Later This Year for Rules Clearing the Way for All-Digital Checks

A set of rules governing the exchange of a new type of all-digital check could be in place as early as late summer, allowing banks and vendors to begin work on offering a product that would work on mobile phones and would entirely do away with paper. That's if current expectations at the Electronic Check Clearing House Organization, which is working on the rules now, hold true, David Walker, president and chief executive of the Dallas-based organization, tells Digital Transactions News. Walker says ECCHO, whose rules banks use as they trade electronic check images under the auspices of Check 21, expects its Operations Committee to have a rules set ready for presentation in June to the ECCHO board. If the board approves the rules, they could go into effect in “only a handful of weeks,” says Walker, who cautions that the rules would apply only to transactions between financial institutions that are ECCHO members. Some 2,268 depository institutions belong to the organization. At the same time, vendor interest in the product, known as an electronic payment order, or EPO (Digital Transactions News, Jan. 7), is apparently running high, which could lead to pilots and possibly commercial products fairly soon. “A number of vendors have a good bit of interest,” Walker notes. The new digital check, he argues, would require relatively small technology investments and could yield big payoffs in driving further costs out of the nation's check system. As things stand, image exchange has largely succeeded in replacing paper checks with electronically transmitted images at the bank of first deposit. In some cases, remote deposit capture has pushed this process down to the merchant level. But all checks still originate as paper with the check writer. “We have tens of billions of checks that aren't in electronic form, at least at the point of origination,” says Walker, who co-authored a report on EPOs published in November by the Federal Reserve Bank of Chicago. With an EPO, a consumer could “write” a check on a smart phone, using special software installed on the device to fill in fields on a check image appearing on his screen and sign the instrument, possibly with a stylus. The software would then transmit the image over the wireless network to a payee, who could then deposit it electronically. After that, the instrument would clear and settle in the same way as any other check image. Since these transactions are entirely new to banks, ECCHO's rules would spell out a legal definition of the instrument and describe how legal liabilities would be split among the parties to the transaction. Walker points out that a similar form of transaction, known as a remotely created check, is already flowing through the banking system, though without legal definition and with unknown liabilities. These checks are created when merchants receive instructions from customers over the phone or the Internet and then create a check image for processing. Walker says ECCHO's interest in EPOs, apart from improved efficiencies, stems from the need to create a legal framework for such transactions. “It doesn't make sense for them to go through the system undefined,” he says. ECCHO began work on the new rules last summer, Walker says, after receiving instructions in February from the board to write specifications for a new form of payment that would combine the best characteristics of the traditional check with the efficiencies of beginning-to-end electronic processing. But this is not the first time the organization has gone down this path. Walker recalls that ECCHO developed rules in the mid-1990s for a “fully electronic check.” But in those pre-Check 21 days, few banks were prepared to handle items that had never had paper form, so the effort never took off.