by Paul M. Connolly, First Vice President and Chief Operating Officer, Federal Reserve Bank of Boston
Remarks at New England Banker Forums
October 2003

This evening I would like to talk with you about pending federal legislation known as "Check 21". First, what is it? Second, what impact might it have on your institution, and your customers, when it becomes effective? And third, what are its potential longer-term implications?

What is Check 21? Its official name is the Check Clearing In the Twenty-First Century Act. Currently it is in the very final stages of Congressional passage.

Earlier this year two somewhat different versions passed the House and the Senate, with no dissenting votes in either chamber. Early this month a conference committee agreed upon a blended version of the bill, and that version now must be voted upon by both Houses. Votes are expected this month, and if both Houses approve it again, the bill will go for the President’s signature.

If it is enacted, Check 21 becomes effective one year later, which would be October or November of 2004.

What does Check 21 do? It enables a more electronic check collection system for the country.

It does not require banks to change the way they collect checks. However, it gives them a new option, and in doing so it does require banks, and their customers, to accept paper reproductions of their original checks.

These reproductions are called Image Replacement Documents, or IRDs. They are produced from digitized images of the original checks. They include images of both the front and the bank of a check; they have specific wording to identify them as replacement documents; and each one has the check-writer’s bank routing number and account number, and the dollar amount of the check, in magnetic ink along the bottom, just like the original check, so that IRDs can be processed through check sorters.

The Check 21 legislation is intended to take some of the costs and delays of paper processing and transportation out of the check system.

The Federal Reserve Board proposed the legislation to the Congress at the end of 2001, after extensive work with banks, trade associations, and consumer groups. The concept really gained momentum after the experience of 9-11. Your may remember that when airports were closed for days after the awful events of 9-11, that meant checks did not move from city to city for collection.

The Board, and many bankers, believed the country needed a better, more reliable way to collect check payments.

The essence of Check 21 is to enable a bank to capture images of checks and transmit those images electronically, instead of transporting paper for collection. If the payor bank is willing to accept an electronic transmission of the check payment information, with the images also transmitted or perhaps available on request, then the whole collection process can be entirely electronic.

If the payor bank does not want such an arrangement, the collecting bank can send the check images to another party that will print IRDs from those images and present the paper IRDs to the payor bank.

In that case, the payor bank still will receive the checks in paper form, namely the IRDs, while the collecting bank will gain some benefits from electronic delivery.

Imagine, for example, a bank on the West Coast presenting checks to payor banks in the East. Sending an image file electronically instead of putting checks onto a plane could mean collecting many checks one day faster, which means having the funds one day earlier. It also means that fog or snow will not delay the collection of the checks. When the image file is received, by a correspondent bank, or a Reserve Bank, or a service bureau, that party can print and deliver IRDs and still speed up the overall collection process.

So, how will Check 21 affect you and your customers?

It introduces at least one change, and it offers you new opportunities.

The one change it brings to every bank is the requirement to accept these IRDs for presentment, just as you would accept the original checks. And if you return checks to your customers in their statements, they will receive whatever IRDs you receive.

Check 21 includes safeguards for you and your customers. The bank that creates an IRD has to warrant that it is accurate. The bank also has to make sure that the IRD is produced in accordance with industry standards for quality.

How many IRDs will start showing up in your incoming check presentments, and how soon, we do not know. Right now the change seems more likely to be gradual than rapid.

Besides being on the receiving end of change, you might want to take advantage of it. I want to encourage you to think about what opportunities Check 21 might offer to your bank.

For instance, at what time each evening do you have to ship checks for collection to us at the Federal Reserve Bank? Or to your processor? What if you could send images electronically? Would that relieve some pressure on your operations? Could you offer later deposit deadlines to your business customers?

Or, suppose you still sent paper checks to us for collection, but we offered a service to convert those checks into images, and we could send them across the country electronically, and get your funds collected faster? Would that help you?

Or, suppose we could return bounced checks to you earlier, by sending images to you, or to your processor? Then you could send the images, or send IRDs on paper, to your customers who deposited those checks. Would that reduce risk for your customers and you?

The Reserve Banks will be offering new services to support Check 21. We really want your input about what services would be most valuable for you. Please think about Check 21, and let us know.

Finally, what might be some longer-term implications of Check 21?

We certainly hope it will give the country a more electronic check collection system. We hope it reduces risk, reduces cost, and accelerates funds availability for consumers and businesses.

In addition, it might contribute to further progress in two areas: electronic check presentment and check safekeeping, in which banks do not return paid checks to their customers; and the growth of online bill payment in place of check-writing.

When Check 21 takes hold, consumers will see these IRDs in their monthly statements. Meanwhile, two other emerging practices will be reducing the numbers of checks in those statements. Each year more stores are converting checks into electronic ACH payments at the point of sale, and handing the customer‘s check right back to him. Also, more billers, and credit card providers, will be receiving check payments in the mail and converting them into electronic payments, so that the customers never receive the checks back.

Over time, more consumers will see an ever smaller share of the checks they write coming back to them in their statements. As this evolves, more consumers may become more willing to do without the remaining checks. Maybe even here in New England.

While this is happening, banks may realize savings and efficiencies from their use of Check 21, and those benefits could spur broader efforts on their part to increase electronic check presentment.

Also, over time, Check 21 is likely to make image services more prevalent. As banks look at their opportunities to send and receive check images, more banks may expand their use of image systems. As they do, they may promote more check image services to their customers, including image statements, which some of you already offer; and, making images accessible through online banking.

If more customers start using online banking services to look up check images, they will become better acquainted with their banks’ array of online services, including electronic bill payment. This could give impetus to conversion of more check payments to electronics, especially among those consumers who until now have been less prone than others to go online, and to go electronic with their payments. This is just a hunch, but I think Check 21 could be a "sleeper" that will bring "Everyman" into the world of online banking.

Once Check 21 passes, we will be sending you more information about it. Meanwhile, I hope that my sneak preview for you this evening has been helpful. Thank you.