Taking the paper out of checks

Source: Technology Digital

Date :16/07/2007 15:18:47

With the new of electronic checks passing though the Federal Reserve Bank expected to double by next year, Unisys is helping to develop a totally new system capable of handling anything the future mig

By David Weldon

On any given day, the Federal Reserve Bank system processes approximately 38 million checks.

Of that number, approximately 25 million are good old fashion paper checks, like the ones people return with their monthly bill statements, write at the local food store, or insert into the nephew’s birthday card.

The other 13 million are so-called Check 21 checks, or digitally scanned images of the original real thing. (The Check 21 name derives from the federal legislation passed in October, 2006, that authorized the use of electronic checks as valid transfer of currency). While the electronic checks still get funds from party A to party B, they do it tremendously faster — by eliminating the need for humans to view the check on its route.

If the numbers above sound impressive, consider the total number of electronic checks processed through the Federal Reserve for the month of March alone — 279 million. And by the end of next year, the number of electronic checks processed daily is expected to reach 20 million.

But getting from 13 million to a near doubling in a year is no small task. Which is why the Federal Reserve Bank system is embarking on a major technology implementation —a total next-generation open payment platform that will be able to handle a dramatic increase in the check volume passing through the system each day, and to do so with even greater optical quality.

This massive project has been turned over the Unisys Corporation, which has had an ongoing technical support relationship with the Federal Reserve for many years. Unisys, which successfully bid on the project, actually helped the Federal Reserve with the development of its present system, so it is in a good position to understand the client’s needs.

“The Federal Reserve has a first generation system that they put in place quickly, to handle their immediate needs,” according to David Luther, vice president of solutions management in Unisys’ Global Financial Services group. “But it will reach some of its capacity limits soon, and won’t be able to handle the increase in checks going through the system.”

Unisys was given the contract to develop a new system in May, and will provide hardware, software and consulting services to the Federal Reserve around the new platform. Requirements for the new system are that it be a scalable, flexible, open system, capable of processing existing technologies, and also emerging requirements for electronic payment processing.

The initial systems work is targeted for the Cleveland Federal Reserve Bank, though the Richmond, VA Federal Reserve is also being considered. There are 12 banks in the Federal Reserve system overall. While the Federal Reserve certainly does not process all checks written on a given day, it is the largest processor.

“The Federal Reserve is a subset of the total banking system,” Luther explains. “Other banks may transfer checks directly, or through a third party system. But they do a large, and a critical piece of it.”

The Federal Reserve isn’t the only banking group interested in electronic check processing — all banking groups are processing an increasing percentage of their check transfers in this manner. The reason is simple: savings.

“When the Check 21 legislation went into effect in October, 2006, it didn’t mandate that banks do it, it allowed them to,” Luther says. “It’s been more of an electronic benefit for them. Banks can realize a lot of savings if they don’t have to physically deal with the checks.”

Challenges with the new system include an upgrade to optical recognition quality, to further reduce errors in the system scanners reconciling the numeric amount on a check with the actual hand-written amount.

“With the new automated character recognition program, it is more likely to find a problem with a check and to identify the amount correctly. The process is very good now,” Luther says, but will soon get much better. Unisys is also building in more fraud detection features.

Another challenge with the second-generation system is to design it so that is very flexible.

“A critical criterion of the Feds with this system is that they wanted to have a more standardized system, and one that could scale up or down, and could change very quickly,” Luther says. “The solution that we proposed to them can scale up or down, can handle any change in the format of checks in the future, and adapt quickly, and can do intelligent routing.”

This is also one computer system that quite simple, “can’t be down,” Luther explains. After all, this is the Federal Reserve Bank. That places further challenges on the new system to design fool-proof fail-over functionality, automatic disaster recovery of the system to a remote site, and lots of hardware and software testing features.

Unisys is well underway in designing the new system, and “out timetable is to develop it through the end of 2007. The Federal Reserve will switch over in 2008.”

In terms of the scope of the work, Luther says “we aren’t in a position to discuss the size of the contract, but it is a mission critical system for the bank, and for the economy,” Luther says.

It is also the largest project underway for Unisys right now, “with 30 of our servers dedicated to the project,” he says.

The reason for such a large display of firepower is due to the very nature of the project — processing and managing large volumes of digital files.

“We use 3D virtual Enterprise. We use it to model the business requirements of the Federal Reserve, not just the processed used today, but how they will change in the future,” Luther explains.

The new platform will also move the Federal Reserve from a decentralized system to a centralized one. That helps in the modeling of the new platform, since Unisys can quickly evaluate the full impact of any changes made along the way throughout the entire enterprise.

Finally, the new system will give the Federal Reserve an improved ability to track individual checks through the system. This is made possible by the improved quality of digital image reading technology, tied to file management processes. The result will be the capability of the Federal Reserve to see the status of any check at any given time.

With the completion of the new Federal Reserve system, individual banks will not be forced to adopt electronic check reading technologies if they haven’t already done so. But they would be smart to.

“They will be able to work easier with the Federal Reserve Bank,” Luther notes. “They’ll be able to process later in the day than other banks, and they could process their entire volume in a couple of hours.”