Data Financial Check Imaging Newsletter

July, 2002

Electronic payment future bright in North America 6/13 BS&T

The global banking industry will spend $12.8 billion this year on payments technology, & is expected to devote $14.3 billion to the technology by 2005, according to TowerGroup. The bulk of this year’s spending ($9.2 billion) will be devoted to electronic payment processing, far exceeding the amount ($1.6 billion) spent processing paper. “In the industrialized nations, electronic transactions have long overtaken paper payments,” said David Medeiros, TowerGroup. Still, in North America, banks will spend $1.1 billion this year (71% of the world total) to process paper payments, reflecting the anomalous US attachment to the paper check. 

Soon, however, North American banks may be embracing electronic payment systems as tightly as their European counterparts. The share of electronic payments in the US economy will increase with the implementation of new operating rules from NACHA & from the Check Truncation Act, which would take effect on 7/03 or 1 year after enactment, whichever comes later. These changes in the regulatory environment promise to transform the paper check from a formal legal document into a mere written payment instruction. NACHA’s rules for Accounts Receivable Conversion will allow billers such as telephone, electric & gas utilities to truncate checks at the lockbox. Lockbox operators, instead of airlifting checks back to their bank of origin, will soon be able to scan a check, transmit the image & then destroy the original, resulting in significant cost savings. “This has the potential to cut significantly into the check-based payment volume in the US.” 15 to 20 billion checks are sent to US lockbox processors, according to TowerGroup. But the shift to electronic payments won’t necessarily result in lower expenses for North American banks. While industry spending on paper processing is projected to remain flat over the next 3 years, spending on this electronic payments processing will hit $2.3 billion this year, & will grow 6% annually.

CHECK CONVERSION SOFTWARE IS NOW AVAILABLE FROM DATA FINANCIAL.

Truncation bill gains interest but not steam 6/26 AB

Lawmakers are interested in the Federal Reserve Board’s proposed Check Truncation Act, but not enough to pass legislation this year, according to one House Financial Services Committee member. Rep. Frank Lucas, R-OK, said that there was favorable reaction to the bill, which would permit the transmission of checks electronically. But it is “not a barn-burning issue. I suspect you will not see legislation move this year, though there will be a hearing on it possibly,” Rep. Lucas told NCR’s 2002 ATM Channel Planning Seminar. Legislation on bankruptcy reform, terrorism insurance, & issues related to the Enron scandal will probably take precedence over the truncation bill, he said. The measure has yet to be introduced in Congress, but Fed Chairman Alan Greenspan has been promoting it. The banking & automated teller machine industries have been particularly interested in the bill because it would save them substantial costs by eliminating the need to transport & process paper checks. “People think of payments as so high-tech these days, but the check roll is so labor-intensive,” said Louise Roseman, the director of the Fed’s operations & payment systems division. The bill would not mandate that banks accept electronic transmissions of checks. But a bank would not be able to demand the original paper check be sent to it for processing if, for example, one of its consumers asked for a check back. Instead, a “substitute” paper check, which could be printed from the captured electronic image of the check, would be sent to the bank. The bill would give these substitute checks the same legal force & standing as the originals. “A bank can demand paper, but it can’t demand the original check.” Roseman said that even in the present environment, few original checks are retained for very long. “This is something that’s becoming very prevalent today, independent of this legislation.” But consumer groups worry about the possibility of multiple images of checks floating around the payment system, & the potential for accounts to be debited more than once. Consumer groups also worry that consumers could be liable for check images that are poorly captured & therefore illegible. Roseman said that according to the bill, if an image is not legible, the bank that initially captured the check image would bear liability for the check. A coalition of banks, along with ABA, has also sent its own version of the bill to lawmakers. A concern banks have with the Fed’s bill is the issue of recrediting consumers. If a consumer makes a claim for recrediting, & the bank cannot prove the check was properly charged to the consumer’s account, then the bank must recredit amounts of $2,500 or less within one business day, according to the bill. “Banks are concerned that a day isn’t long enough to investigate the validity of the claim & banks say they would be “subjected to losses from bogus claims.”

