COLUMBIA, S.C. and PHOENIX — Two check processors on oppositesides of the country may be employing different strategies, butboth agree the cost savings of switching from paper to digital hasabout caught up with the cost of conversion technology.

For the South Carolina Credit Union League's PalmettoCooperative Services, convincing member credit unions to scanchecks at branches is the order of the day. Palmetto is anxiouslyawaiting the day the volume of imaged checks will surpass thevolume of paper checks, which should happen by the end ofApril.

In March, the group received approximately 700,000 checks thathad been scanned at 130 member branch locations. That marked adrastic increase of more than 200,000 items over February'snumbers.

According to Ed Culpepper, executive vice president and chiefoperating officer for the league, the ramp up began last October,when the CUSO processed 116,000 scanned checks.

“We had a lot of credit unions that were testing and in variousstages of implementation, but over the past few months it's reallytaken off,” Culpepper said. According to Vice President for ItemProcessing Stacey Gibson, the processor will also start acceptingchecks received for credit unions as images by third quarter, andanticipates about 65% of all check items being processed throughPalmetto will be images by year-end. Palmetto is currentlyprocessing images received from the Federal Reserve and Metavante'sEndpoint Exchange.

“Of course, you can't force everyone to present checks to you asan image, some can elect to still drop paper at your door. We stillhave same-day settlement banks that present paper to our door, likeBank of America and Wachovia. These guys will be presenting a lotmore images than they do today, and we think they'll ramp up quitea bit in 2007. But, they're still trying to figure out economies ofscale and doing it the proper way,” Gibson said.

Gibson said bank mergers, and resulting platformincompatibilities between merging institutions, have slowed thebank industry's adoption of the technology. However, he believesthat the Federal Reserve will soon raise the price of processingpaper checks to the point where big banks will decide images aremore cost-effective. Culpepper predicted that by the end of 2008,the transport of paper checks will be a thing of the past forfinancial institutions.

“Sure, people will still be writing paper checks, but as far asonce it's reached the clearinghouse, checks will be moved by imageinstead of paper,” he said.

Palmetto is currently in talks with Wachovia to offer directexchange of imaged checks, Gibson said. The CUSO has an existingrelationship with the prominent East Coast bank, participating indirect paper exchange for more than a decade.

Gibson said he is looking forward to two new processing methods:merchant image capturing, and ATM deposit imaging.

“The merchant capture product already exists; however, creditunions traditionally haven't had a large book of businesscustomers, so the demand isn't that great in the credit unionworld, but that is starting to change. This product will allowcredit unions to become more competitive in that environment,”Gibson said.

The processing pro said ATM deposit imaging will cut down oncollection time for paper, and also decrease ATM servicingcosts.

Sending checks to Columbia via the digital highway rather thanInterstate 20 is now a viable option for credit unions outsideSouth Carolina, and Culpepper said Palmetto now has customers fromfive other states, with room to grow.

“We're definitely picking up more business,” he said.

Unlike Palmetto, FirstCorp's CU eArchive Solutions (CUeas) isn'tanticipating the day the CUSO processes more imaged checks thanpaper ones. In fact, FirstCorp President/CEO Pete Pritts said he'dhave to look up the current ratio.

“We think this is all just a bridge to something better. I'mmore excited about the March 16 law that allows checks to beconverted to an ACH transaction. Imaging is just a bridge to ACHtechnology, which is where I think we'll end up,” Pritts said.

Pritts is referring to last month's NACHA launch date for BackOffice Conversion (BOC), which allows retailers, billers andfinancial institutions to convert eligible checks into ACH debitsin the back office. For credit unions, eligible checks includethose presented to the credit union for payment, often for aloan.

The corporate does receive checks scanned at branches, a serviceit launched earlier this year. Pritts said the reaction ismixed–some members are lining up to install the technology, whileothers are still opting to hold out.

“Imminently, our goal is to do away with paper, but creditunions have long project lists, and they get busy, so we'll see howit goes,” he said. CUeas purposely waited to offer the serviceafter an economic feasibility study indicated it wasn't viableuntil a threshold of other institutions caught up with thetechnology.

“The entity advancing the technology pays for checks to bedelivered on the other end, and if institutions can't receive thefile, not only do you have the charge to process the item, there'sanother charge for replacement check printing. It didn't makesense. As more financial institutions in the world invest intechnology to receive the files, then the process will be what thelaw envisioned it to be. The industry has to first make the capitalinvestment,” Pritts said.

That extra step of printing replacement checks for catch-upinstitutions is precisely why Pritts is a champion of ACHconversions instead. Pritts said he believes the cost savingsassociated with check-to-ACH processing is finally catching up withthe cost of purchasing conversion equipment, and predicts NACHAwill also allow personal checks to be converted to ACH within thenext few years.

And in keeping with the ACH strategy, CUeas will skip offeringcheck scanning services for member business accounts, insteadoffering check-to-ACH services for merchants.

“Retailers love it, because they can just swipe the check andget paid the next day. The transaction settles in the credit unionaccount and runs through the ACH processing system,” Prittssaid.

Plus, ACH processing will allow businesses to save on expensivecheck processing fees common in bank business accounts.

“These folks get pillaged compared to consumers,” he said.

The corporate is already processing ACH conversions for oneretailer who is a member of AEA Federal Credit Union in Yuma,Arizona, but as far as additional check-to-ACH retailers, Prittssaid, “there's lots of excitement, but not a lot of sales…yet.”–[email protected]