Paper-check burden soon to lighten up

Speed: A new law will allow banks to electronically process paper checks, replacing a costly, cumbersome 19th-century process.

January 04, 2004|By Paul Adams | Paul Adams,SUN STAFF

Call it a disappearing act.

The tons of canceled checks that accumulate in America's basements and attics are headed the way of the savings passbook - and so is the two- to three-day float that many consumers depend on when they write a check.

What's officially known as the Check Clearing for the 21st Century Act, or "Check 21," which kicks in later this year, will allow banks to substitute an electronic image for an actual paper check when settling transactions with banks nationwide.

Instead of physically transporting checks by truck and plane, banks will be able to essentially beam an image to its final destination in a fraction of the time it takes to get there by air or ground transportation - and transfer funds almost immediately.

The change promises to save the banking industry billions of dollars in transportation and labor costs, while helping to curb check fraud.

"It's a real watershed event," said Alenka Grealish, a senior analyst with Celent Communications, a Boston financial services technology research firm.

"To have this paper schlepped across great distances is just very 19th century, and it's one of the great sore points in terms of banks trying to move toward real-time processing, so this marks a real big opportunity for banks to get rid of a burden."

An estimated 42 billion checks a year are hauled around the country in an endless parade of trucks and planes at a cost to the financial industry of about $7 billion.

At the Baltimore branch of the Federal Reserve Bank of Richmond, armed couriers deliver 1.6 million to 2 million checks every day. Clerks feed the checks into high-speed sorting machines that process and separate them into batches before they are reloaded onto trucks and transported by land and air to banks all over the country.

A check written in Baltimore and destined for a bank in, say, Los Angeles, might pass through 10 to 20 processing facilities and transportation modes before ending up back in the check writer's bank statement.

Soon, the Fed will close its Richmond check processing facility and move that work to Baltimore, raising the number of checks handled daily to more than 3 million during peak times.

Using technology to take the paper out of banking is something the industry has been working on for years, with a growing number of transactions taking place over the Internet.

The Pew Internet and American Life Project, which tracks Internet usage, said 34 million Americans did banking over the Internet in 2002, an increase of 127 percent over the previous year.

The move toward greater use of check imaging technology has been gaining as banks discover the cost savings and the potential to offer new services.

In anticipation of Check 21, a growing number of banks have invested in imaging technology and equipment designed to take advantage of the new law, industry officials and banking consultants say.

It got a big push after Sept. 11, 2001, when all commercial planes were temporarily grounded. The tragedy left about $48 billion in financial transactions stuck at U.S. airports. That's when federal officials began discussing Check 21 in earnest.

"There could be half as much paper moving through Baltimore five years from now, but you might have more people sitting at [computer] screens repairing and processing images," said William J. Tignanelli, senior vice president for the Baltimore Federal Reserve branch.

Some experts estimate the use of paper checks will decline at an annual rate of 2 percent to 5 percent over the next four years. The Federal Reserve, which processes 56 percent of all inter-bank checks, estimates it will have processed 4.8 percent fewer checks last year than in 2002, and 9 percent fewer in 2004.

Even so, check processing remains the second-largest expense for banks, next to maintaining branches.

In a research report, Grealish, the Celent Communications analyst, said the industry employs more than 50,000 people to process checks. Among other things, the processing clerks punch in codes that make it possible for the sorting machines to read the amount on each check and send them on their way.

"It's an extremely labor intensive process and very prone to error," said Steve Ryan, senior vice president of BISYS Group Inc., a New York provider of technology and outsourcing services to the financial industry.

The migration to check imaging could cost jobs as banks eliminate the manual labor associated with traditional processing methods.

But banks say the impact will be minimal, since many of those low-skill workers will be shifted to other tasks.

For example, at a Bank One Corp. facility in downtown Baltimore, employees process payments for various businesses that contract with the bank, such as a local phone company. Workers open payments sent in by customers and remove the checks, which are then electronically scanned, said Calmetta Coleman, a spokeswoman for the bank. The images are sent on, but the paper checks never leave the facility, which employs about 250 people.

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