Celent: Image Exchange Will Nearly Pull the Plug on Check Conversion

Image exchange will account for 93% of all transit checks by 2010, marginalizing what are now some highly popular forms of electronic check conversion, including the fastest-growing form of e-check, account receivable conversion (ARC), according to new projections from Celent Communications. The New York-based research firm says today's nascent image-exchange networks will drive down costs as they build volume, cutting the cost advantage of check conversion through the automated clearing house and underscoring other advantages of check truncation over the ACH, including the ability to process all checks and generally faster clearing time. The impact on ARC will be especially dramatic, Celent says. ARC transactions have been exploding as billers seize on the cost and float advantages of converting paper checks they collect at lockboxes. The National Automated Clearing House Association, a Herndon, Va.-based group that sets rules for ACH transactions, expects ARC volume to hit 1.25 billion this year, a six-fold increase over 2003 (Digital Transactions News, Oct. 28). But Celent says ARC transactions will peak at 3.5 billion in 2007 and decline to 2.6 billion by 2008. By 2010, it says, “ARC will be a marginal item in the ACH network” as billers and financial institutions increasingly adopt image exchange. The percentage of transit checks traded over image exchanges, meanwhile, will balloon from virtually nothing now to 15% next year, 30% by 2006, 61% by the following year, and better than 90% by 2010, Celent forecasts in its report, “The Future of Check Processing in the U.S.” Volume will be driven by the adoption of image exchange by major banks accounting for the bulk of the nation's commercial deposits. Networks built by such banks include that put together by the New York-based Small Value Payments Co. (SVPCo.), which began trafficking images in August. As these networks begin trading images between them, Celent says, volume will build even more rapidly. Though many observers have predicted that image exchange will co-exist with check conversion, Celent says the buildup of image volume will generate economies of scale on image-exchange networks, driving banks, billers, and merchants to prefer image exchange. Banks will also not want to support two separate pipelines for electronic check processing, the firm says. Although the impact on ARC will be dramatic, according to Celent's projections, image exchange will also increasingly marginalize check conversion at the point of sale, which NACHA calls POP, says one of the co-authors of the Celent report. This form of conversion has mostly been adopted by small retailers, and these merchants will be slow to convert to imaging, says Gwenn Bezard, an analyst at Celent, because of cost and training issues. But ultimately POP too will be a minor item on the ACH, he says, possibly by 2011 or 2012. “I would expect POP to disappear at some point in the future as well,” he says. “It just takes time.” NACHA disputes Celent's findings, pointing out that check-processing costs are rising, rather than falling, as the volume of checks continues to plunge. This trend, NACHA says, will make it difficult for image-exchange networks to achieve the economies of scale that Celent forecasts will bring image-exchange fees closer to ACH levels. As it is, ARC processing costs about 2 cents per item, compared to the 14 to 20 cents it costs to process a paper check at a retail lockbox. Regarding Celent's forecasts for ARC, a NACHA spokesman says the e-check offers benefits the research firm overlooks. “There's no justification offered for the assumptions that check image exchange will provide better exception management, fraud management, or settlement than ARC,” he says. As for the limitation of check conversion to consumer items, he says there's no reason to assume that ACH rules “will remain static forevermore.” Check conversion involves the conversion of a paper check into an electronic debit in ACH format. The two biggest forms of such conversion are ARC and POP. Image exchange involves the trading of digital images of checks rather than the paper itself. Banks can clear the images if they are so equipped or can clear so-called substitute checks, which are printouts of the images. Unlike check conversion, which under NACHA rules is confined to checks drawn on consumer accounts, image exchange networks can carry images of business and consumer checks.