Cash Technologies & Netkey check cashing applications 6/20 Businesswire

Cash Technologies subsidiary CT Holdings, a provider of self-service financial applications, & Netkey, a leading provider of self-service & kiosk software, have completed a marketing agreement to provide financial transaction systems to banks nationwide. Cash Tech’s Bonus product will be the first to be marketed under the agreement. Bonus allows automated check cashing at bank branches using advanced ATMs, solving a problem that ties up tellers & costs banks billions in fraud & manual handling each year. Bonus has the potential to reduce a bank’s cost to cash a check & can minimize lines at the teller window caused by check cashing transactions that are estimated to comprise a third or more of all retail branch transactions. “With the top 10 US banks estimated to spend more than $2 billion per year in manual check cashing costs, self-service automation can produce dramatic improvements,” said Bruce Korman, Cash Technologies. “Given Netkey’s extensive banking relationships we believe that they will be excellent marketing partners for our Bonus product line.” Powered by Cash Technologies’ patented EMMA transaction processing software, Bonus employs biometric ID & OCR capabilities EMMA’s technology will permit banks to offer additional services, such as money orders & transfers, bill payments, prepaid debit cards & more. Bonus uses software from Netkey to provide system management capabilities. “Consistent with our strategy to provide innovative self-service products, Bonus addresses a problem experienced by retail banks,” said Alex Richardson, Netkey. “Netkey is excited to partner with Cash Technologies to offer retail banking customers the first automated check-cashing solution available to these institutions.”

STP & payments: loud buzz, low volume in the US ABA-BankingJournal 5/02

 A strong contender for buzzword of the year is straight-through-processing, STP. Known as end-to-end electronic processing, this can be thought of as the holy grail of e-payments, according to skeptics anyway. With a projected cost-savings in the zone of 25% to 50%, the potential payoff of STP in B2B transactions has lured industry efforts for close to 3 decades. The earliest systems, under the banner of EDI, were implemented by private communications networks & required painful bilateral negotiations between buyers & sellers. EDI is still alive & in use by the largest corporations, those with upwards of $5 billion in annual revenues. Now we have the internet, a public network capable of one-to-many & many-to-one communications at very low costs. In theory, this should be the vehicle for bringing an EDI-like service to the rest of us. But US businesses are still reluctant to adopt the new technologies involved, recast their accounting systems, & pay the cost of parallel processing as they phase in STP while continuing to handle paper checks. Alenka Grealish, Celent, says the US payments system is still characterized by the striking dominance of paper checks. Celent reports that in 2001, US corporations processed 9.1 billion transactions worth $31.3 trillion. Paper checks were used in 82% of these payments, which accounted for 65% of the total dollar value of B2B payments. The average value of these payments: $2,738. ACH payments, with an average value of $8,689, came to 13% of the total volume & 34% of the total value. Celent forecasts that ACH/wire payments won’t surpass paper checks in value until 2008 & even by 2010 will account for less than ½ the volume of checks. The US is far behind Europe. In 1999, electronic payments in Germany, Netherlands & Switzerland accounted for 95% of the value of each country’s total noncash payments. In the US, it was 49%. Why the US lag? Based on surveys of corporate & treasury executives, Celent reports that a lack of payment & accounting system integration & insufficient information are the 2 greatest barriers to electronic payments. On the subject of integration, Grealish refers to “points of pain” in present systems. Matching the seller’s invoice with the buyer’s purchase order typically entails a volley of messages by phone, fax, e-mail, etc. There are risks of incomplete remittance information when the payment is received at the corporation or the bank’s lockbox. Manual entry of remittance information into the A/R system introduces risk of error. Reconciling remittance information with bank credits calls in another volley of messages with more risks of error. Insufficient information is the other big problem. 20% of all invoices involve exception items. These & other missing remittance details can cause delays, waste the time of accounting staff & inflate processing costs for sellers & buyers. Even electronic information loses much of its value if it arrives separately from the payment. The Celent report highlights 2 new programs designed to serve as linchpins coupling corporate accounting systems to ACH. The 2 systems, from Clareon & Xign, grew out of US Treasury pilot programs & were launched in 2000 & 2001. Both assume that user corporations have internally integrated accounting systems. Both claim that it takes a buyer less than 3 weeks to set up a payment system & only 20 minutes for a supplier to register. Short term, both firms must convince corporations of the quantifiable benefits & ROI of their linchpin services. Future growth could come from integrating functions that are further up the supply chain (such as invoicing) & more payment options (such as conditional payments). These & other innovations at the NY Clearinghouse are moving financial services toward the STP goal, albeit slowly. In the forefront of STP innovation is Identrus, a bank-owned PKI for global-500 corporations. Identrus’ Project Eleanor, in pilot, adds to PKI a B2B payment system built on the experience of leading global banks, including those, like Germany’s, that have migrated away from paper checks. Eleanor’s specifications are based on open, vendor-neutral standards, which banks can use to develop their own proprietary applications.

