WEST PALM BEACH, Fla. – While the rest of the financial world has been busy getting itself image-enabled since October 2004 when Congress passed Check 21 legislation, credit unions have been leveraging their head start with truncation to implement the technology with their credit union clients. In fact, league service corporations like Synergent, the Illinois Service Corp., Palmetto Cooperative Services, and The Members Group, didn't waste any time getting things in place in anticipation of Check 21 even before the legislation was passed. As early as fall 2003, Synergent, a subsidiary of the Maine Credit Union League formed a Check 21 group, “So by the time the legislation was passed, we were prepared to begin our image exchange product although the other pieces weren't in place yet,” says Hunter King, senior vice president of Synergent. “At the time we began using our remote capture product, the Fed and other institutions weren't ready to do full image exchange. We allowed credit unions to capture checks electronically and send us the files, and then we printed those as substitute checks and sent them to the Fed and other end points,” he continued to explain, adding that, “Credit unions are well positioned to take advantage of electronic checks because they've been truncating from day one.” Synergent currently receives about 400,000 items a month electronically from credit unions, and King said it also still receives about 300,000 paper items a month. However, he emphasized, “the paper side is going down fast as the electronic side grows.” Imaging Overtaking Paper for Some There are currently more than 100 credit union branches either transmitting to Synergent live or are at various stages of testing in the five New England states – Maine, Connecticut, New Hampshire, Massachusetts and Vermont – where Synergent has clients. Synergent also processes items for credit unions in Rhode Island, but it doesn't do image exchange with them. While the intent of the Check 21 legislation was to facilitate the movement of checks electronically when the original items weren't available, King said the League Service Corps wanted to be able to rely on electronic transmission. By partnering with VSoft Corp., Duluth, Ga. for check processing on the clearing side and as of March 2005 with the software provider's branch item capture solution, King said that has allowed Synergent to do full electronic check collection and get a jump on bringing credit unions over to its image exchange platform sooner. “The decline of paper volume will happen quicker that we originally anticipated,” he said, “VSoft's software allows us to handle all aspects of image exchange.” King says Synergent is also in the process of developing partnerships with some local banks that would allow them to swap items electronically instead of going through the automated clearing house or the Fed. The subsidiary of the Maine Credit Union League is clearing about four million items a month and expects to complete the testing on the clearing side with the Fed in the next three to four months. So far Synergent has not joined any network, but King says it plans to. The Members Group also got a jump on imaging before Check 21 was signed into law. In November 1999, when it purchased its imaging system, Judy Philben, director of item processing for The Members Group, said the company's goal was simply to replace its microfilm-based system. A year earlier it had purchased check processing software from Advanced Financial Software, Oklahoma City. Philben said at the time, AFS was already implementing imaging. Although The Members Group had microfilm-based sorters, “when we made the financial investment for imaging, we replaced all our hardware and installed the necessary imaging software,” she said. Since then The Members Group has joined Endpoint Exchange because, said Philben, “They were owned by AFS and we felt it was appropriate for compatibility since we were already using AFS' software. We were confident in their ability and the functionality of their system.” CU Holdouts Philben acknowledges that when The Members Group went live with image exchange in January 2005, initially with a handful of small and mid-sized CUs, she expected within a year that some of its larger credit union clients would join the network and start exchanging images, “but that hasn't happened,” she says. The company, which is equally owned by Iowa Corporate CU and the Iowa League, has about 250 clients in 16 states plus Canada that use one or more of its products including cards (credit, debit, ATM and prepaid processing), item processing, ACH, ALM, mortgage and reporting. Of those, it handles the item processing for 105 CU clients, and 85 of those are live on image exchange. Tom Kuehl, CEO of The Members Group says the company is working with the remaining 20 CUs on removing nontruncated accounts and converting those members to truncation. He acknowledged though that some members are resistant to the idea of not getting their paper checks back. They're set in their ways, he said, “and we're trying to figure out what is the best route for those credit unions.” The Members Group is currently handling about 5,000 nontruncated accounts a month. “We've told them there will come a time when the check originals won't be available and they'll have to make a decision. At this time I don't want to force these credit unions. They're concerned if they tell their members they won't be able to give them their originals back that the members will take their share draft business somewhere else. They don't want to inconvenience the member, so it's a matter of convincing their membership that they don't need their original check,” said Philben. Initially, in fact, it took awhile for The Members Group to sell the advantages of imaging to its credit unions. Philben said it promoted the service to credit unions as an improved service to them – better quality image, the convenience of online access. The credit unions were “very impressed,” she explained. They use image retrieval not just in response to a member's request, but for exceptions and NSFs also. “In the microfilm days, the credit unions wouldn't have taken the time to research