Check 21 Approaches, Part II

This article first appeared in the AFP Exchange magazine, Sept/Oct 2004 issue.

Impact On Corporate Treasury
Most significantly, however, Check 21 dramatically changes the way corporate treasurers and accountants do business as check float is nearly eliminated from the equation.

Historically, corporate treasurers have sought to maximize the time their payable checks spend in float while minimizing the float time of their receivables, a game of sorts that is built into their accounting system. With billions of dollars floating around, the interest amounts to real money.

"There’s always a half-full and a half-empty [perspective]," said Steve Hill, managing principal for Carreker Corporation. "Every corporate who writes a check can expect that their check will clear faster—if someone’s getting it faster, someone’s paying it faster."

With the implementation of Check 21, corporate cash managers are changing their behavior by looking differently at the way they manage cash on a daily basis, he added. Though the "float game" has changed, Hill told AFP Exchange that Check 21 would benefit corporate treasurers in three ways.

As imaging technology is adopted, commercial banks will begin to convert large corporate receivable checks into IRDs to be sent directly to the payer’s bank or printed locally as a substitute check, speeding the clearing process tremendously.

In turn, said Hill, the greater speed and volume of electronic information about corporate payments will bring a reduction in check fraud. A corporate treasurer using positive pay would be able to examine payment items much faster and have more information about that payment. In the event that a check fails to clear, the corporation would be notified and might be able to suspend the delivery of goods and services.

The third primary benefit of Check 21, said Hill, involves the increasing use of imaging technology by banks and businesses large and small. As technology equipment costs continue to fall, large corporate behemoths to small "Mom and Pop" businesses would take advantage of remote deposit, allowing them to deposit checks directly into their bank accounts from ATMs or on-site equipment connected to the bank via the Internet.

An insurance company that accepts walk-in payments by check, for example, might use imaging equipment to scan the check for remote deposit directly from their office, eliminating the need to visit the bank after hours and wait for the check to clear. Essentially, the check is cleared with greater speed and companies can reduce their exposure to check fraud.

"This has got to be viewed as a really positive change for the industry, especially for corporate treasury folks," said Hill.

Aside from gains in increased efficiencies, the adoption of check imaging and the substitute check will allow corporations to retain the three vital protections of that most venerable of financial instruments—controlled disbursements, automated reconciliation and positive pay.

New Competition For Banks
The rollout of new technology enabling Check 21 implementation represents the convergence of imaging and networking technologies that have been around for several years, but which are now viable because of changes in the law and the introduction of new products by technology vendors.

During the past several years or so, banks large and small have spent hundreds of millions of dollars to prepare for the starting gun of what is said to be a marathon in the evolving world of corporate payments. The banks that are getting ahead in this new technology and business-relationship race are those that not only have Check 21 down cold, said Hill, but have been planning their business for the three to five years following Oct. 28.

Though some corporate banking analysts say that check imaging will allow banks to cement relationships with customers, others say that competition among banks will become fierce as traditional limitations—such as geography—are eliminated from the equation.

"If you can digitize a paper item that needs to go from New York to California, you’ve taken down the boundaries of time and distance," said Hill.

Today, for example, a large corporation with operations in multiple states would maintain a number of depository relationships with local or regional banks operating in their states. "But that whole relationship has an opportunity to change where one bank could provide the services for not only all of those states," said Hill, "but all of those branches in those states"—threatening local depository relationships, to say the least.

In the coming years, banks would begin to introduce remote deposit that would allow corporations to consolidate banking relationships not only within the U.S. but around the world. As remote deposit is rolled out in Europe and Asia, American corporations with overseas branches might use just one foreign bank to clear checks, sending the money home electronically rather than shipping the paper checks.

With fewer and stronger banking relationships, banks that are winning the competition might gain more business from customers who had previously used local banks simply because they were convenient, while corporate customers might benefit from reduced costs passed on by banks.

This opening of the traditional geographical territories held by banks will create competition among banks that had not previously been competitors, said John Crofoot, CTP, a principal of Global Concepts, Inc., a payments consultant in Atlanta.

Check imaging "will open each institution, which has the technological ability, to a lot more customers, and it will create a lot of competition among banks," said Crofoot. Though many might believe that larger banks that have traditionally been on the cutting-edge of technology and strategic thinking would have an advantage, he added, the technology might actually level the playing field.

Surprising to some, banks with less than $30 billion or even $20 billion in assets have developed aggressive plans to use the new Check 21 law and available technology to capture depository relationships from corporate customers distributed broadly throughout the country, said Crofoot.

Through its subsidiary, Net Deposit, Zion’s Bank of Salt Lake City is preparing to compete with small, mid-size and large banks by using remote deposit. Today, Zion’s has $28.6 billion in assets and operates in eight Western states, primarily Utah and Idaho. Likewise, Memphis-based First Tennessee has $17 billion in assets and plans to aggressively pursue depository relationships across the country.

Aside from banks, non-financial entities such as technology providers might see an opening to capture some of the value-added technology and financial management business that banks are hoping to gain based upon their depository relationships. These technology vendors, said Crofoot, plan to pursue this market by approaching merchants of all sizes to offer check imaging and check verification services at the point-of-sale, "which can eat into the depository and check processing revenues of financial institutions and leave those institutions with the highly commoditized service of basically clearing and settling payments."

Thus, banks would handle the depository end of the relationship while third-party vendors would compete for the value-added business of capturing payments and processing payment information for the company’s receivables accounting software. "It’s going to be an area of competition and those banks that are out there first with the best solution and the best price are going to have an advantage in not only retaining current customers but in stealing customers," said Crofoot.

Yet, while third-party technology vendors might encroach upon bank territory from the technology part, said Hill, banking institutions would have a natural advantage in seizing the value-added business of check imaging and information delivery. "The trust of the depository relationship is a very strong one," he added.

While technology is a great leveler of the playing field and would ultimately benefit competitors to the banking industry, said Carreker, it is only one aspect of the financial services business. "More than ever," he said, "banks will have to keep innovating to earn their customers’ loyalty, but Check 21 and its aftermath make that possible."

Read Part I

Read Part III