Boston, MA
May 2004

The Complexity and Risk of
Check 21 Imaging Operations


Before Check 21, the paying bank had both access to the physical check and the liability associated with any illegible image — but this all changes in October when sweeping changes will go into effect based on the Check 21 legislation.  Check 21 creates a substitute check, generated from an image, that is a legal document.  The legislation also shifts liabilities between the paying bank and the bank that first converts a check into an image or accepts a check image.  These changes, which fundamentally alter the check processing landscape, were made to foster the adoption of check imaging across the financial industry with the expectation that image adoption will drive significant cost savings associated with processing checks.  Since the infustry processes 40 billion checks a year, the move to adopt check images and shift liabilities is a project of incredible scale.

History shows that every large project is inherently risky, and creating a new system to process 40 billion checks a year valued at $39.3 trillion has its own risks.  And, the faster a financial institution deploys imaging to reduce costs; the greater the risk it incurs.

This report identifies five areas of risk involved in deploying large projects and then identifies many specific risks inherent in Check 21 and distributed check imaging.  While each individual financial institution ultimately faces its own unique circumstances, the report presents the key areas that every financial institution needs to consider and we trust that the report will be instrumental in guiding the institution’s auditing of their own risk assessment effort.

The most prominent risk associated with Check 21 is that the first bank that adopts a truncated (imaged) check becomes liable for providing a good image to the bank of first deposit.  Complicating this, the legislation makes it the responsibility of the paying bank to define the quality that meets the definition of “accurately represent all of the information on the front and back of the original check”, a definition that if taken literally would be impossible to achieve with the technology available today.  Mitigating this risk through contractual negotiations is the first order of business for banks of first deposit that move to adopt check-imaging solutions.

Tim Sloane, Director of the Debit Advisory Service for Mercator Advisory Group and the author of the report says that Check 21 will demand a comprehensive review of risks and issues that will then need to be addressed whether through the implementation of technology, process, contracts, or a combination of all three.

Mr. Sloane says, “The check 21 legislation shifts responsibilities and liabilities and it is extremely unlikely banks will continue to behave as they do at present when the rules and liabilities are changed so dramatically.”

This report contains 26 pages and contains 4 exhibits.

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