Union Bank customers can view their cancelled checks & deposit slips online 7/1 Businesswire 

 A cancelled check is frequently the only way consumers can solve payment disputes or accurately reconcile their checking accounts & it is often several days before this crucial information can be ordered from the bank & received in the mail. Union Bank of California launched a feature that allows consumers who use Bank@Home on the Web to see images of their cancelled checks & deposit slips online & bring together their full financial picture to one safe, secure & easy-to-use site. “Union Bank of California has created an added value that will bring a new level of convenience & personalization to retail clients using the site. Access to check images along with the additional online account information & relevant tools, will provide our online banking customers with more ways to better manage their money & simplify their lives.” Customers may view front & back images of cancelled checks & deposit slips online free of charge up to 6 weeks. Cancelled checks & deposit slips can be viewed online by clicking on the dollar amount of each check or deposit slip as it appears on Bank@Home’s account summary page. Bank@Home on the Web check & deposit slip imaging is the most recent addition to Union Bank of California’s list of innovative programs for its online banking clients.

Treasury conversion of corporate checks 6/02 AFP-Pulse

A new US Treasury rule gives the go-ahead for federal agencies to convert business & consumer checks to ACH debits at lockboxes & point-of-purchase locations. In an acknowledgement of AFP concerns about corporate check conversion, Treasury will attempt to target small & mid-size business collection sites only. When Treasury issued its corporate check conversion plan for public comment in 7/01, AFP urged the government to withdraw its proposal. AFP reported to Treasury that 81% of respondents to an AFP member survey opposed the conversion of corporate checks to ACH debits because it would seriously disrupt cash management practices & controls. Unless banks are able to link check & ACH systems on a same-day basis, positive pay, automated reconciliation, stop pay & CDA services would be weakened significantly. Respondents stated that reconciliation would become a “nightmare,” exposure to fraud would increase, investment & borrowing decisions would be delayed, & payers would lose control over the timing & method of payment. Returns would skyrocket because of ACH debit blocks & filters. Treasury recognized that the “conversion of business checks issued by large businesses may interfere with cash management tools until financial institution check processing & ACH systems are integrated.” To minimize the chances of large corporate checks being converted when they are received at government lockboxes, Treasury will focus on lockboxes receiving payments primarily from small & medium-size businesses that are less likely to use sophisticated cash management tools. At any lockbox where all checks are converted, remitters will have the option of paying by ACH or other means if they do not want their checks converted. Check conversions to ACH will not require authorization by the payer. A signed check sent by the payer to a lockbox following receipt of a notice that the government plans to convert the check will signify the payer’s authorization to convert. Agencies will have the option of allowing payers to opt-in or opt-out of the conversion process. Treasury reported that its check conversion pilot at points-of-purchase was successful because it converted checks issued primarily by small businesses with accounts that do not use cash management tools. Most checks presented for payment at government agencies are for mandatory fees, fines & taxes. Large companies are unlikely to present checks for over-the-counter payments. If an ACH debit is created by check conversion is returned by a debit block or positive pay system, Treasury will generate a paper draft on the corporate account using the stored check image. These transactions are governed by UCC & will be settled through the check processing system. As in lockbox conversion, notice will equal authorization. Treasury’s pilot experience showed that obtaining a separate written authorization from the customer & providing the customer with a copy of that authorization took significantly more time at point-of-purchase. Standard disclosure language will be posted at cash registers & will be available as a brochure at cashiers. NACHA rules currently require a written authorization. “We are pleased that the government has acknowledged the validity of AFP’s objections to corporate check conversion to ACH,” commented Donald Hollingsworth, chair of AFP’s Payments Advisory Group & treasurer of Ameren. “We continue to be concerned that check conversion leaves corporations vulnerable to increased exposure to fraud, time-wasting manual processes, delays in the ability to make decisions, & loss of control.” AFP supports migration from checks to electronic payments, “but in the absence of integration between a bank’s check & ACH systems, companies must have the ability to opt-out of a system that converts their checks to ACH debits.” The Treasury’s ruling is available at www.fms.treas.gov/ach/checkconversion.html.

