COLUMBIA, S.C. and PHOENIX — Two check processors on opposite sides of the country may be employing different strategies, but both agree the cost savings of switching from paper to digital has about caught up with the cost of conversion technology.

For the South Carolina Credit Union League's Palmetto Cooperative Services, convincing member credit unions to scan checks at branches is the order of the day. Palmetto is anxiously awaiting the day the volume of imaged checks will surpass the volume of paper checks, which should happen by the end of April.

In March, the group received approximately 700,000 checks that had been scanned at 130 member branch locations. That marked a drastic increase of more than 200,000 items over February's numbers.

According to Ed Culpepper, executive vice president and chief operating officer for the league, the ramp up began last October, when the CUSO processed 116,000 scanned checks.

“We had a lot of credit unions that were testing and in various stages of implementation, but over the past few months it's really taken off,” Culpepper said. According to Vice President for Item Processing Stacey Gibson, the processor will also start accepting checks received for credit unions as images by third quarter, and anticipates about 65% of all check items being processed through Palmetto will be images by year-end. Palmetto is currently processing images received from the Federal Reserve and Metavante's Endpoint Exchange.

“Of course, you can't force everyone to present checks to you as an image, some can elect to still drop paper at your door. We still have same-day settlement banks that present paper to our door, like Bank of America and Wachovia. These guys will be presenting a lot more images than they do today, and we think they'll ramp up quite a bit in 2007. But, they're still trying to figure out economies of scale and doing it the proper way,” Gibson said.

Gibson said bank mergers, and resulting platform incompatibilities between merging institutions, have slowed the bank industry's adoption of the technology. However, he believes that the Federal Reserve will soon raise the price of processing paper checks to the point where big banks will decide images are more cost-effective. Culpepper predicted that by the end of 2008, the transport of paper checks will be a thing of the past for financial institutions.

“Sure, people will still be writing paper checks, but as far as once it's reached the clearinghouse, checks will be moved by image instead of paper,” he said.

Palmetto is currently in talks with Wachovia to offer direct exchange of imaged checks, Gibson said. The CUSO has an existing relationship with the prominent East Coast bank, participating in direct paper exchange for more than a decade.

Gibson said he is looking forward to two new processing methods: merchant image capturing, and ATM deposit imaging.

“The merchant capture product already exists; however, credit unions traditionally haven't had a large book of business customers, so the demand isn't that great in the credit union world, but that is starting to change. This product will allow credit unions to become more competitive in that environment,” Gibson said.

The processing pro said ATM deposit imaging will cut down on collection time for paper, and also decrease ATM servicing costs.

Sending checks to Columbia via the digital highway rather than Interstate 20 is now a viable option for credit unions outside South Carolina, and Culpepper said Palmetto now has customers from five other states, with room to grow.

“We're definitely picking up more business,” he said.

Unlike Palmetto, FirstCorp's CU eArchive Solutions (CUeas) isn't anticipating the day the CUSO processes more imaged checks than paper ones. In fact, FirstCorp President/CEO Pete Pritts said he'd have to look up the current ratio.

“We think this is all just a bridge to something better. I'm more excited about the March 16 law that allows checks to be converted to an ACH transaction. Imaging is just a bridge to ACH technology, which is where I think we'll end up,” Pritts said.

Pritts is referring to last month's NACHA launch date for Back Office Conversion (BOC), which allows retailers, billers and financial institutions to convert eligible checks into ACH debits in the back office. For credit unions, eligible checks include those presented to the credit union for payment, often for a loan.

The corporate does receive checks scanned at branches, a service it launched earlier this year. Pritts said the reaction is mixed–some members are lining up to install the technology, while others are still opting to hold out.

“Imminently, our goal is to do away with paper, but credit unions have long project lists, and they get busy, so we'll see how it goes,” he said. CUeas purposely waited to offer the service after an economic feasibility study indicated it wasn't viable until a threshold of other institutions caught up with the technology.

“The entity advancing the technology pays for checks to be delivered on the other end, and if institutions can't receive the file, not only do you have the charge to process the item, there's another charge for replacement check printing. It didn't make sense. As more financial institutions in the world invest in technology to receive the files, then the process will be what the law envisioned it to be. The industry has to first make the capital investment,” Pritts said.

That extra step of printing replacement checks for catch-up institutions is precisely why Pritts is a champion of ACH conversions instead. Pritts said he believes the cost savings associated with check-to-ACH processing is finally catching up with the cost of purchasing conversion equipment, and predicts NACHA will also allow personal checks to be converted to ACH within the next few years.

And in keeping with the ACH strategy, CUeas will skip offering check scanning services for member business accounts, instead offering check-to-ACH services for merchants.

“Retailers love it, because they can just swipe the check and get paid the next day. The transaction settles in the credit union account and runs through the ACH processing system,” Pritts said.

Plus, ACH processing will allow businesses to save on expensive check processing fees common in bank business accounts.

“These folks get pillaged compared to consumers,” he said.

The corporate is already processing ACH conversions for one retailer who is a member of AEA Federal Credit Union in Yuma, Arizona, but as far as additional check-to-ACH retailers, Pritts said, “there's lots of excitement, but not a lot of sales…yet.” –ivanaknapp@gmail.com

Instant Insights /

Check Processors Agree: the Era of Cost-Effective Conversions Has Just About Arrived

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