The way your business handles checks could change dramtically over the next few years.
Check 21 (The Check Clearing for the 21st Century Act) is a new federal law which will go into effect October 28, 2004. The law mandates acceptance of a new negotiable instrument known in the banking industry as, the Image Replacement Document (IRD). An IRD is simply a substitute check. This allows a bank that exchanges images a legal means to produce a valid physical image of the check as a replacement for the actual check if an institution or an account holder requests a physical check.
This legislation enables banks and other financial institutions to streamline their check processing operations. Most checks processed today are electronically imaged. These images can be moved between banks without the need for physical movement of paper checks, which reduces the cost of transportation and other labor inherent in check processing. It also insures check movement in the event of an emergency or disaster that halts the transportation system, as the events of 9/11 did.
It is important to note that there is no legal mandate for the exchange of images, nor does it require a bank to accept images. Banks that do not have check imaging capabilities can still require a physical document.
But for institutions with check imaging, this will allow it to leverage their imaging systems by participating more in electronic exchanges
Electronic Cashletter Exchange (ECE) lets banks present digitized check images for clearing to each other or through participation in image exchanges. ECE has standards known as X9.37. If images are presented to a Federal Reserve Bank, it must be formatted to those standards. This in effect has made X9.37 the de facto industry standard. Although banks and image exchanges can agree on different formats, X9.37 is likely to be the most widely used format.
For business owners, Check 21 could open the door to opportunities to save on costs associated with research fees that banks charge for check copies, allow control of their check images, and allow for better availability of funds, or even reduce check item charges.
Because this legislation facilitates the movement of digitized check images, it not only will reduce costs for a bank, it will give businesses the opportunity to capture their own check images and take advantage of these standards to transmit their check images to their bank for proof of deposit. There are advantages for both the bank and the business to make deposits in this format.
The biggest advantage is the reduction in travel to the bank to deposit checks. Naturally cash will always have to be deposited physically to the bank, but the physical items could then be mailed or couriered to the bank later for truncation and retention purposes. But for businesses that take in a large volume of checks or have security or staff related concerns, uploading check images directly to the bank may have an enticing appeal.
A business with the capability of imaging and uploading checks will be able to perform their own research, thus avoiding check research fees. It could improve productivity and accounting accuracy. Instead of adding machine tapes or multiple deposit slips listing check after check, the images could be quickly scanned and after some simple data entry and reconcilement, the images would be uploaded to the bank.
Depending on the software and hardware investment this could result in significant long term savings for some companies.
Another possible savings are the per item fees that some banks charge to process business checks. Most banks allow companies to deposit a certain number of checks each month, but after that, charges accumulate for each item over the limit. Electronic exchanges will lift the boundaries of how businesses can clear their checks. For example, it would be possible for a business to reduce per item fees by depositing the checks with a clearing exchange or even another bank. The clearing exchange or bank could then electronically deposit the funds into the company's primary business account.
While banks are addressing Check 21 internally, they may not have considered the potential that digital check imaging could have for their business account holders. Each bank will have to weigh factors such as; proof of deposit requirements, electronic security, fraud, regulatory requirements, and other issues, in order to accept deposits in this manner.
In reality, most banks have the technical infrastructure in place to accept images from business customers. It is just a matter of creating policy and standards to enable businesses to realize cost savings from digital check imaging. But once banks are ready, it will change the way businesses handle checks.
Ken Murphy is a technical consultant for banks and businesses that utilize check imaging technology. He has 16 years of experience in check processing and has been involved in check imaging since 1996.
Written by: Ken Murphy
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