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Paperless Checks
Pradeep Shankar
Thursday, January 30, 2003
Alok Chaturvedi, CFO of a leading software firm in Bangalore, deposits a check for $ 90,000 at the HongKong and Shanghai Bank (HSBC), Bangalore. That done, he has to wait for a full 15 days to count his cash. The delay is explained away on the flight of the check all the way from Bangalore to Manhattan Bank in New York where it has to be validated. Hardly a pleasant experience for a chief financial officer in what is showcased as an electronic era!

Back to the CFO's check. It simply will not reach the bank in Manhattan so easily because it has to pass through the centralized foreign exchange bank in Mumbai, which in turn will route the check to the bank in NY. Should the check be sound and reach its destination at all, Manhattan Bank deducts its service charge and transfers the money to the astro account of HSBC in the U.S. and informs HSBC's centralized foreign exchange bank in Mumbai. After receiving the intimation, HSBC debits the amount from its astro account and credits it to HSBC Bangalore branch. The Bangalore branch in turn will transfer the money to the CFO's account. “Will technology ever transform his 15-day trial into a day's event?” Chaturvedi wonders. Like Chaturvedi, not many are aware that such a miracle is, indeed, possible.

The rapid growth of credit and debit cards and electronic modes of payment notwithstanding, especially in the U.S., the use of paper checks continues. More than 50 billion checks are processed in the U.S. alone annually and,on average, five different transactions take place between the time one writes a check and it is honored.

Various studies have shown that it costs from $1 to $5 to process a single check and according to a Federal Reserve study the direct cost to society is $1.25 per check. This adds significant cost not only to the way business is conducted but also to a nation's economy. Is there a solution to this enormous concern? Happily, yes: replace the outdated paper trail with seamless, technology-aided solutions that are more efficient, fraud resistant, and definitely less expensive.

Making a move in this direction is the Productivity From Information Technology (PROFIT) initiative at MIT's Sloan School of Management, which is developing cutting-edge systems to take the check electronically right from the source to its destination. The key concern of PROFIT is to study the deployment of information technology in both private and public sectors to increase productivity in many areas such as manufacturing, finance, transportation, and telecommunications.

The Process
The PROFIT system for the banks involves scanning a check once it is presented and emailing the PDF image to the bank of origin. The numbers on the checks are read with the help of character recognition software. The whole task is executed almost instantly, on the very first day, saving precious time and money. This is in total contrast to the Chaturvedi system that requires a bank official to go through several paper-based compliance motions. The PROFIT system enables banks to process and approve/reject each others' requests through an IT-enabled database. The system requires banks to use a dependable Web browser to log in and view the list of checks awaiting clearance. The list clearly shows the status of each check and upon sighting a clear code, the check is approved for wire transfer the same day. It is the responsibility of the bank of deposit to ensure that the check receives prompt response one way or the other.

The system has an “express” option to process checks almost instantly but the facility comes at an extra fee that will be shared by the banks involved in the process.

Happily, the Federal Reserve Bank and the National Automated Clearing House Association have approved the electronic fund transfer technology for movement of money from one place to another cost, and time-efficiently. What is required now is user initiative.

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