The Future of Share Drafts: More Choices for Payment Systems Participants

A lot is happening in the world of share drafts. Merchants and banks are converting share drafts into ACH entries to reduce cost and speed processing, and legislators are passing a law (the Check Truncation Act, also known as “Check 21″) that will provide new options for the collection of share drafts. The changes taking place all serve to speed up the collection of checks and share drafts, thus reducing float and fraud. For credit unions – the changes are good, and have the potential to reduce processing costs and fraud losses. Allowing payment systems participants the choice of converting a check into an ACH entry, or converting a check into an electronic image (under Check 21), to collect the item brings a certain degree of competition to the world of payment processing. The market will quickly gravitate to the most cost effective means of collecting checks and share drafts. This competition is healthy and will serve to drive processing and collection costs down. The check-to-ACH conversion process has a head start on Check 21, and many merchants and banks are already using this option. Unfortunately, these check-to-ACH conversions present technology challenges to credit unions whose data systems process share draft and ACH files separately. For example, stop pay orders placed on share drafts that have been converted into ACH entries can slip through the cracks. It is expected that vendors will correct these issues quickly, and the check to ACH conversions will continue to quickly increase in volume over the near term. On the other hand, the check processing industry is feeling the heat from the loss of volume. Check 21 will provide laws that allow payment system participants to convert checks and share drafts into electronic images that can be presented for payment via transmission versus the physical delivery of the items. The sponsors of Check 21 expect that financial institutions will adopt electronic image presentment over the check-to-ACH method. The consensus among operations people is consumer checks will go the check-to-ACH route, while business checks and commercial deposits will be collected through the Check 21 methods. Time will tell. Credit unions and their processors need to be equally adept at processing files under both methods of check electronification. The good news for credit unions is that our industry is well positioned to implement both check-to-ACH and Check 21. Corporate credit unions, leagues, and service corps who are major processors of share drafts have image-based technology in place today. Our industry history of truncating share drafts has prepared us well for the future. Credit union processors have long been image-enabled, and have the technology in place to adapt to an environment of image-based share draft transmissions. The banking industry, on the other hand, will have a slow and expensive transition to the world of image processing. It will take several years for the banks to catch up with credit unions on Check 21. Most corporate credit unions also have a robust ACH processing system, which allows our members to receive and originate ACH files. Credit union ACH processors and our data systems are far advanced over the Federal Reserve and our banking peers. This allows us to provide more flexible solutions to deal with share drafts that have been converted to ACH entries. Don’t be surprised when forward-thinking processors figure out a way to combine share draft and ACH processing for posting and settlement purposes. And finally, it seems that Check 21 and check-to-ACH conversions present an extraordinary opportunity for the credit union movement to consolidate our payment systems volumes to take advantage of economies of scale. Entrepreneurial organizations, whether they be corporates, service corps, or CUSOs, who can aggregate high volumes for the presentment and settlement of share draft and ACH files will find opportunities that can substantially reduce processing costs for our industry. Change brings opportunity. Continuing our tradition of being payment system leaders will ensure credit unions make the most of these opportunities.