Check Image Volume Continues to Grow and Could Save Banks $2 Billion Annually

Implications: Check image volume continues to shatter year-over-year records and check imaging/exchange could save banks $2 billion annually by reducing transportation costs, reducing float time, check fraud and check processing costs. Image exchange networks such as SVPCO, Endpoint Exchange, ECCHO, Fiserv and the Federal Reserve Banks are working to build a check clearing infrastructure that will improve the efficiency of the payments system and encourage laggards to adopt 100% electronic check imaging/exchange. Currently, the costs to process paper checks is 6.6 cents, compared to 5.9 cents for IRDs/Substitute checks (are paper printouts of images authorized under the Check Clearing Act for the 21st Century) and 2.7 cents for image/exchange checks. The Federal Reserve Bank has built in incentives in its new fee structure and effective 1.2.08, banks that process electronic images will see a reduction in processing costs, while the Fed plans to raise its paper check processing fees and IRD fees.

Analysis: Since the passage of the Check Clearing Act for the 21st Century (aka Check 21), banks, image/exchange networks and the Federal Reserve Banks have been working to build the infrastructure to move banks to 100% electronic check imaging/exchange and move banks away from paper check processing. However, some banks have been slow to make the investments in image/exchange and adopt 100% electronic check imaging/exchange and still use IRDs/substitute checks (Image Replacement Documents) which is costlier and erodes the cost benefits of electronic check imaging/exchange.

1.  IRDs/substitute checks is more costly than electronic check processing but was authorized by the Check 21 Act as a workaround for banks who had not built the infrastructure to process checks electronically but who still wanted to reap the benefits of check imaging/exchange, including reduced transportation costs, reduced float time and a reduction in paper check processing costs, however, some banks still haven't moved to 100% electronic check imaging/exchange and as a result they will pay more effective 1.2.08, to process paper checks and IRDs/substitute checks, when the Federal Reserve Bank raises it fees

2.  Electronic check processing will potentially grow significantly over the next few years and the Federal Reserve Bank has built in incentives into its new pricing fees and for banks who process checks electronically their fees will be reduced, while banks who continue to process paper checks will be penalized with higher fees for processing paper checks and IRDs/substitute checks

Takeaway: The Federal Reserve Bank will play a vital role in bringing banks on board to adopt 100% electronic check imaging/exchange and further indication of the Fed's shift to electronic imaging/exchange is the reduction in the number of check processing sites around the country, which has dropped from 45 sites to 19 and by 2011, the Fed will reduce that count to four check processing sites. As check imaging/exchange volume continues to grow paper check volume will erode by 6% annually over the next five years.