Processing Considerations

Tool 5: Evaluating Opportunities With Substitute Checks

Risks and opportunities are present in any decision in banking, and the decision to truncate and electronically clear paper checks is no exception. Banks that clear checks electronically benefit from faster check clearing, reduced back office costs, and new revenue opportunities. Banks that continue to process paper checks risk losing customers to competitors that move to check image exchange and pass along to customers the benefits of faster, safer check clearing.

As with any strategic decision, however, the decision to truncate checks requires careful analysis of capacity, costs, and opportunities. The four sets of questions that follow begin the process of evaluating the opportunities. Tool 6 provides case studies and an economic model to help quantify the costs and benefits. are designed to walk a bank through the analysis. The questions address four critical considerations in any truncation analysis: (1) changes in processing, (2) transportation and presentment costs, (3) Federal Reserve availability of funds, and (4) risk management. Being able to answer these questions should put a bank one step closer to making an informed decision about Check 21 opportunities.

Processing Considerations

• What is the bank’s average cost to have a teller process a customer deposit?

• What are current processing time cutoffs? How many additional deposits could you include if these were extended?

• How will the organization respond to extended-processing windows offered by competitors?

• On average, how many passes through a reader/sorter are required to process one batch of checks?

• What would be the impact on processing throughput if multiple passes on a reader/sorter were eliminated?

• How many holdover items does the bank average per day, and at what opportunity cost?

Transportation and Presentment Cost Issues

• What is the bank’s average clearing cost per transit item?

• What is the average transportation cost per transit item?

• How much does it cost you to prepare a cash letter?

• How many same-day-settlement endpoints does the bank have?

• If the bank could increase the number of same-day-settlement endpoints it presents to, how much would be saved on clearing fees?

• If the bank could process all items as though they were local, what would be the impact on cost structure?

• If a competitor’s cost structure improved significantly, how would your bank counter in order to remain competitive?

• How much is the bank paying in clearing and transportation fees to expedite large-dollar checks through the clearing process?

• What is the current cost for a returned item, and how long does it take for the item to be returned?

• What is the opportunity cost if the industry adopts a major technological improvement and the bank doesn’t follow?

Funds Availability

• What is your average availability on a transit item?

• What benefits would your company realize if non-earning assets could be converted to earning assets more quickly? How would this impact your company’s earnings per share?

• How would your company respond if competitors collected funds faster than your organization?

• If you experienced a permanent change in the structure of your balance sheet, how would you redeploy assets?

Risk Management

• Does the bank have a contingency plan in the event transportation networks are unavailable?

• If the bank could clear items faster, what would be the effect on fraud-reduction initiatives?

• Has the bank looked at new security features necessary to support fraud fighting efforts in an electronic check clearing environment?

AMERICAN BANKERS ASSOCIATION1