Is It Time to Trash Your Checkbook?

Electronic payments have outpaced paper-based transactionsBiz Spotlight – Banking and Finance

When account holders at North Jersey Community Bank write checks they don’t expect to get them back with their monthly statements. Like many other financial institutions these days, NJCB sends a computer-generated image instead of the cancelled check. In fact, banks are getting closer to the day when the whole idea of paper checks may be cancelled.

“North Jersey Community Bank has promoted online banking since we opened about a year ago,” says Paul E. Fitzgerald, CEO of the Englewood Cliffs-based financial institution. “Banks have to be prepared for electronic transactions, which have already displaced paper checking.”

Several forces have shaped this transition. Cost cutting is one, of course. Consumers have also pushed the conversion to electronic transactions: it’s easier to swipe a card than to fill out a check. But, the biggest push has come from the federal Check Clearing for the 21st Century Act, or Check 21, which took effect in November 2004 (See NJBIZ Oct. 18, 2004).

Under it, when a bank processes a check it must copy both sides of the paper draft, then transmit the images to the bank that has the money on deposit. The images replace the original for legal purposes.

“Electronic imaging can reduce float [the time it takes to process and pay a check] to as little as a day,” says Fitzgerald. “It also slashes costs, since banks don’t have to physically transport paper checks for processing.”

Under the old system, tons of paper moved among banks as they accepted checks and sent them back to the issuing institution for payment. In contrast, electronic checks let institutions use the Internet or other virtual conduits to quickly and inexpensively move the data from point to point.

Fitzgerald says the next step will be so-called “remote capture,” a process that enables the merchants themselves to feed paper checks through a scanner, converting them to an electronic format for faster processing. “Eventually this will impact the branching strategy of banks,” he says.

Branches won’t disappear, he says—especially since studies show that some groups, like senior citizens, prefer to deal with humans—but they will offer more and more automated functions.

Meanwhile, companies like Wells Fargo, a financial services company with an office in Short Hills, are doing their best to help businesses migrate to electronic check processing.

“Check 21 and technology advances are driving new payment efficiencies like Wells Fargo’s Desktop Deposit scanners,” says MaryLou Barreiro, the company’s regional marketing president. “The device, which costs from $500 to $800 depending on specific features like the number of checks that can be processed per minute, allows businesses to take a customer’s paper check, scan it and have a deposit transmitted directly to the business’ institution.”

According to Wells Fargo, 630 clients have bought about 1,200 of the scanners since their introduction in mid-2005. Barreiro says that Reliance Vitamin, a Somerset firm that manufactures private-label vitamins, recently signed up for the service, while Elizabeth-based New England Motor Freight is considering the product.

“Conceptually, we like the idea,” says Craig Eisenberg, CFO of NEMF. “We handle an average of 4,000 to 5,000 checks a week, and a scanning device would enable us to automatically update our accounts-receivable records, while saving a day on the float.”

Of course, this means the company issuing the check can’t count on a grace period before its funds are tapped to pay for the draft.

One concern about this change is that eliminating paper checks removes a key component in the audit trail. In an effort to alleviate that problem, e-payment providers use sophisticated software that can compare signatures, analyze the sequence of check numbers and develop profiles of account holders’ typical payees and customary totals. Similar to the way that some credit card companies notify a cardholder of unusual purchases, this kind of software flags out-of-the-ordinary transactions.

While firms like Wells Fargo try to bridge the gap between paper and electronic payments, companies like Princeton eCom are trying to bring the era of paper-based checks to a close.

“We create a link between billers and banks,” says Ron Averett, CEO of the Princeton-based company. “Our services let financial institutions like Commerce Bank, New Jersey Natural Gas and other companies offer Web-based bill-paying services to their customers. We also offer phone-based interactive voice-response systems that let people pay their bills over the phone. It’s all about creating convenient ways for businesses to interact with their customers.”

Consumers, however, may pay for the privilege. While the Commerce Bank Website says there is no charge for its online bill-paying service, New Jersey Natural Gas passes along an eCom “convenience fee” of $4.95 when a customer pays with a debit or credit card.

Averett says processing paper checks costs a company between 85¢ and $1.50 per transaction. But after an initial set-up fee that ranges from about $5,000 to $50,000, he says businesses will only pay about 10¢ to 20¢ per transaction for Princeton eCom’s service.

“In 2004, we executed about 67 million payments,” he says. “In 2005 we did about 90 million, and we expect to do about 120 million transactions this year.”

In a December 2004 press release, the Federal Reserve’s Financial Services Policy Committee announced that 2003 activity represented the first time that the volume of electronic payment transactions exceeded the volume of paper-based checks.

According to the Fed, in that year, the most recent one studied, there were 44.5 billion electronic exchanges in the U.S.—including payroll deposits and transactions with credit and debit cards—that represented some $27.4 trillion of activity. That compares with 36.7 billion checks worth $39.3 trillion written during the year.

Still, Fitzgerald of North Jersey Community Bank says he’s not quite ready to write off paper-based checks. “Some people will always want to use a checking process that’s tangible,” he says. “The idea is to make bank branches that are high touch and high tech.”

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