Check 21: The New Technological Drive Towards Paperless Banking

Over the last decade, banks have spent a great deal of resources on technology improvements. With decreasing interest rate spreads, banks are being forced to look for new ways to increase profits. Recently, new legislation was passed that will allow banks to become more efficient in check truncation through technology. The new legislation is commonly referred to as Check 21. If used properly. Check 21 will increase employee efficiency and reduce other operational costs such as courier services. This paper examines the short history of Check 21 and discusses how technology affects banks profitability. Key areas where banks can become more efficient with the help of the new technology will also be determined. The paper will give ROl, NPV, and IRR estimates for what the new technology investments will provide. There is also a checklist for managers that will help determine the best technology for their banks. INTRODUCTION Check 21 is a new law recently passed by the United States Congress (House of Representatives, 2003). This law gives a printed check image the same legal standing as an original paper check. This will allow banks to simply swap images of checks electronically. The law was passed due to the effect September 11, 2001 had on the banking industry. In the aftermath of 9/11, planes were grounded all over the nation; therefore, checks could not be sent to their bank of origin. This effectively cost many individuals and businesses millions of dollars. Holds were put on deposits made because the funds were uncollectible for an extra two to three days (Anderson, 2004; Kelly, 2004; Kendler, 2004; Thomas, 2004). For years prior to passing Check 21 law, the U.S. Congress had been researching possible ways for banks to swap checks electronically. Check 21 has the potential to save banks millions of dollars per year by doing away with sorting and transportation costs, as well as reducing the risks associated with returned checks. The consensus in the banking industry is that most, if not all, U.S. banks will have to acquire the technology to exchange images in the near future. The costs associated with this new technology will definitely be a barrier for many of the smaller banks and may open the door for many new mergers to take place in the banking industry. Articles have suggested that the DTA (Distributed Traffic Agent) developed by VECTORsgi may be the best technology solution for many banks (Anderson, 2004; Bielski, 2005, Hollingsworth, 2004, Kendler, 2004). This new law took effect in October of 2004. However, after one and half-year, there is still much to learn about the technology options available. Furthermore, there will definitely be security issues that must be resolved before the image transferring begins. Due to the changing times in the banking industry, this topic warrants immediate investigation. Not long ago, "image processing" to many banks simply referred to check safe keeping, microfilm replacement, or one or more point solutions delivering incremental benefit to a portion of the overall process. Increasingly, financial institutions are embracing benefits of re-engineering their check operations in response to the radically changing payments landscape. At the present, there appears to be diverse response to the current challenge. All fmancial instimtions acknowledge the need to address the impact of Check 21 on their current operating models and the impact shrinking margins are having on their core services (Boardman, 2006; Pezdirtz, 2003). The majority of banks recognize the benefit of identifying and deploying end-to-end image solutions and capturing the full savings potential of image exchange (Bielski, 2005; Bills, 2004;Denver, 2006; LaRue, 2003). Many banks are beginning to create detailed business cases and ROT estimates to support these initiatives. A growing number are Communications of the IIMA 99 2006 Volume 6 Issue 3 Check 21; The New Technological Drive Toward Paperless Banking Hsieh preparing to deploy image-based re-engineering of their current operating models and are beginning to pilot various image exchange solutions (Bearingpoint.com, 2004). The rest of the paper is organized as follows. Although, most studies regarding Check 21 were done by the practitioners, a rather thorough review of the related articles will be presented first. A simple retum on investment (ROl) model is then used to illustrate how the technologies induced by Check 21 might help banking industry. Some management implications will then be presented. A short summary of major findings and a brief of directions for future studies then conclude this report.