Paper jam in payments 7/1 Operations&Fulfillment

By now, we were all supposed to be beaming payments back & forth between our cell phones & smartcards. Purchases would be check-less & cash-less & sci-fi smooth, our old coins & dollar bills just study aids for school kids. But the 1990s ended before the future quite got here. Captain Kirk is out of a job again, & our lives are more complicated than ever. In payment processing, reality is turning out to be a little messier than many prognosticators had hoped. Cash hasn’t gone away. Checks haven’t gone away. Despite predictions of its demise, paper hasn’t gone away; on the contrary, it chokes transaction channels more than ever before. For retailers, the answers regarding which payment forms to support are less clear than they seemed just a few years ago. Some payment processing experts almost wax nostalgic remembering the old days when electronic payments only came in 2 flavors. “Everybody bitches & moans about Visa & Mastercard, but at the end of the day, they were only 2 payment methods you had to support,” says Nick Baxter, president of First National Merchant Solutions of Omaha. Now there’s AmEx, Discover, JCB, debit cards, electronic checks, PayPal, & more - each with its own technological characteristics & its own payment cycles. Supporting these choices for the consumer adds up to an expensive proposition for merchants. “The cost of supporting all those payment methods has got to be eating them alive.” Unfortunately, nothing about payment processing seems to be getting simpler. Even the end of paper checks, which once seemed a sure bet, now seems somewhat more distant. Although checks have declined as a % of transactions, the number of checks in circulation has actually risen by 2% a year over the past 20 years, according to a Fed study. It found that 49.6 billion checks are still written annually, representing 60% of all non-cash payments, or $47.7 trillion. ½ of all those checks are written by consumers. Consumers may love them, but Alan Greenspan doesn’t. The Fed still moves checks amounting to $13 billion not in bytes but in bundles. 4 nights a week, the Fed shunts about 23 tons’ worth of little paper slips among 45 processing centers around the country, by truck & air courier, according to GAO. Those air couriers make 192 flights a day. For a number of years, Fed executives have tried to change the system, but it’s been a slow process. In 1998, Alice Rivlin, vice chair of the Fed, said, “Every time I visit a Reserve Bank & watch those high-speed sorters working so hard & the trucks coming in & out to the airplanes, I think, ‘This is a really impressive, fast & cost-effective way of moving paper, but why are we moving paper?’” This past winter, the Fed drafted a bill that would give images of checks the same legal weight as the originals, making it possible to reduce some of those overnight flights. Sounds sensible enough, but the proposal has yet to find a sponsor in Congress. Observers speculate that between the Post Office, check printers (printer Deluxe is a nearly $3 billion concern), paper companies, & private air couriers, there’s a whole checking industrial complex that might have a lot to lose by a radical change in the status quo. Banks don’t like the proposal either, because its optional nature means that banks would need to maintain both paper routing systems & electronic networks - making the process that much more complicated, according to Stephen McNair, FTP Consulting. Last September, NACHA released guidelines allowing retailers to create e-checks for the first time. The new rules enable merchants to take a customer’s checking account number over the phone or in person & create an electronic check equivalent that draws on the customer’s bank account within 48 hours. NACHA estimates that more than 9 million telephone e-checks were processed in the first quarter of this year. Renee Frappier, Pacific Network Services Ltd, a Vancouver global payment processor, believes the new e-checks create opportunities for some direct marketers. Although credit cards are often considered ubiquitous, a Fed study pegs consumer access to transactional accounts such as checking accounts at 90% of the population, compared to about 2/3 who have credit cards, according to NACHA officials. “For those people who don’t have credit cards, it’s going to open things up for them in terms of responding to direct response promotions. All of a sudden they’ll be able to call somebody who’s selling something through a call center & make their payment,” Frappier says. NACHA’s Michael Herd says that the most popular use is for paying recurring bills, where there is already an existing relationship with the consumer. According to First National’s Baxter, such customer trust is a key limit to the acceptance of this new technology. “Whilst consumers are quite happy for somebody to play fast & loose with their credit card, the concept that somebody could get into my checking account into which my paycheck is deposited is a push.” Herd says electronic checks present a number of advantages to merchants. “Check conversion provides the merchant with all the benefits of electronic processing - the lower costs, the less labor-intensive payment handling, the faster returns, the better collection of NSF insufficient funds items; it gives you all that benefit without trying to tell your customers to do something differently.” E-check boosters initially predicted savings of as much as 2/3 for merchants, but this isn’t turning out to be the case, says Michael Manna, Robert Manna Associates. Manna speculates retailers will probably just break even with e-checks. He predicts that while remittance costs will go down, clearing costs may actually increase, since the bank usually needs to create a paper equivalent to take the place of an electronic check. “With electronic payments, you would think that would be easy, you just push a button & send the data. But still, with the system that’s in place, many times paper has to follow.” FTP’s McNair asks, “If I’m receiving bill payments & some of them are paper & some of them are electronic, have I really reduced my costs or have I increased my costs?” He argues that in the short run, electronic conversion will actually increase costs for companies receiving payments, at least