Check 21 Image Clearings

 The payments industry has undergone significant changes in the past two decades and none more than that of the paper check with the implementation of Check 21 in 2005.  While the number of checks written has continued to decrease each year, check payments are still a significant source of revenue and expense for most financial institutions.  While it has been acknowledged by almost every industry expert that the conversion of the paper check to an image document has resulted in significant operational savings for most financial institutions, the impact to a financial institution’s collection expense for its transit items continues to be dictated by the clearing agent(s) utilized.

Primary Costing Factors

While it is commonly accepted that the collection expense phase of the process has also realized savings in both the per item collection expense and check float (almost all routing numbers are available in one business day) due to both the Check 21 image conversion process and the increased number of potential clearing agents in the new image environment, it should be realized that the collection process remains a function of several additional parameters, most of which have been minimally impacted by the implementation of Check 21.  These can include account analysis expenses, cash letter fees, government assessment fees, clearing agent availability deadlines and others.  Additionally while the consolidation of the twelve Federal Reserve (FRB) check operations into a single nationwide image site has been said to result in a cheaper per item pricing overall for items deposited with the FRB, each financial institution has to take into account that the FRB’s tier assignment and pricing for each routing number in the image environment are now being based upon its average daily data compared with all other routing numbers across a nationwide database rather than the ‘local’ paper environment and its smaller list of regional routing numbers.  This has resulted in situations where routing numbers that were in tiers 1 and 2 in the paper environment could now be in tiers 3 and 4 in the image world.  This can have a sizeable impact to a financial institution’s collection costs and even more so if its processing profile results in its utilization of more than one Federal Reserve deadlines since the per item cost increases with each extended deadline.  With regard to correspondent banks and 3^rd party processors, they have often chosen to adapt tiered pricing strategies that can appear to be similar to the FRB but since they do not have the same constraints as the FRB regarding image exchange, they can utilize individual image exchange opportunities to offer a product that can be more attractive than the FRB’s depending upon a depository financial institution’s deposit mix.

A final factor that can impact a financial institution’s collection costs is the conversion of its regular paper check deposits to image deposits by its customers via an electronic depository channel being offered by the Cash Management/Treasury Management department.  While it is expected that these deposits will normally be receipted by the financial institution earlier in the business day cycle, the handoff of the transit debits from the deposit to the Image Send system should be reviewed periodically to insure the expected thru put has been realized.

Recommended Analysis Processes

While most financial institutions’ check deposit mix has remained consistent throughout the Check 21 conversion process, it can not be over emphasized the need to analyze pricing and/or deadline changes by the current clearing agent(s) to insure that one’s collection expenses have not been adversely impacted and if they have to identify viable alternatives.  Based upon the observed current ‘change’ environment, it is recommended that this analysis process be conducted once a year when new pricing and/or availability schedules are generally announced.  Obviously, if a significant midyear price and/or availability schedule change is announced, an additional analysis should be done.  In the situation where a financial institution has not conducted a detailed review of its check collection expenses in at least two years or is realizing a significant increase in check volume (at least 25%) due to a merger or an influx of new customers, it is recommended that the RFP process be utilized to ascertain whether the current clearing arrangement is optimal.  My personal experience in analyzing the responses to an RFP has consistently been a reduction in collection expenses of at least 10% of the original collection expense with some situations almost 20%.

Future

Since the ‘death’ of the check has been predicted with no degree of accuracy thru today, this means that depository institutions will continue to accept them from their customer base.  Additionally, with the uncertain economy creating an understandably cautious lending environment and extensive regulatory legislation impacting the profitability of several payment products, the need to ascertain that the traditional check product’s costs are optimal can be critical to the bottom-line of the financial institution.  While the check collection segment would appear to be a small portion of the check payment process, it can have a significant impact on the profitability of the check deposit products if not optimally maintained.  The value that can be realized by utilizing an individual who is knowledgeable in check collection and how to build an optimal clearing scheme is something that will create and maintain value for years to come.

In closing, I look forward to your thoughts and further discussions regarding the future of the check in payments.