Reports of imminent death aside, checks aren’t vanishing, and banks need to deal with a future still filled with paper.

For one thing, people—and, especially, businesses—will keep writing them. And the efforts in the banking world have been more to electronify checks than replace them with electronic payments. So while the various methods of squeezing paper out of check processing are making progress, the day when there are no checks is far away, says Alenka Grealish, manager of Celent Communications’ banking practice.

“I don’t think we’re going to be around” when checks vanish, says Grealish, so check processing will persist. “Somebody has to be around to be the last resort—the person processing the last 100 checks.”

While people and businesses continue writing checks almost unabated, fewer of them are being processed every day: According to Grealish’s research, check processing, which has declined by 7.5 percent on a compounded annualized growth rate (CAGR) since 2002, will further decline by a 9.5 percent CAGR between now and 2010.

But even when 90 percent of checks are electronically processed, and Grealish expects that day to come by 2010, plenty of checks will still flow through the system—at least 20 billion, or 80 million a day, compared with about 33.5 billion in 2004, she estimates. So even under the most optimistic scenario, banks will need to be able to process paper checks well into the future: The event horizon for a checkless world is, at best, indeterminate.

Not to say that pressure won’t keep building to minimize paper checks: Among other factors militating against paper checks, processing costs will keep rising, and transport options will keep shrinking, until the sheer economics of check processing will drive much processing into the hands of a few third-party outsourcers with enough volume to make a living out of a business that was once the average bank’s meat and potatoes.

But meanwhile, and try as they may, banks won’t be able to punish their customers enough to stop all of them from writing checks. Ghoulish as it may sound, the banking system qua system is going to have to wait until check writers who are now 50 or 60 die off, which guarantees that on the retail side alone, checks have at least another 20 years of life in them.

Meanwhile, getting businesses to stop writing checks is almost a fool’s errand. For one thing, the game of treasury management is built around checks, the post office, and float. For another, the accounts system of the typical business is still what you could call a paper-rich environment, and not every business is big enough to profit from the agony a wholesale switching to computerized systems entails. Also, even if every large corporation switched to a fully computerized accounts system tomorrow, rivers of paper checks would still flow from the nation’s small businesses. And lawyers are very attached to paper receipts, whether or not electronic ones are admissible in court.

Banks are just as bad as check writers, she adds. Business checks are a fee-generating cash-cow for banks, and even the most enthusiastic advocate of electronic payments would be hard put to convince a typical bank to abjure business check processing in a period when almost every revenue source is under attack by technology and non-bank competitors.

Still, Grealish says there are ways to encourage even businesses to write fewer checks, and eventually whittle down the volume. “There are carrots and sticks,” she says. “Banks can offer economic incentives to customers to move to electronic payments. And I think the big cash-management banks will develop products that reflect the attributes of a check, but are electronic,” like a procurement card that replicates controlled disbursement and replicates the float.

There are other factors working against a long, prosperous future for checks, she thinks. While no bank has to pay a penalty for accepting only paper payments, notes Grealish, three significant trends are conspiring to discourage the practice, aside from rising processing costs.

These include the aforementioned decline in the number of air couriers specializing in checks: Grealish expects costs to skyrocket as much as 10 percent per year as a result. Also, she points out, rising short-term interest rates inflate the cost of float: She estimates that 50 extra basis points in the federal funds rate means an extra $50 per $1 million in float for a bank.

Added to this will be that generally increasing processing cost: The Federal Reserve, for instance, has been trimming check processing facilities and raising processing prices for the past several years. Costs like that should increase as much as 23 percent by 2010, she estimates. Also, says Grealish, third-party processors will gradually stop supporting paper-based processing technology over the next five years. The result of all these pressures will be a marked diminishment of paper in the system within four years, she says.

Don’t expect paper checks to vanish, though. Paper checks, diminished in numbers or not, will be with us for a long time. It’s like what actor Art Carney’s character said in one of his last movies, Harry and Tonto: “Nothing ever changes in this town—they just move the names around.” (Contact: Celent Communications, Alenka Grealish, 503-228-0878)

In the latest in what seems an unstoppable march, DataTreasury Corp. settled its outstanding patent infringement litigation in the U.S. District Court for the Eastern District of Texas with NCR Corp., paying DataTreasury a fee and agreeing to license the Melville, L.I. company’s check imaging technology. DataTreasury said NCR had been infringing on DataTreasury’s patent rights. It’s the latest in a series of settlements stemming from a number of similar suits that DataTreasury filed in 2002.

DataTreasury, which has already settled its litigation against JP Morgan Chase & Co., Ingenico Group, and other firms that it says also infringed on its patent rights, is still suing several other big financial services firms-- including First Data Corp., Citigroup, SVPCO and Bank of America, among others—on the same grounds.

Continue reading "DataTreasury, NCR Settle Patent Infringement Case" »

We don’t blame you if you haven’t been following the Check Clearing for the 21st Century Act (H.R. 5414). After all, the title doesn’t sound like something of interest to online bankers. But the impact could be profound.

The act clears the way for check images to be used in the clearing process, eliminating the need for paper to be shuffled around the country. The check image itself will have all the legal power of the original paper. From the bank’s standpoint, it will eventually put an end to the costly return of paper checks, an option used by 46 million U.S. households according to the Consumers Union.

