Digital deposits: new rules allow businesses to scan rather than take checks to the bank.

YOU MAY STILL BE ABLE to use the old excuse of "the check's in the mail," but new regulations and technology for processing business checks are reducing the amount of time they take to be paid once they arrive. In fact, Indiana businesses can now process checks much like debit cards and receive payment on the same day the check is presented.

Major changes in business checking took place several years ago when it became possible to transfer images of the checks in place of the physical paper checks. The Check Clearing for the 21st Century Act (Check 21) became effective in 2004 and created a new negotiable instrument called a substitute check.

That allowed banks to process check information electronically and deliver substitute checks to banks on which the paper checks were written. A substitute electronic check is the legal equivalent of the original paper check and includes all the same reformation. Banks benefited from using such electronic versions of checks to reduce their back office tasks of collecting and processing paper checks and then shipping them from bank to bank and then back to the customer.

Now new rules that took effect in March are giving business owners an opportunity to reduce their transportation of paper checks, typically a trip to a local bank branch with a stack of checks that need to be deposited.

Making remote deposits. Jim Young, president of Indiana Business Bank, says the new regulations and technology allow faster and more efficient processing for both banks and business customers. Indiana Business Bank will make remote deposit capture available to its customers this summer and Young says it will save trips to the bank and also decrease the number of people waiting in line to deposit checks.

In remote deposit capture, a business scans checks that it receives from customers and transmits the scanned images to its bank for posting and clearing. The basic requirements for making such digital deposits include a computer with an Internet connection and a check scanner.

In addition to saving time on the processing side, Young notes that business owners can also improve their internal accounting by increasing the speed of matching payments to receivables. And by getting the checks processed more quickly, companies will have faster access to their funds. Although Indiana Business Bank will continue to provide a courier service to pick up deposits for its business customers, Young expects remote deposit to become a popular service for businesses.

Back office check conversion. An even faster way for businesses to get paid from customer checks became possible with new regulations that just took effect in March. The back office conversion process allows business checks to be immediately "converted" into electronic payments when they are taken for payment. Such conversion takes places when the account information is captured from the check through a scanning process and then an electronic transaction is created for Automated Clearing House (ACH) processing.

That means money from the customer's account is immediately verified and transferred to the business account, effectively eliminating the "float" that often took several days for check payments to post.

Although most checks presented at a business will be eligible for back office conversion, NACHA, the electronic payments association that represents 11,000 financial institutions, lists exceptions that include:

* Checks that contain a special field with the account and routing numbers

* Checks written for an amount greater than $25,000

* Third party checks

* Checks provided by a credit card issuer accessing a credit account

* Checks drawn on a home equity line of credit

* Checks drawn on an investment company

* Obligations of financial institutions (travelers checks, cashier's checks, official checks, money orders, etc.)

* Checks drawn on the U.S. Treasury or a Federal Reserve Bank

Businesses using back office conversion must post a notice in a prominent and conspicuous location and must also provide a copy to customers that says: "When you provide a check as payment, you authorize us either to use the information from your check to make a one-time electronic fund transfer from your account or to process the payment as a check transaction."

As the process is initiated over the next several years, the posted notice must also say: "When we use information from your check to make an electronic funds transfer, funds may be withdrawn from your account as soon as the same day we receive your payment and you will not receive your check back from your financial institution."

Businesses using back office conversion retain the checks, rather than handing them back to customers as with other point-of-purchase check conversion. Once the payment information is captured from the checks, images of the checks are retained for at least two years and the original checks must be securely stored until destroyed.

Business owners that want to opt out having their checks converted in such a manner can do so by using checks that include an "Auxiliary On-Us" field at the bottom of their checks. The field is a series of numbers that appears before the bank routing number and account numbers. It is only available on larger business checks and not on the standard "personal" six-inch checks that some businesses use. Although industry standards do not specify what the field can be used for, they generally are used by corporate treasury, purchasing and accounts payable departments.

