready to transmit images. If you talk to a lot of operational experts, using ECP is a good way to get ready for Check 21," said Kenealy. Kishbaugh said Mid-Atlantic is ready on its end, but is still interviewing electronic clearing houses like SVPCo and NetDeposit to see who brings the most value. He said there are still so many questions to answer with dealing with the substitute checks and splitting up paper processing and imaging. "I think the cost savings in Check 21 are not realized in year one. We could start to get them in year two as things fall in place. But not until down the road when the larger credit unions and the larger banks are on board will there be real cost savings," said Kishbaugh. "We're not even sure the Fed's role, will they be an electronic clearing house? They haven't made that clear yet." Kishbaugh said he's talked to some of the largest commercial banks in Pennsylvania and most say they are not ready for image exchange. "They have given me indication that it's in their capital budget but it will be two years before they are fully ready. So we might see receiving electronic images in, but not kicking electronic out until the second year," said Kishbaugh. Virkler, who said Empire is as ready as it can be, thinks it will take 10 to 15 years before all paper is out of the process. "People keep saying we're going to save money, but if you're supporting both methods, paper and images, it's costly. Back when Internet banking came out people thought we could get rid of brick and mortar, but what happened, we're still supporting both," she said. Fraud and Float If imaging takes off and lots of exchange agreements are worked out members may see a decrease in float time for checks. This message will have to get our or CUs could see an increase in NSFs and some very unhappy members. It also may change consumers' payment preferences as many like the float that checks present. Some say credit cards will become more popular because of the ability to pay later. Eric Salas, Marketing Manager for risk management firm Primary Payment Systems, Scottsdale, Ariz., said CUs that aren't image enabled may experience longer float times than normal because of the extra step of creating a substitute check. This could lead to more fraud as crooks look for the path of least resistance, PPS believes. "You can be adding days to the process in theory. What we're saying is that checks drawn on non-image or partially imaged institutions may become the target of fraudsters," said Salas. PPS, which is a partner of CUNA Mutual, Corporate One and other CU vendors for fraud prevention tools, said CUs need to have more safeguards in place to guard against check fraud, including faster and more effective ways to check identity and verify accounts. Salas said all the big banks are adding these solutions and in credit union land they're selling like crazy. "It's looking like these systems will be the norm in the future," he said. -

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