the item, they would just have returned it,” she said. On the branch capture side, Philben acknowledges, The Members Group has been slower to move on that “because the market hasn't moved in a specific direction yet. There's still a lot of uncertainty, we're waiting for them to settle in.” She added that, “We've determined this will be the year that Iowa Corporate Credit Union will make a decision on branch capture and will set a direction on how that service will be offered. Branch capture will remove geographic boundaries and will be a big advantage to Iowa credit unions.” Philben estimates Iowa Corporate CU will announce its decision by the second quarter 2006. Branch Capture Lags George Fiegle, executive vice president and chief operating officer of ICUL Service Corp. said Illinois CUs haven't done too much with branch capture either as yet. The Illinois Credit Union League subsidiary processes about seven million items a month for 220 credit unions using AFS software – it also networks with Endpoint – but he foresees a time when credit unions will do more branch capture on their end for over-the-counter checks. According to Fiegle, ICUL Service Corp. will work with Mid-States Corporate CU on this “when the time comes.” Mid-States went live with Endpoint in 2004. For Palmetto Cooperative Services Inc., that time may come sooner than later. The company, a wholly-owned subsidiary of the South Carolina Credit Union League, plans to meet on March 7 with First Carolina Corporate CU, the corporate for CUs in North Carolina and South Carolina, and VACORP, Virginia CUs' corporate, as well as with its software vendor VSoft and Canon, to iron out an implementation process for branch capture. Mark Curran, CCUE, senior vice president/business development for Palmetto Cooperative Services explained that, “Those are the three states we do item processing for credit unions in, so those corporates have a large stake in what we do.” He added that Palmetto Cooperative is also working with the two corporates to put a package together for their credit unions that could include items like purchasing scanners – the company is suggesting CUs buy the Canon 180 from CUNA to get a price break – or a certain number of software licenses for credit unions to offset the cost of implementing branch capture. Noting there are two CUs in branch capture beta test now, Curran said Palmetto Cooperative plans to begin rolling out implementation of branch capture by mid-March. Each month, Palmetto Cooperative handles 3.2 million inclearing items from 66 South Carolina credit unions, 1.5 million from 56 North Carolina CUs, and 2.7 million from 35 Virginia CUs. It also handles one million monthly deposit items from 25 CUs in South Carolina, and received 2.7 million image receipts from the Fed each month for 35 Virginia credit unions. Palmetto Cooperative Services has been fully image enabled since 2001. In addition to CU employees being able to create images of members' checks when needed, members can also access images of their own checks by using a link on their CU's Web site that connects them to an image database. While CUs' transition to imaging went smoothly and Curran says, “Credit unions are way ahead of the imaging and truncation game,” he says Palmetto Cooperative Services has seen the same lag with area banks that the other league service corps have experienced. But that's understandable, he said, because the large banks like Bank of America and Wachovia have very complicated processing systems, “so it takes them longer to integrate all of their systems. Besides, whereas credit unions are accustomed to truncation, the big banks still have to convince their customers they don't need their paper checks back.” Stacey Gibson, vice president of payment system for Palmetto Cooperative Services, said once banks catch up with imaging, all financial institutions will benefit. “Once it starts everyone will see advantages. We knew 2005 would be a research and development year for everyone to look at their options and do some testing. We're through that now. All the processors have their strategies in place, and it's just a matter of time before everyone comes to the table at the same time.” The company has been involved with a couple of regional banks for direct exchange relationships, and Gibson said it hopes to have that functioning by the end of the second quarter 2006. Like The Members Group and ICUL Service Corp., Palmetto Cooperative Services is a member of the Endpoint Exchange because of its direct relationship with AFS which Gibson said, “put in the first truncated system in Singapore, so we knew they had an understanding of what bumps we were going to hit. Endpoint is also the network most credit union processors are on, so they have the experience which is important as more members exchange image items.” Kuehl concurs with Synergent's King that “the league service corps are moving in the direction of image presentment faster than banks because credit unions have been involved with imaging and truncation longer than the other.” In addition, he says, “If you're a national bank you have a huge investment in check processing and you have to replace what you have with new systems. That's a huge investment, and that's what's slowing the transition. Also, a lot of larger financials have branches in several states, so that becomes a cost factor,” he says, adding that it could take larger institutions like banks two to three years to get all their branches live on image exchange. Ironically, just as more financials become image-enabled, other payment forms such as debit cards are becoming increasingly popular. Kuehl says The Members Group has already seen a decrease in the number of items it's processing. “We invested in imaging at a perfect time when there was still a lot of volume,” he says. “As a processor, our concern is the decline in volume and the heavy fixed costs associated with the imaging hardware and software,” he continues. “We project what the level of volume has to be to pay for that. If that decreases by 20% it forces you to look at how long you want to continue to make that fixed investment.” -

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