Savings from the process. Wells Fargo & Co. was one of the first financial institutions in the United States to provide back office conversion to its business customers when the new electronic check processing rules took effect.

Lex Curry, regional vice president for Indiana at Wells Fargo, says the new check processing is just one example of how technology can improve banking. He recalls how Wells Fargo pioneered change when the idea of processing check images instead of paper checks became apparent during the period when air traffic was halted after the September 11 attacks in 2001.

"We were the first bank to have a totally Web-based product," he says, noting Wells Fargo took the lead in developing much of the technology. "The technology that we developed in-house gives us a lot of flexibility in working with our customers.

Curry cites Wabash National in Lafayette as an example of a company that has benefited from that new check processing technology. The truck trailer manufacturer uses electronic check deposit at 22 locations around the country and researched a variety of remote deposit solutions before selecting Wells Fargo.

An analysis of the process revealed that when Wabash National processed an estimated 1,200 checks electronically, it realized a benefit of approximately $4,000 per month, with $2,000 realized from having faster access to payments and another $2,000 saved on overnight and courier fees for deposits.

Back office conversion can lead to even greater savings, Curry says. "The benefit is that once checks convert into an ACH, it speeds up the process." In addition to having faster access to their funds, businesses also have greater control over deciding when to process the checks, which Curry notes can be helpful if there is a question about whether there are sufficient funds.

While setting up the back office conversion process is a fairly simple matter of using a check scanner and a computer with internet access, Wells Fargo also gives its customers the option of having the bank handle the conversion for deposits made at cash vaults, banking stores and ATMs.

"Wells Fargo business customers will be able to choose how to make deposits and instead use us as the back office with Smart Decision, our optimized routing service," says Keith Theisen, senior vice president of treasury management for Wells Fargo. "Businesses can use our remote deposit solution, our coast-to-coast network of cash vaults or any of our 3,000-plus banking stores to make check deposits. The checks will then be converted in our back office."

Fewer checks. Brian Johnston, bank operations manager for 1st Source, the largest locally owned financial institution headquartered in the northern Indiana-southwestern Michigan area, has seen a number of changes in check processing for the company's area 63 banking centers.

Johnston says the Check 21 regulations have increased the number of substitute checks that arrive as electronic images from other banks. In addition, growing use of credit and debit cards by consumers has slowed the overall number of checks that are being written.

"We've noticed on the inbound side a steady decrease in the paper coming into the bank," he says. Order volume for check printing has decreased as well.

That decrease in check processing activity has allowed banks to operate more efficiently and led to some consolidation among the Federal Reserve's check processing centers. However, while electronic payments are more efficient to process for banks and allow faster transaction speed for customers, Johnston says paying by check will continue to be an option for many years to come.

"Old habits die hard and there will always be some places that don't accept electronic payments," he says. For example, he cites church offerings as a good example of where checks are routinely used and unlikely to be replaced by electronic payments.

Steve Schenck, Midwest regional president for Regions Financial Corp., has also noticed quite a few changes in technology over the past 34 years. Schenck, who is retiring in June, began his career with Indiana National Bank, where he became chief financial officer in 1985 and then continued to work in the same Indianapolis office during a succession of mergers that included NBD, First Chicago, Union Planters and Regions.

Through those various changes in banking operations, Schenck has seen a steady upgrade of banking procedures that reflect advances in technology He says large banks pay particular attention to the desires of various customer segments and often use technology to roll out new services.

"What drives the success of banking is understanding the needs of customers," Schenck says. "Customers expect the technology." As technology has increased the speed of transactions and information, bank customers have demanded the same and that has led to many changes, from 24-hour Web-based banking to the new back office conversion, he explains.

For example, Schenck recalls that 10 or 15 years ago, paying for groceries with a credit card while most people were writing checks would be frustrating for those waiting in line while the charge was submitted for approval. With today's technology, exactly the opposite is true, with card payments approved in seconds and cashiers taking longer to approve a purchase paid by check.