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Are Fully Electronic Checks Ready for Takeoff?

Thursday, December 21, 2017 (RemoteDepositCapture.com / Patti Murphy)

A consensus may be coalescing around the case for fully-electronic checks. Widespread adoption has been an elusive goal, but that could change with pending Reg CC amendment.
There is broad industry support emerging for fully electronic checks. Nearly 7 out of 10 industry stakeholders polled by RemoteDepositCapture.com think end-to-end electronic checks should be part of the payments mix supported by banks and credit unions.
 
Fully electronic checks – officially designated as electronically created items (ECIs) by the Federal Reserve – have been moving through the inter-bank clearing system for years. No one has a firm fix on how prevalent they are, however, as the items resemble traditional checks in every respect except there’s no paper involved. And since more than 99% of checks now enter the inter-bank clearing stream as electronic files, according to Fed reports, there’s no way to differentiate electronically-initiated checks from those that start out as paper items.
 
The Check 21 Act and the evolution of remote deposit capture are largely credited with eliminating the costs and inefficiencies associated with paper check clearing. And numerous studies suggest the move to electronic processes drives financial benefits for financial institutions and their customers. ECIs (also known as EPOs, for electronic payment orders) aim to extend those benefits to the payment initiation process.
 
In 2015, the median cost to a business for issuing a paper check was $3.00, according to a benchmarking survey conducted by the Association for Financial Professionals. A 2016 study by Bank of America puts an even higher price tag on the process. It found the cost of issuing a single business check was well over $4, inclusive of check stock, stamps, envelopes and time spent writing and mailing check payments.
 
ECIs eliminate many of these cost components. But they have existed in a legal grey area because they are not addressed by existing check laws and regulations, which proponents explain, hampers widespread adoption. That’s set to change next year under pending amendments to the Fed’s Regulation CC (which implements check laws, like Check 21). The amendments, approved in June, primarily address issues related to RDC, such as allocating responsibility for losses from duplicate deposits. (Click here and here to for detailed reporting on those amendments.) But they also create a new indemnity that applies to ECIs.
 
The ECI indemnity is similar to those applied to RDC items under the upcoming Reg CC amendments. It stipulates an FI that transfers/presents and receives settlement for an ECI indemnifies any subsequent FI collecting, paying or returning that ECI against losses that might arise because the item was not authorized by the accountholder or already had been paid.
 
David Walker, President and CEO of ECCHO, and a long-time proponent of ECIs, said he is encouraged by the Fed’s move to address ECIs in Reg CC. “It will begin to change some opinions” about using ECIs, Walker suggested.
 
“If the latest Poll Central data is an indication, there clearly is interest, and we expect that interest to grow with the Fed’s recognition of ECIs,” added John Leekley, Founder and CEO of RemoteDepositCapture.com.
 
Poll Central is a feature of RemoteDepositCapture.com that seeks visitor views on RDC and payments issues. Over the past 12 months, 133 visitors responded to the poll question “Should the payments industry allow fully electronic checks?”, and just over 69% voted yes. “This level of interest in fully-electronic checks is especially noteworthy, because we know from numerous studies that checks remain a popular payment method among businesses, particularly small and mid-sized businesses,” said Leekley. “ECIs produce many of the same efficiencies and cost savings for check issuance that businesses accepting checks payments realize from using RDC.”
 
eChecks as Interim Step
Vijay Balakrishnan, Vice President for ePayments at Deluxe Corporation, agreed electronifying check initiation drives benefits. “It’s not just the paper [check], but the postage and labor. Those costs add up very quickly, and the bigger a company is the bigger a cost item this becomes,” Balakrishnan said.
 
The banking industry has invested significantly over the years in what has become an efficient check clearing infrastructure. “So why not leverage that and push through more volume?” said Balakrishnan. In doing so, FIs can provide benefits to paying companies that mirror those payees achieve with RDC, he added.
 
Deluxe offers an almost fully electronic check service called eChecks that complies with current check rules, Balakrishnan said. A key selling point: “Neither the payor nor the payee needs to make changes to workflows or accounting systems,” Balakrishnan said. A company using eChecks to initiate a payment only needs the recipient’s email address. Upon receiving an email with a secure link to their eCheck, the recipient retrieves and prints the item which they can then deposit using RDC.
 
“There’s been a lot of receptivity to eChecks,” Balakrishnan said.  Deluxe customers initiated $3 billion in eCheck payments in 2016. “This year it will be well north of that,” he said. Two vertical markets where eChecks are promising are healthcare and insurance. “We’re seeing that in paper-intensive verticals like these the value proposition is resonating,” Balakrishnan said.

 


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