From Imaged to Paperless Checks

Paper checks don’t remain as paper very long. In today’s digital age, they are quickly imaged so they can be electronically cleared and settled.

Converting paper to digital images became law in 2003 with the passage of the Check Clearing for the 21st Century Act (Check21) and the initial implementation meant large companies and banks didn’t have to ship paper all around the country.

Today, more and more of the paper check imaging is being done by merchants and businesses that accept them. Community banks led the way in deploying remote-deposit check scanners as a way to offset the competitive advantage mega banks had with their branch network. By scanning and electronically depositing check images, community banks were able to attract business customers and businesses could choose a bank not just for the convenience of the physical branch to make paper check deposits.

Some businesses image checks one at a time at the point of sale while others use industrial check scanners that can image hundreds of checks a minute in the back office. Check imaging is now incorporated into ATM deposit functions and there are even apps available using your smart phone’s camera to snap a photo and deposit a check.

We’ve come a long way in seven years. But a big question remains. Why do we even have to write a “paper” check in the first place, why not just start with the image?

Is the industry ready for next evolution in check technology?

The inventor of the paperless check, Global Standard Financial, Inc, (GSF) thinks so. Clark Gilder, CEO of GSF points to a Fed policy paper published in November 2009 titled Digital Checks as Electronic Payment Orders (EPO) that agrees with him.

The Fed writes that “a digital check EPO could leverage the existing electronic check infrastructure and provide a convenient, low-cost payment option for both consumers and businesses, based on a payment method that they have found useful for many years.”

GSF announced that they had been awarded two US patents covering the fundamental processes necessary to securely create a paperless check (GSF describes these pure electronic payments as Digitally Originated Checks™ or "DOCs") ahead of the big banking show (http://www.bai.org/) this week.  To see the GSF patent, go to http://bit.ly/DOC_Patent.

As an alternative payment, keeping all the benefits of writing a check yet eliminating the need to start with a piece of paper has enormous implications for business models from peer-to-peer payments and gift giving to B2B invoices and payments to government and merchants.  And accepting paperless checks would costs much less than accepting a debit card today, something businesses and merchants should be enthusiastic about. In fact, instead of pushing Interchange legislation, they should push Congress to adopt revisions to the Check 21 law to secure paperless checks legal standing.

Of course, the security demands of both banks and check writers are a key consideration in any new payment method.  While the volume of paper checks is starting to decline, the growth in paper check fraud continues. Forgers can easily alter the dollar amount of a paper check and simple signatures are the standard authentication mechanism. Clearly sophisticated fraud technologies, electronic signatures and encryption can greatly enhance security. GSF employees these as well as providing additional security using digital rights management features and unique per check identification codes. In terms of security, these enhanced measures make paperless check fraud much more complex to perpetrate.

Over the years, the Federal Reserve has gone about the business of eliminating expensive paper processing after the check was written. Now it is the time to extend the benefits of digital checks all the way to the check writer. With the Fed and ECCHO (the check clearing trade association) endorsing the paperless check concept and the know how and technology available, its just a matter of time before we will all be carrying a check book again, except this time it will be digital and on our smart phone.

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