Please help me understand. We are a paper bank. Our customer writes a check to HUGE CABLE CO. that deposits the check at BIG BANK. BIG BANK is an image bank. BIG BANK truncates our check (correct?)sends it to its intermediary who says PAPER BANK does not accept images. BIG BANK then reconverts and sends a substitute check to PAPER BANK.

1. Is this scenario logical?
2. Won't BIG BANK charge PAPER BANK for reconverting?

I am being told we (a) won't see many substitute checks and (b) there will be no additional charges. I think just the opposite is true. Someone please help me understand.

You will not have any additional charges for receiving paper. Paper is and will continue to be the "default".

Your scenario is possible. It may also be that the intermediary will create the substitute check for forward processing to Paper Bank. And a third possibility is that Big Bank will elect to just forward the paper item through the processing chain to Paper Bank.

As for the costs associated, you are correct (for now). The cost of creating the substitute check will not be passed forward to Paper Bank. As time goes by, we will start to see more and more "image" cash letters. As image exchange becomes the norm, the smaller banks will then start to see more of the fees associated with exchange of paper items.

As for the number of substitute checks, it is possible there might not be very many substitute checks. That is an unknown at this time. It all depends on who decides to play (the image exchange process). If institutions are going to be assessed higher processing fees for sending images that in turn will eventually need to be turned back into paper, institutions may elect to process paper for a while.

I have also heard that there are some institutions that are waiting on their bank software vendors to write (and test) the piece that will allow for image capture and exchange.

Thank you both for your responses!

Currently, the costs of printing a substitute check cannot be passed on to PAPER bank. However, as bb suggests, I've heard a half dozen different speakers from the Fed say that assumption does not apply in perpetuity. It is likely that when more than half of all checks are being presented in image form the "default" position will change to images and the receiving bank will pay for the production of the substitute checks which it alone requires.

The question is not if a bank will go to imaging, it is when.

Thanks again Ken. You've been a big help with my understanding of this Check 21 business!