For years we have been hearing about the death of the check. While that prediction has not yet come true, the volume of checks has steadily declined. A Federal Reserve Payments Study in 2017 shows check volume has decreased 3% annually from 2012-2015 to 17.8 billion checks for $28.8 trillion in value. This trend has accelerated with the introduction of debit cards, ACH, Same Day ACH, and credit cards, and will more than likely continue with the introduction of faster payments.
There is still one type of check that has not seen any significant decrease in volume; namely checks drawn on banks from foreign countries, especially checks drawn on Canadian banks which comprise the vast majority of this segment. It is estimated that 1% of the check processing includes items drawn on Canada. This represents approximately 356 million items and a total processing cost in excess of $7 billion. Most of this cost is borne by the financial institutions and their customers. The potential to streamline and reduce costs is huge.
One reason that the Canadian items are not decreasing is that Canadian banks often charge large fees for international wires. Check issuers are choosing the lowest cost option for them to pay for international purchases. A second reason for the increase in foreign checks is that US companies are expanding their global footprint and increasing their business dealings in foreign countries. Accepting checks is a convenient way to expand business.
Financial Institutions choose to accept foreign checks for a variety of reasons, including the increased ease with which their customers can sell products and services globally. Clients depositing foreign checks are often a Financial Institution’s most profitable client segment with other extensive banking needs that can include lines of credit, credit cards, mortgages, loans, and wealth management, all of which may be at risk by not offering a full menu of services. With that in mind, it can be frustrating that the processing of foreign checks has not kept pace with advances in technology. The processing time and costs have remained quite high.
Most Financial Institutions clear foreign checks by having these items deposited at the branch, either as a separate deposit or by having the item kicked out for special handling at a central processing area. Today there are two options for clearing these checks on a provisional credit basis.
Behind Door Number One: The Federal Reserve
EXPENSE: Foreign checks are generally couriered to the FED (approx. $30), which charges a $15 batch fee, a $5 per check fee, and a $1.50 encoding fee. Unless volumes are frequent, many Financial Institutions hold foreign checks until they have a critical mass sufficient to offset the courier and batch fees, otherwise these transactions become extremely expensive.
PROCESSING INEFFICIENCIES: Reconciliation of foreign checks cleared via the FED is a cumbersome process. The FED credits the Financial Institution for the face amount of the check in USD in 2-3 days, and several days later debits back for the conversion amount. For example, a CAD 1,000 check will be credited at USD 1,000 with a reverse debit for USD 250 if the exchange rate was CAD 1.25 = USD 1.00. This means that every check needs to be touched and processed twice.
FUNDS AVAILABILITY: Foreign checks must be coordinated internally to a central processing area, and then overnighted to the FED. Many Financial Institutions do this weekly if their volume is less than 150 annually to manage the courier expense, which delays availability further. The exact amount of the credit for the depositor is not known for a few days after receipt at the FED, which will usually be 2-5 days after initial deposit at the FI, depending upon its internal process, so settlement of a provisional credit check deposit can take well over one to two weeks.
Behind Door Number Two: Correspondent Bank or International Providers
EXPENSE: Financial Institutions still incur a courier fee, a per check fee, and occasionally a batch fee. The courier fee becomes the most significant issue unless foreign check volumes are significant.
PROCESSING INEFFICIENCIES: Reconcilement of foreign checks cleared via a foreign exchange partner/correspondent is much easier. They will provide the exact amount of the exchange and totals so that reconciling can be done in one step.
FUNDS AVAILABILITY: Clearance times are still dependent upon how quickly the Financial Institution can get the check(s) from their branches to their FX partner, with returns (NSF, stopped payment, fraud) still possible several weeks later.
How Technology Eliminates Expenses, Inefficient Processes and Unavailable Funds
The technological advances which made Check 21 a reality in the US have now finally progressed to a point where a third option can be applied to clearing checks drawn on banks in Canada (both USD and CAD), which account for more than 99% of all foreign checks. Technology and regulatory changes in Canada will now allow for items to be imaged and cleared electronically.
Systems now exist which permit Items to be scanned directly from the branch or by the Central Processing Area within a Financial Institution, directly to the processing agent, with next day credit. Courier/mail fees are eliminated as are items lost in the mail. Additionally, this scanning option provides significant compliance and monitoring advantages. For example, Financial Institutions in the US are prohibited from clearing checks related to online gambling. As a result, most online gambling companies establish themselves offshore, with a large number of these in Canada, which facilitates payment of winnings to clients with USD checks drawn on Canada. New scanning technology now enhances the ability to block these items immediately, allowing the Financial Institution to return the item back to its client and avoiding the facilitation of business payments for online gambling companies.
Accelerating Innovation for the International Payments Cycle
For financial institutions that already accept checks drawn on Canada this new capability will represent an opportunity to save costs, improve processing and enhance compliance. For financial institutions that have steered away from accepting foreign checks this will represent an opportunity to attract more profitable clients. This enhanced functionality provides another example of how advances in technology continue to streamline the international payment cycle, permitting financial institutions to further differentiate themselves in bringing additional value to their clients.
About the Author
Dan Caputo is the Vice President, Global Payment Solutions at AscendantFX, a technology-based payments solutions provider. Dan provides correspondent international payment and check clearing solutions to community banks and credit unions that are looking to expand their service offerings, control their costs and enhance compliance. Dan can be reached at firstname.lastname@example.org.