Assuming the Act becomes law, the back-office cost-savings and fraud-reduction potential will drive adoption rapidly. The change will be a boon for online banking, providing three new reasons for going online:

(1)     The ability to view, store, and print images of DEPOSITED ITEMS (at branch or ATM), a significant new benefit, especially for small businesses.

(2)     For those with check truncation, online banking becomes the only way to view, store, and print hand-written checks.

(3)     Eventually, low-cost scanner/readers will be available for the home and small business market, enabling users to self-deposit checks directly into their own PC, skipping the trip to the branch/ATM altogether.

The only downside, at least for those with branch networks, is that check truncation at the PC will eliminate one of the last reasons to visit the branch. Consider yourselves warned.                             

www.PortraitCheque.com

Would you accept this check? If AnyBank USA was replaced by Citibank, American Express, or Visa, you probably would. Downloadable traveler’s checks could be a short-term solution for remote cash access, at least
until rechargeable-at-the-desktop smart cards become common.

The Company: PortraitCheque.com is a privately held start-up based in Evergreen, Colorado. The company began operations in January, but the concept has been used in New Mexico for more than a decade at founder Thomas K. Reed’s Santa Fe company, Vivigen, a health services firm which paid employees a portion of their salary in PortraitCheques. The check’s were guaranteed by United New Mexico Bank of Santa Fe and were widely accepted in the local market. Reed is a long-time entrepreneur, having been involved in 24 start-ups.

Newly appointed President, Brent Abrahm, briefed us on the concept. He’s trying to take the it national with priority number one: signing a big-name backer, such as American Express, to guarantee the checks and add much-needed credibility. He’s also been gauging interest among potential distributors, especially the Net-only banks looking for a way to differentiate themselves and meet the cash needs of remote users.

But the key person on the team may be patent attorney LeRoy Hahn, who will likely be called in to protect the company’s provisional patents, should they be approved, and the product takes off.

The Product: The company has created a patented process by which customers can print out their own “traveler’s checks” via desktop or Web-based software. Users would countersign the checks in the presence of the merchant to use in lieu of cash.

The Patents: The company holds two provisional patents on the downloadable traveler’s check concept:

Pricing to User: Approximately $0.50 per check in lots of 100 for $50 (four per page).

Pricing to Distributors (banks): negotiable

The Business Model: The company expects to make money selling the check stock at approximately $0.50 per check as well as licensing the concept to distributors, both financial and non-financial companies. A financial institution that steps forward to guarantee the checks on a national/international basis is likely to garner the lion’s share of float and lost check revenue. But this company will also be on the hook for the lost, stolen, and fraudulent checks successfully passed to merchants.

Security Features:

•  SSL encryption during authorization process
•  watermark and fraud deterrents in paper stock
•  user’s picture and signature on check

How it Works: Online demo available at www.portraitcheque.com/demo/members.html .

•  Users submit signature, photograph, and checking or credit card account info to bank or other agent.
•  Agent authorizes the user.
•  User installs client software on PC (Web version coming).
•  When user wants “cash,” they send a request to the PortraitCheque.com server with username, password and social security number.
•  PortraitCheque authorizes the transaction after checking for funds availability, debits customer account, and sends encrypted instructions back to user’s PC authorizing the transaction.
•  User prints the check on their desktop printers using PortraitCheque check stock, preprinted with the user’s picture and signature.
•  User takes the check to any retail location where it is countersigned in front of the merchant and used in lieu of cash or personal check.
•  Merchant deposits the PortraitCheque in its bank along with other paper items.

Contacts: Brent Abraham is Pres., (303) 670-6818, babrahm@portraitcheque.com ; Thomas Reed is CEO, (505) 983-8299, treed@portraitcheque.com . LeRoy Hahn is Patent Attorney at Christie, Parker and Hale, (616) 795-5843.

The conventional wisdom is that some day smart cards, rechargeable from the desktop, will free Net banking customers from the drudgery, and expense, of using ATMs to get cash. PortraitCheque.com proposes to move that day forward by a decade or so (at least in the United States) with an interim paper-based system. But significant hurdles in merchant and user acceptance remain. And a big-name guarantor of the checks must be found before the product moves off the drawing board.

PortraitCheque.com’s Web site is relatively low budget, but they’ve only been in business since January.

There are also major control and fraud issues yet to be resolved. Under the current system, users don’t actually fund the checks until they initialize an authorization and printing process via their PC. This takes place after the user has received the check stock. There are obvious concerns with forgery and the passing of bad checks.

Although the picture and signature would provide some safeguards, the system is by no means fool-proof. Since the checks represent guaranteed funds with no point-of-sale authorization, they will have to be treated much like a Visa Check Card (off line debit): provided only to good credit risks, with ATM-like maximum daily limits (e.g. $500 per day in downloaded checks), and with an expiration date of
a year or less. It’s also unknown what consumer protection regulations would apply to the instrument.

If and when these hurdles are overcome by PortraitCheque.com or someone else, there could be an advantage to being first in your market offering “instant cash from the desktop.” It could differentiate your online product, deliver value to end users, create a buzz in the media, and cut your foreign ATM expenses. There could also be modest revenues from paper check sales.

Realistically, most of your remote users will prefer to get their cash through ATMs and POS cash-back. We see only a small minority of subscribers willing to bother with Web-based traveler’s checks. But, as a copy point and marketing tool, it has considerable appeal, at least while it is new.