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Robert Hunt, TowerGroup
Robert Hunt, TowerGroup
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IRDs -- Can Industry Limit Volume During Transition to Electronic Presentment?

The IRD is at once an effective tool for improving the check presentment process and a barrier to achieving full electronic check presentment.

Check 21, the Check Clearing for the 21st Century Act, allows banks to convert a deposited check to a digital image for transmission to a site near the paying bank where it is reconverted to paper as a substitute check or "image replacement document" (IRD) for presentment at the paying bank. The IRD was clearly designed by the Federal Reserve System (FRS) to reduce check transportation, float and handling costs while not forcing banks to upgrade their technology capabilities. Banks already possessing image check technology, however, argue that IRDs are costly and delay the transition to full electronic presentment.

TowerGroup believes that the IRD is, in effect, a pill that has to be swallowed in order to reach the long-term goal of full electronic presentment. The challenge for the FRS and banks is to limit the usage of IRDs during the transition to electronic presentment. The FRS' recently announced IRD pricing ranges and incentives for banks to accept electronic presentments are positive steps to ensure that IRDs will not represent a high percentage of check-initiated payments.

Assuming moderate short-term interest rates (3 percent to 4 percent), we believe that IRD transaction volume will represent less than 1 percent of total check volume. If this projection is accurate, then the cost impact of IRDs on banks should be minimal. However, higher interest rates or a drawn-out transition to electronic presentment would result in higher IRD transaction volume and processing costs for banks.


The Federal Reserve System and its member banks have long striven to reduce check handling and float costs by use of streamlining methods such as local clearinghouse exchanges and direct presentment (bypassing the FRS by transporting checks directly from the depositary bank to the paying bank). Additionally, both the FRS and a number of banks have initiated electronic check presentment programs that typically utilize a "checks following" model to conform fully to legal requirements.

Although the FRS might ideally have drafted legislation requiring banks to accept full electronic presentment, it faced the fact that compliance would force all banks either to upgrade their hardware and software or to seek the services of an outsourcer. This requirement would have been resisted by many smaller community banks and thrifts, which process relatively little check volume. Instead, the FRS created a substitute check, the image replacement document (IRD), which allows for the truncation of the original check without requiring paying banks to adapt image technology.

The use of an IRD reduces the costs of check transportation and processing by eliminating the shipping of the physical check to the paying bank. The original check is converted to image form by the "truncating" bank, which transmits the image and related data to a site near the paying bank. The image and data are then used to reconvert the transaction to a printed form, the substitute check. These printed images are then delivered to the paying bank.

Banks may present IRDs through the FRS or third-party network vendors. Non-image-enabled depositary banks can present IRDs by forwarding the paper checks and instructing the FRS, a correspondent bank, or a third-party vendor to truncate the checks and forward the images to another facility located near the paying bank.

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