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Electronic Payment Future Bright In North America

Although domestic banks will spend over $1 billion this year to process paper payments, new legislation is expected to boost investment into electronic transaction systems.

The global banking industry will spend $12.8 billion this year on payments technology, and is expected to devote $14.3 billion to the technology by 2005, according to TowerGroup, Needham, Mass.

The bulk of this year's spending (approximately $9.2 billion) will be devoted to electronic payment processing, far exceeding the amount ($1.6 billion) spent processing paper. "In the industrialized nations, electronic transactions have long overtaken paper payments," said David Medeiros, director of global payments at TowerGroup, at its annual conference recently held in Boston.

Still, in North America, banks will spend $1.1 billion this year (71 percent of the world total) to process paper payments, reflecting the anomalous U.S. attachment to the paper check.

Soon, however, North American banks may be embracing electronic payment systems as tightly as their European counterparts. The share of electronic payments in the U.S. economy will increase with the implementation of new operating rules from NACHA and from the proposed Check Truncation Act, which would take effect on July 2003 or one year after its enactment, whichever comes later.

These changes in the regulatory environment promise to transform the paper check from a formal legal document into a mere written payment instruction. NACHA's new rules for Accounts Receivable Conversion, or ARC, will allow billers such as telephone, electric and gas utilities to truncate checks at the lockbox. Lockbox operators, instead of airlifting checks back to their bank of origin, will soon be able to scan a check, transmit the image and then destroy the original, resulting in significant cost savings.

"This has the potential to cut significantly into the check-based payment volume in the U.S.," said Medeiros. Approximately 15 to 20 billion checks are currently sent to U.S. lockbox processors, according to TowerGroup estimates.

But the shift to electronic payments won't necessarily result in lower expenses for North American banks. While industry spending on paper processing is projected to remain relatively flat over the next three years, spending on this electronic payments processing will hit $2.3 billion this year, and will grow 6 percent annually.

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