until the majority of payments are electronic. “What I’ve done is that now I’m supporting 2 processing operations rather than one,” says McNair. Manna & McNair believe that initial savings through e-checking will be less than advertised. Electronic payments generally add new choices for the consumer, but don’t necessarily lead to gigantic new efficiencies for anyone else. “They’re still saving some money in the sense that the consumer didn’t have to pay for postage, the retailer didn’t have to pay for someone to open an envelope & capture the amount that check was worth, so all those costs are saved. But a piece of paper is still going back & forth through the system.” Another element of our fabulous future life that hasn’t arrived in quite the way some expected is in micropayments. When e-commerce first began, many theorists believed that a new system would be needed to make small payments in cyberspace. But for some reason, consumers proved reluctant to trade their cash for online currencies with such unlikely names as Beenz & Flooz, & most of the companies created to meet this perceived need are now defunct. Still, not every alternative payment scheme has gone the way of all Flooz. PayPal, an online payment company that got its first break helping eBay buyers & sellers do business without disclosing credit card numbers, went public last spring. Last year, 7.5 million users sent or received at least one payment using the service, & in April PayPal announced that its revenue had tripled from the previous year, reaching $48 million. Nick Baxter, First National Merchant Solutions in Omaha, says the success of PayPal should serve as a warning to payment processors. “I think PayPal has been a great eye-opener to the industry. I use it. It’s an incredibly easy way to move money from person to person. If we in the payment processing industry had gotten our act together, there should not have been a potential for PayPal to take off.” But & PayPal has done, it’s unclear whether the firm will be around for the long haul. It is wrangling now with banking regulators over what kind of a company it really is, & PayPal executives admit that they face competition from some fairly serious players. In their annual report, they list Citibank, Mastercard, Visa, eBay, Yahoo, Checkfree, Western Union, Microsoft, AmEx, Western Union, & USPS as possible competitors. In Europe, payment processing ‘s evolution is not in a tidy state either, in spite of the introduction of the euro. Frappier says that credit card processing is much simpler with the Continent-wide currency, requiring one merchant account instead of 12, but that checks are still a problem. “What a lot of people don’t realize is that despite the fact that all of these countries switched to euros as a currency, the banking systems are still separate. If you write a euro check in France, you can’t send it to your supplier in Germany & expect that they’ll be able to cash it just like that, because it’s still a French check & they’re still a German company.” Further east, the banking systems of several countries, including Singapore, Taiwan, Thailand & Malaysia, have became easier for outsiders to do business in, but the US’s new-found concern about money laundering has introduced new bureaucratic barriers. One service PacNet now offers, which Frappier says is unique, is a system that enables companies to send refund checks in the customer’s own currency, wherever that customer happens to be. While the system may not simplify business for merchants, it probably makes things easier for consumers overseas. As the last big thing started to sputter 2 years ago, the buzzmeisters coined a new word: m-commerce, or buying stuff with cell phones. M-commerce has yet to beam down in most markets. Beyond Norway, where it’s possible to buy soda pop with your cell phone, & Japan, where commuters download cartoon characters as wallpaper for their cell phones, computerized wireless operators are still not standing by. “We’ve talked to a lot of analysts & they’ve all revised their projections down by orders of magnitude from the hundreds of billions of dollars that were going to be spent on m-commerce - suddenly it’s much more modest,” says Simon Pugh, Mastercard & president of the Mobile Payment Forum, a group that’s trying to set standards for m-commerce. MPF is working to come up with universal payment standards that can work with cell phones all over the world. Pugh says this is challenging; different countries & regions use different technologies & communicate with different data rates, & all of these cellular systems are becoming increasingly less alike. To deal with cardholder authentication, for instance, the group will need to agree on 3 or 4 solutions, rather than one. “The optimism that may have existed 2 years ago has certainly vanished. We still feel there is long-term value in developing the mobile environment as an acceptance channel for payment cards. By starting at this level, when the technology arrives and, more important, when the content-service propositions within the space warrant the need for secure payments, everything will be in place & ready to go.” But First National’s Baxter is skeptical such a day will ever come. “I’ve been able to use my cell phone for wireless commerce for eons, I just call 1-800-Lands’ End or LL Bean, & because those guys register me as a customer, I’ve been doing m-commerce for years. What’s the big deal here?” Baxter’s skepticism is not unusual. Pugh says people ask a lot of questions about any new payment technology. “Why would I actually do this? Why is this better than what I do today? Unless we can see everything is in the black, & generates benefit for everyone, it’s never going to fly. That’s one thing we’ve learned the last few years from trying things out on the Internet: Unless everyone wins, it’s not going to happen.” When & if it does, chances are good that it will change a few things & not, as many of us used to say during the Internet boom, everything. Even as new technologies are introduced, payment experts now seem convinced that their evolution is likely to come in fits & starts. “We’ve never seen any one monetary methodology or payment mechanism supplant everything else. They’ve always been in addition to, & I think it’s true with electronic payments as well