Small Value Payments Co., which has been building a national network for the electronic exchange of check images, has set a schedule to connect eight of the largest banks to it.
At the beginning of March, AT&T Corp. will start installing the necessary lines at participating banks, and starting in June, at least two banks a month will start using the system, which will permit them to clear and settle checks by image alone. The first banks to be connected, Wells Fargo & Co. and KeyCorp, were selected because of their readiness to handle images.
The timetable has been delayed slightly, because of the myriad complications in readying an entirely new check clearing system. But executives involved in the process say over time the next-generation network will save money, reduce fraud, and dramatically speed clearing and settlement.
The execution needs to be near perfect, these executives say, because the integrity of the payments system is at stake.
"We have to make sure that we're doing it right," said Stephanie Sturgis-Griffin, a senior vice president at Wells and the group product manager of treasury management, wholesale services. "All the banks have a lot of work to do. Transitioning from a paper-based environment to an image-based environment is a really big deal."
SVPCo, which is owned by 22 major banks and The Clearing House (formerly the New York Clearing House Association LLC), has been developing the system for about two years, and eight of its owners that are considered "vanguard banks" are among the banks that will use it first.
Bank One Corp. and J.P. Morgan Chase & Co. are slated to start using the network in July, Wachovia Corp. and Comerica Corp. in August, and Bank of America Corp. and U.S. Bancorp in October. The September slots have been intentionally kept open to allow SVPCo to monitor and evaluate the image preparedness of various institutions, said Hank Farrar, the president of SVPCo.
"It's a complex installation - you're doing billions of checks," he said in an interview last week. "Image means you don't actually get the check back. All day-two and back-office operations need to function without the ability to have the physical check."
A "second wave" of banks to be plugged into the system would likely include BB&T Corp., Citigroup Inc., and UnionBanCal Corp., Mr. Farrar said. There will be some jockeying for position among banks eager to get connected and to enjoy the immediate savings on check transportation and other costs, he said.
SVPCo bases its selections on which banks have worked out the details of the image operation, he said, including the tricky issue of how to handle day-two items, checks that cannot be processed electronically or are returned to the financial institution where they were first deposited.
It is particularly eager to connect the Federal Reserve Banks to the network, since the Fed handles check processing for thousands of banks, Mr. Farrar said. "Let's be honest, if the Fed tells us that they will be ready by the end of the year, don't let there be any doubt they'll have a slot."
SVPCo also aims to connect two other large check processors to the system this year, he said - Fiserv Inc. of Brookfield, Wis., which serves 1,700 financial institutions; and Empire Corporate Federal Credit Union of Albany, N.Y., which serves 550 credit unions.
The effort to build the network, make it interoperable, and make sure major banks are equipped for it has involved not just SVPCo and its members, but also the Fed and various consulting firms, including Global Concepts Inc. of Atlanta and Bearingpoint Inc. of McLean, Va. Those two firms have been helping banks develop the business case for image exchanges and tailor implementations to work with their own systems.
"There are design documents and specifications for what banks have to do to settle and present through this network," said S. Kere Lewis, Bearingpoint's managing director for payment services, who is based in New York. "We would expect to see ramp-up beginning later this year, with greater volumes and more endpoints added" next year and beyond.
Though the technology standards and specifications largely have been worked out, there are still questions that probably will not be answered until the system is up and running.
"The one open issue that the industry is grappling with today is quality," Mr. Farrar said. "You now have someone else capturing images of your checks for your customers. How do we establish minimum quality controls of the images? How do we assure that when I print out an image of a check on a statement, it comes out looking like a check, not a black blob?"
Bankers from Wells Fargo and KeyCorp who have been gearing up for the system say they will exchange a small number of items at first and have low short-term expectations (though their long-term ones are very high). Wells, for instance, will select wholesale accounts in a particular region that belong to customers who have already opted for truncation - that is, they are not getting their paper checks back - as guinea pigs for the network.
Ms. Sturgis-Griffin says she will personally pick many of those accounts. "It's hard, because many of our customers want to get their checks back. We're starting out small."
Her company expects to save some money off the bat, but it won't be a windfall, she said. "In the near term, the expectation that banks are going to save a lot of money on this has probably been overstated, because we're still operating in a dual environment. We still have a huge amount of paper volume that we have to deal with. Longer term, I see substantial savings, but it's going to take some time, and as an industry some of the check processing costs may go up for a while."
Wells is working in tandem with KeyCorp, where executives also expressed both hope and caution.
"We fully expect from an operational standpoint to see reduced transportation costs, and we fully expect the length of time it takes to clear an item to be reduced," said Rob Hayden, Key's vice president of business planning and performance reporting. This will be good news for corporate customers, because the funds they deposit by check will become available more quickly, he said.
According to Mr. Hayden, there will be other advantages: "We fully expect fraud to decline," and "the nation's payment system won't be subjected to disruption like it was on 9/11."
Allyn Pytel, a senior vice president in Key's client services group, said it has been working on the image project since 1999. Currently, 60% of its customers do not get their checks returned with their statements, and 11% of online banking customers get statements only in an electronic format.
David J. Harris, a vice president and division manager in technology services at Key, said the vastness and importance of the task - and the newness of the technology - are guiding the implementation process.
"When you're dealing with brand new code, there are additional risks that you're dealing with," he said. "We are allowing ourselves a more-than-normal testing period, trying to get code early from partners, doing regular meetings with SVPCo and Wells, as well as internal meetings. Communication and risk-mitigation are critical."
The Check Clearing for the 21st Century Act, which will enable banks to settle and clear by image more freely, will take effect Oct. 28, but nobody expects any magic to take place that day. However, some call the law a catalyst for a much-needed advancement in the payments world.
"To me, image exchange is just the logical maturing of a clearing house," said Mr. Hayden of Key. "Every so often, something happens in any given industry that kind of brings the industry together. Most of us in the industry view this as one of those times when we can come together for the good of the payments system."
