Interstate checking moving into digital age

Filed under: News |

Federal requirements have kept the banking industry in the Stone Age when it comes to high technology, particularly in the area of interstate check transactions. However, a change is a stone’s throw away as Check 21 – the Check Clearing for the 21st Century Act – takes effect in the United States on Oct. 28.

Todd Loudenslager, a Minneapolis-based U.S. Bank vice-president in charge of deposit products, said the new regulation is a “catalyst for banking innovation (in technology).” The federal government has, in the past, required that banks physically present paper transactions (checks) for processing between banks.

With the onset of Check 21, sending banks are now able to use substitute checks that are processed through digital imaging. The checks are then electronically sent to the receiving bank, where a paper check is produced and maintained.

In other words, when someone walks into a bank with an out-of-state check, the bank takes a picture of the check, substituting it with an image and submitting it electronically to the out-of-state bank.

Check 21 is an added benefit to the customers and the bank-processing systems. Loudenslager said that in the past, when a U.S. Bank facility, for example, in one region of the country received a check written through a bank in another region, the check had to be sent to the receiving bank by air or ground. “We process about 15 million checks a day that may be dependent on transportation, and anything that would slow down a truck or a plane, like bad weather, traffic jams or a terrorist situation, interferes with the process,” Loudenslager said. “When 9/11 happened, all transactions were halted because the planes were grounded. Although Check 21 was on the books before 9/11, the terrorist situation added a different tenor to the debate.”

The debate has been settled, and the result is a Star Trek-kind-of-bank novelty, Loudenslager said. “There are two ways you can get to the planets in Star Trek,” Loudenslager said. “You can go by shuttle or the transporter pad, which is the ‘beam me up Scotty’ method.” Loudenslager likened the old method of transporting checks to the shuttle, and the new system under Check 21 as the “beam me up Scotty” approach.

Loudenslager said all banks will have a choice as to which method is used because not every bank will invest in the technology. However, he said transporting checks by air or ground is expensive; thus, he predicts that during the next three-to-five years, most of the banks will adopt the imaging technology. “I think by the end of 2006, banks in general will figure out it makes more sense to image everything,” Loundeslager said. Meanwhile, he expects that 5-to-10 percent of U.S. Bank checks will be “beamed up” through Check 21. Under the U.S. Bank operating guidelines, only larger checks that need to clear long distances will be digitally processed.

“Many people ask me ‘What’s the big deal with Check 21,'” Loudenslager said. “I say most people won’t notice anything this year, but all of this starts the ball rolling to increased technology in the banking industry.” Loudenslager envisions that “five years out” customers will be able to go into a branch, present an out-of-state check and the teller will image it immediately. The check will be connected real time with the other bank, eliminating the check-clearing waiting period.

Will banks eventually eliminate checks? “There will always be checks that need to be written, especially for local purposes – like smaller stores,” Loudenslager said. However, one advantage to Check 21 is security. Loudenslager said the omission of paper checks guards against fraud and identification theft.

Customers whose checks are processed through the digital technology will receive an image of the substitute check, which is a business-size check, for their records, Loudenslager said. Both sides of the check are imaged, and included on the check will be information identifying the check processor. Many banks have already replaced actual checks with images in the customers’ monthly statements.

The banking technology now available under Check 21 seems like a no-brainer, one that could have been in place years ago, considering today’s state of high technology. However, Loudenslager said the regulation that required banks to exchange paper products was the main obstacle to high-tech progress in the industry. U.S. Bank has been working with financial organizations to fine tune the new regulations, making certain the technology is up and running when Check 21 is implemented in October. Digital scanning will be available in all 11 U.S. Bank processing sites throughout the country.

As technology catches on in the banking industry, a survey completed by Weiss Ratings, Inc. indicated that bank profits reached a new all-time high in 2003 with $121 billion in earnings recorded – a 14.5 percent increase over the $105.6 billion recorded in 2002.

U.S. Bancorp, the parent company of U.S. Bank, is the seventh largest financial services holding company in the United States and operates 2,325 banking offices in 24 states. U.S. Bank recorded a second-quarter net income of $1,036.9 million, compared to $919.9 million in the second quarter 2003. U.S. Bank reported a first-quarter net income of $1,008.4 million. While the national banking industry’s net-interest margin weakened, U.S. Bank’s net-interest margin was stable and earning assets were flat. (

Tom Naughton, the U.S. Bank regional president for southern Colorado, said the banking industry has picked up with regard to its retail products but the demand for commercial industrial activity has been “flat.”

According to varying newspaper accounts, the banking industry is on an upswing or a downward spiral. Naughton said there are inconsistencies in the banking industry news accounts because there is a tendency to lump the larger banking institutions with the smaller banks. When someone is defining banking trends, large banks and small banks are not “apples to apples,” Naughton said.

The banking industry is still subject to “market blips,” Naughton said. Although there are “good things on the horizon,” the economy is not yet “over the hump,” he said. The economy needs a series of positive events, which include added investments and additional employee hiring, before a healthy economic outlook is absolute, Naughton said.

However, he said continued low-interest rates have allowed people to refinance their debts and gain more buying power. “All of that has a positive impact on the consumer,” Naughton said.

The banking industry’s movement to high technology may also have a positive influence on the consumer as electronic processing clears checks faster and more efficiently. The consumer downside: As high technology is woven throughout the banking industry and real-time networks are set in place, consumers will no longer be able to float those rubber checks.