Kohn on Retail Payments
The speech given by the Federal Reserve’s Vice Chairman Donald L. Kohn today at the Western Payments Alliance 2006 Payments Symposium in Las Vegas has been published here. Some of his remarks regarding Check 21:
Clearly, Check 21 has begun to diminish the importance of geography and physical transportation in check processing, and banks have started to reengineer their backroom processes to accommodate end-to-end electronic check clearing.
And then a little later on:
As expected, depository institutions have been somewhat slower in agreeing to accept their check presentments electronically because of the complexity of integrating such presentments into back-office processing and risk-management systems. As a result, the use of substitute checks is widespread.
All fairly well known attributes and the well known current “problem” (i.e. the sheer number of substitute checks being generated). I think most will agree that Check 21 was created to allow banks and processors to achieve efficiency gains and cost savings - all operational considerations. Generating a substitute check probably offsets the Check 21 operational savings when viewed end to end (note that as far as I know the FED is currently generating substitute checks for over 90% of the image exchanged volumes it receives!).
However, if you look at what has been immediately successful (and the very first thing Kohn mentions above as a success of Check 21) - diminishing the importance of geography and transportation between the customer and the processing centre (e.g. remote deposit capture) - maybe this outcome alone makes Check 21 a success. Maybe the envisioned “efficiency gains and cost savings” everyone is looking for is missing the point a little. Banks can now sell new products to clients outside their traditional geographic footprint. If getting these clients means generating substitute checks, then so be it. Maybe most of the Check 21 story for now is about revenue not costs. Maybe the operational saves if achieved are just gravy or incremental. Maybe that is why banks are now starting to look for the promised “efficiencies and cost savings” via other methods.
