o, I had my first e-check transaction last month. That's pretty amazing, considering e-checks (i.e., checks that are converted to electronic payments and cleared through the automated clearing house, or ACH) have been a POS payment option for almost a decade.

But now, compared with other payment trends, ACH check conversion adoption is finally occurring at near breakneck speeds. And new conversion formats, such as back-office conversion (BOC) and remote deposit capture, only energize the trend.

Dave Kvederis, President and Chief Executive Officer of BankServ, a San Francisco-based software and services firm, likens industry adoption of check conversion to the ATM adoption process. A former banker and one-time Chairman of NACHA - The Electronic Payments Association, Kvederis recalled his days as a young banker trying to interest executives at a large Midwestern bank to deploy ATMs. "They wanted nothing to do with ATMs," he said.

It took more than 15 years for ATM cards to become a ubiquitous part of the U.S. banking scene, and then only after banks abandoned the notion of proprietary card networks and began thinking in terms of regional and national ATM networks.

"I'm willing to bet that 10 years from now there won't be any [businesses] going to banks to deposit checks anymore," Kvederis said. Instead they'll be using BOC or other remote deposit capture options, he predicted.

Presently, fewer than 100 banks have deployed remote deposit technologies, according to Christine Barry, Research Director at Boston-based Aite Group LLC, a research and advisory firm. She's expecting a five-fold increase in banks with remote deposit services by 2008.

As the name implies, remote deposit refers to the process of capturing check images and/or magnetic ink character recognition data remotely and transmitting data files in lieu of the physical movement of paper checks to effect clearing and settlement. Individual payments may be cleared as electronic payments (through the ACH) or as truncated checks.

Several companies, including BankServ, are rolling out remote capture services that use decisioning tools to help determine the best way to clear individual checks, using the ACH or check images.

BOC is a cross between remote deposit and POS check conversion, which in 1998 became one of the first ACH check conversion formats.

With BOC, data are collected from batches of checks taken in at the POS; the data then are used to create ACH debit payments in a batch fashion, for example, at the end of the business day.

In the days leading up to the October 2004 enactment of the Check 21 Act, some experts speculated that ACH check conversion would fall out of favor with banks and their business customers. But that hasn't occurred. In addition, some experts have raised concerns over potential risks associated with check image exchanges that result in the creation of substitute checks and the potential cost of any consequential damages.

Authorized by 931.ibm.com/bin/gsmb_keywords_2006/driver.cgi?ind=banking&sol=PCI&keyword=check_21" target="_blank">Check 21, substitute checks are paper documents that can be used in lieu of original checks when those originals have been digitized and cleared as electronic checks. Banks (and business customers) that create substitute checks make legally binding warranties that no other attempts to collect those checks will be made. If and when it does happen, those banks and/or customers are on the hook for consequential damages.

At last count, the Federal Reserve was receiving about 500,000 imaged checks a day from 200 financial institution endpoints. Final presentment of almost all of those checks, however, is done with substitute checks, at an average cost of $0.025 per item, according to Brian Egan, a Check Product Manager with the Federal Reserve Bank of Chicago.

"We've ended up printing a lot more substitute checks than we ever expected," Egan said during a presentation at Checks in Transition, a conference put on in late March by TAWPI, The Association for Work Process Improvement. "We are now the single largest cut sheet paper purchaser in the United States," he said.

Updated check data

Egan said that the volume of checks cleared through the Fed currently is declining by 5% to 6% a year.

Industry wide, check clearing volume apparently is declining even faster. Aaron McPherson, Research Director, Payments at Financial Insights, a research and consulting firm based in Framingham, Mass., estimates the number of checks cleared between financial institutions is falling at a compounded annual rate of 10.4% a year.

McPherson forecasts that 19.7 billion checks with a total value of $27.2 trillion will clear through the banking system in 2009. That's off a base of 34.1 billion checks worth a total of $38.2 trillion in 2004. Total value is expected to decline less quickly because consumers are writing fewer checks, and increasingly, low dollar checks are being replaced by debit card transactions, McPherson explained.

The last time the Fed counted, in 2003, approximately 37 billion consumer and business checks were cleared through the U.S. banking system.

Last year, nearly 2 billion checks written by consumers were converted to electronic payments and cleared through the ACH, according to NACHA.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .