WEST PALM BEACH, Fla. – On October 28 the much heralded Check 21 law went into effect, and for credit unions that means . not much. While Check 21 is expected to be a catalyst for image exchange of checks, most experts agree its fruits won't fully be recognized for at least a few years. The impact to credit unions is even less in the short term because credit unions do not return checks and most of the industry is already in an image environment. The change will occur for CUs when they start sending those images to other financials. Credit unions must wait for the big banks to get their imaging systems and pipelines ready before they can take that step. CenCorp President/CEO William Walby likened Check 21 today to a person with a camera phone trying to send a picture to someone who doesn't have a camera phone. "What's the sense of sending if the other person can't receive it," he said. Walby said there will be no major changes to credit unions or their members until the 19 large banks (which account for 60% of all checks cleared) that make up SVPCo (a consortium of large banks) get ready for image exchange. So when will large commercial banks be ready? Most experts say it will take about two years, but the banks have some significant obstacles to overcome says Paul Abbot, director of check image solutions with Mobius Systems. Abbot certainly knows large bank check processing. He is a former Bank of America item processing executive and works with many of the largest banks in his role with Mobius. "Unlike the credit unions, the banks have a lot of work to do in regards to their infrastructure. They've had a mindset for decades that they were going to send checks back to customers. So that's one of the bigger things the commercial banks have to overcome, to wean customers off getting their paper checks back," said Abbott. He said some banks are choosing to create check image statements and send those to customers – a strategy he thinks doesn't work. "To me that's like repaving the cow path," said Abbott. Abbott said credit unions have to be patient with banks and understand even if credit unions were at the same point banks are with imaging, banks would be slower to get up to speed solely on their size. He said for a commercial bank processing 60 million transactions a day, changing its established processes and infrastructure is a long, costly process. And there may be some reluctance given that banks have invested millions in their paper infrastructure, not to mention the forecasts that check volume will continue to decline as other payment methods proliferate. Abbot does see a unique window of opportunity for smaller banks and credit unions to seize right now while the large banks are still gearing up for image exchange. He is a proponent of having companies image their deposits and electronically forward those to their financial institution. He said large banks will see this issue emerge with their corporate accounts, but a large credit union may be able to make in-roads with some companies since its imaging is already established. In the short term, what credit unions will notice most from Check 21 is the emergence of substitute checks. These are basically paper copies of checks that can be exchanged as if they were the original checks. The potential benefit here is that financials can choose to have a substitute check printed somewhere near the financial it is drawn from, which would eliminate the need of sending checks across the country and speed processing. A number of sources interviewed for this story said this scenario will make sense for high-dollar checks where the float makes a difference. Credit unions may decide to selectively have substitute checks printed for those instances. So an institution in California, for example, could have an established relationship with a print vendor in New York to send them the electronic file for them to print, thus eliminating courier costs and saving on float. Keep in mind, they say, this is probably going to be more likely in the banking world where there are very large commercial checks being written. Also, this will be more effective in a higher interest environment where there's more money at stake. Jeff Vetterick, VP of Marketing for Advanced Financial Solutions, one of the leading check imaging companies that credit union item processors are turning to, said one effective way for CU processors to print substitute checks is through an image exchange network like Endpoint Exchange or SVPCo. That way the check clearing process can still be 99% electronic and is only printed in the last mile or so at one of the image exchange network's print centers. Vetterick said there is a compelling case for CU processors to print outgoing returns as substitute checks because they can avoid a lot of internal processing. One confusing issue surrounding Check 21 is determining when CUs have to give members substitute check disclosures. Originally, Check 21 was going to require all financials to send disclosures to their customers informing them about what substitute checks were and their legal status, etc. The law eventually changed to require those disclosures only when an actual substitute check is presented to the member – and in the credit union world that's not often. Alan Bernstein, senior vice president of EasCorp, said the corporate processes five million checks each month and maybe gets two requests to return a check. So the rarity of it is hard to dispute. Bernstein also said CUs should know that they don't have to present the disclosure if they are sending a copy of a substitute check. "Say we get a substitute check from Bank of America and we take an image of it. That goes in our archive and then becomes a copy of a substitute check and is not a substitute check," said Bernstein, so it would not require the disclosure. Bernstein described Check 21′s implementation date as one of the most over-hyped events since Y2K, though it doesn't approach the level of hysteria from Y2K. In the days leading up to Oct. 28 a number of mainstream media outlets like local and national newspapers started running Check 21 stories. The problem, say some in the CU industry, is the stories often painted an unrealistic picture. Cyndi Koan, SVP of Operations for SunCorp said according to some local media reports in SunCorp's Arvada, Colorado headquarters area, Check 21 will cut float time to mere minutes. "In order for that to happen everyone would have to be online in the same system. Even then image files have to be transmitted to our credit unions, posted to their host systems. All of that takes time. Most debit cards don't work that fast. They're still batch processing. And they don't even start out with paper like we are with checks," said Koan. SunCorp is on the Endpoint Exchange Network, one of the players trying to aggregate electronic exchange, but Koan said even Endpoint is a long way away from having any considerable volume. "At this point none of our major trading partners are ready to do any direct image exchange. We've been on Endpoint Exchange since March and have seen very little volume there," said Koan. Koan said she expects that major banks will be fully ready for the image world by 2006. She noted that the top 25 largest banks account for 80% of the nation's check volume, so their readiness is critical. But looking in the future, Check 21 could be a powerful tool for the industry. Credit unions ideally will be capturing checks right in their branches and electronically transmitting them to their check processor, eliminating costly courier services. The only time paper will come into play is with returns, the majority of which are NSFs. Although, one source pointed out that even returns will become more scare given the way credit unions are rolling out overdraft protection programs. However the vision of branch capture still has to make business sense for individual credit unions. "It may be real important in a very large state to have branch capture if courier delivery is $500 a day. If courier delivery is $10 to $20 a day, it might not make sense. You have to buy phone lines and have systems. It's complicated," said Nancy Virkler, Senior Vice President, Operations for Empire Corporate. Virkler described Oct. 28 as just another day and said it is the starting point of an evolution not a revolution. Virkler said large banks aren't exactly anxious to invest millions of dollars in changing their systems, especially given the forecasted decline in check usage among consumers. "It was certainly easier for us to make the investment five or six years ago then it would be today," she said. Despite the potential snail's pace of Check 21 adoption, CU item processors are touting their image exchange capabilities. WesCorp for example was one of the first to test image exchange and according to Teresa Ward, WesCorp's vice president of item processing, the corporate is exchanging about 100,000 items a month with Sterling Bank through Endpoint Exchange. Also, next year WesCorp plans to roll out a branch capture product, called IMAGEin, to its member CUs, that will allow them to take checks from their members, image them at the teller window and transmit the images to WesCorp. Corporate One was also set at press time to go live with two of its CU members – one in Ohio and one in Indiana – with receiving images from Endpoint Exchange. It's also working on deploying a common imaging platform to its credit unions to use today as an image archive product, that can eventually help them with Check 21 once banks are ready. Southwest Corporate FCU was the first multi-institution processor to enable its members to complete the "Check 21 Electronic Presentment Circle" back in August when it began live processing with Endpoint Exchange. SunCorp is on Endpoint Exchange and even has two of its largest CUs up and running with branch capture. SunCorp President/CEO Eric Kenealy was more optimistic than most about how long it will take big banks to get ready for image exchange. He also noted that processors have opportunities in their markets. For example, he said 80% of its direct presentment comes from about 14 banks, which SunCorp can make direct connections with. Check 21 has forced corporates and league service corporation processors to ramp up Check 21 educational efforts. Almost all have held conferences or Webinars on the topic. [email protected]