Banks Facing Electronic Transition

June 11, 2004
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GRAND RAPIDS — October is a big month for all banks, but it will have a certain poignancy for United Bank.

Oct. 28 is the date that the federal government’s so-called Check 21 statute goes into effect.

“Check 21” is short for the Check Clearing for the 21st Century Act, a new law permitting the electronic transfer of checks from bank to bank. The measure will begin eliminating the problem of physically transporting untold tons of paper checks among banks throughout the country.

What’s special for United Bank is that the institution came into being in 1887, in Wayland, as what was known as an exchange bank.

That original institution, basically, was two trustworthy men who collected checks from farmers, laborers and merchants in Wayland, and took the checks by horse-and-buggy rig to Grand Rapids banks.

Once in Grand Rapids, they cashed the checks for the folks in Wayland and brought the cash back to town, collecting a fee for their services.

Now, 117 years later, the end of physical check transportation — among banks, at least — is in sight.

Art Johnson, president of United, says he really won’t regret its passing.

Like most of his colleagues, Johnson deeply dislikes handling masses of checks because it’s costly and time-consuming.

“When a grocery store comes in with a deposit of 100 checks,” he explained, “let’s say 20 are drawn on us and the other 80 are on banks here in town — say on Fifth Third — and across the country, like First of California.”

It takes little time to process the checks drawn on United, he said. But the other checks must be transported by courier to the local check-clearing house or, for checks from outside the community, to Detroit to be sorted and disbursed across the country.

All the banks everywhere, he said, pay other firms to undertake those transportation and sorting and clearing services.

As for checks drawn on United, he said, they go to a large mechanical sorter in the basement that reads the numbers on the checks.

“Every bank has a sorter,” he said, “and I imagine some of the big banks have dozens. Sorting is the one part of banking that’s a factory kind of operation.

“It’s very physical and mechanical and noisy and dirty.”

Sorting the bank’s own checks will continue, he said, but electronic transfers will replace the transportation of tons of checks.

“What Check 21 does is two things,” he said.

“First, it gives legal standing for an electronic substitute check.

“Second, it requires all banks in the check-clearing process to be able to at least receive the check electronically. That will facilitate the development of electronic collection.”

Thanks to electronics, he said, money will be able to move a lot faster in both directions. Customers’ deposits will be credited more quickly, he said, and conversely, checks will be debited more quickly.

“Float is gone,” he added.

And there will be another benefit, he said.

“It’s also going to help banks in a state like Michigan — where we have snowstorms and that sort of thing.”

Obviously, he said, electronic lines can go down, too. “But it’s a lot less likely than roads being impassable for several days or planes being delayed.”

He said that as far as hardware is concerned, United — like a great many banks — is equipped for the October transaction.

“For some years, United has been able to take a picture of the checks — capture both sides — for our own purposes, instead of sending checks back to our customers with their statements.”

Given the right soft ware, he said, it now will be possible to capture those images in an electronic file and send that file to the Federal Reserve Bank to be sorted electronically.

He suspects electronic checking among banks will save money over time, though he also said it’s difficult to say how much.

“At this point, we don’t have a feel for what it’s going to save us. Perhaps the biggest savings will be getting money collected earlier.

“And to the extent that our costs go down over time,” he added, “then bank service fees will have the potential to not go up as much as they might otherwise.”

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