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The Green Sheet

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Fed Seen Thwarting Migration to Fully Electronic Checks

Thursday, August 23, 2018 ( / Patti Murphy)

Fully electronic checks are the latest in a string of innovations that have enhanced the efficiency of the check payment system. So why does the Fed seem to be erecting barriers to adoption?
Fully electronic checks, commonly known as electronically-created items (ECIs), remove the last vestiges of paper from the check payment system. But a proposal pending before the Federal Reserve Board, if approved, could be the death knell for ECIs.
The proposal, an amendment to Regulation J, would prohibit financial institutions from processing ECIs through the Fed. The Fed wrote in an explanation of the proposal that the ban would not prevent FIs from exchanging ECIs by agreement. But not everyone agrees.
Since a significant share of checks clear through the Fed System – 45% of inter-bank clearings on the forward collection side and 68% of return checks, according to the Fed’s data – most FIs would be reluctant to offer ECIs, said David Walker, President of Tiller Endeavors, LLC. “The best option would be for the Fed to avoid creating artificial regulatory barriers to the enhancement of payments, to encourage market forces to determine what is most acceptable to the users and to support the market in achieving a faster, safer and more efficient payment system,” Walker stated.
“We feel the Fed is missing a real opportunity here,” said Tony Fera, CEO of All My Papers. “Particularly on the B2B side.” All My Papers has developed software for creating ECIs as well as software that can detect ECIs in check image files.
Innovations Make for Faster, More Efficient Payment Systems
Businesses and consumers rarely, if ever, abandon tried and true payment methods. Technological advances that continuously improve the efficiencies of payment systems are one reason why. Credit card payments, for example, required paper sales drafts and authorization processes until the 1980s, when electronic data capture took hold. And the ACH for decades relied on paper/phone initiation requests and the exchange of magnetic/floppy disks between originating and receiving financial institutions.
The check payment system has benefitted from similar advances. The invention of MICR technology, in the 1950s, introduced significant efficiencies, as did the emergence of image capture technologies beginning in the 1980s. Ongoing advances in image capture and exchange, coupled with passage of the Check 21 Act, really carried the day, however, by effectively eliminating the need for daily exchanges of paper checks between FIs. Today by most estimates nearly all inter-bank checks clear electronically.    
ECIs make up a small percentage of check clearings – about 80 million ECIs a year get exchanged between FIs, according to an analysis All My Papers did last year. The pending Reg J amendment seems to have put the brakes on additional ECI activity, Fera noted. “If they would allow these to go through I think a lot of businesses would use them,” he said.
ECIs offer all the benefits of fully-electronic payments without the time and financial investments needed to adapt accounting systems and processes to newer, electronic payment methods. “You’re not replacing an entire system; you’re just adapting an existing system,” said Fera.
Is Your Organization Considering ECIs?
There appears to be broad industry support for ECIs. When polled the industry last year, nearly seven out of 10 industry stakeholders said fully-electronic checks should be allowed to clear through the banking system. (See article here.)
Are you with a corporation or FI that uses or would like to explore using ECIs? We’d like to hear about your experiences and/or the benefits sought. Send an email to


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