Privacy Gets A Public Airing

The passage of check clearing legislation through Congress hit a pothole recently when key politicians voiced concern over the law's potential impact on consumer privacy.

The opposition came to light during testimony from Danne Buchanan of Zions Bancorporation in support of the legislation known as the Check 21 Act. Buchanan, an executive vice president at Zions, based in Salt Lake City, and CEO of its NetDeposit subsidiary, spoke on behalf of the ABA, ACB, CBA, ICBA and the Financial Services Roundtable in an impressive show of industry unity.

But this display of support did not stop some important legislators, including Senate Banking Committee ranking member Paul Sarbanes, D-Md., from questioning Buchanan about potential misuse of personal consumer information gathered during the check truncation process. "What was interesting, and which I did not expect, was Senator Sarbanes questioning the privacy aspects of this bill," said Buchanan. "His concern is that banks will use this check information to do data mining."

That concern is unfounded, he said. "There is nothing in this bill that has to do with storage. This bill is dealing with image replacement documents, so that you can facilitate clearing of checks, not storage of checks."

Nevertheless, in order to combat the threat-however remote-of improper access to check image archives, legislators are likely to push for increased standards for storage, security and oversight.

In the days when a bank had to present physical checks through the chain of collection, there was no practical way to retain information about the payer, his or her address, and what was written on the memo line. All that really mattered was presenting each check back to its paying bank, as quickly and cost-efficiently as possible.

Now, with low-cost imaging technology, anybody in the chain of collection has the technological capability to capture, store, and run queries against every piece of paper that goes through the back office. Indeed, under existing regulations, depository banks already create images of substantial volumes of checks. With bilateral agreements, banks can exchange some of their checks electronically, or send an image with paper to follow. Other institutions create check images as part of the conversion process from check to ACH debit.

Financial institutions expressly asked for, and received, a ruling from the Treasury stating that they would not be responsible for checking the payer of a check against lists of known and suspected terrorists, drug dealers and money launderers.

Indeed, using customer information for anything other than collection would bring nothing but additional headaches. "Banks have no license to interrogate any of that data," said Fred Redeker, president and CEO of the National Clearing House Association.

Accordingly, it's important for bank regulators to keep tabs on the check clearing process, said Redeker. "We believe the protections are there," he said.

Still, consumer advocates lobbying for recredit provisions for contested items have seized upon the privacy issue. "Once the consumer groups sensed that was where Sen. Sarbanes was focused, they started basically jumping on that bandwagon too," said Buchanan. "We'll see how that plays out."

Despite the potential brouhaha over privacy, bankers are looking ahead to their post-Check 21 business models. In many respects, the endgame may resemble other recent innovations in banking. "I think it will unfold just like the ATM networks," said Buchanan.

It wasn't always the case that a bank customer could use almost any bank's ATM to withdraw funds. Getting to this point took decades of growth, the establishment of several regional networks, successive interchange agreements, industry consolidation, and finally, the imposition of lucrative fees.

Similarly, each bank that wants to send or receive check images will have to sign onto a set of operating rules, choose a settlement forum and figure out how to move check images in and out of its own systems-at a profit. "At some point, it will interoperate just like the ATM networks do," said Buchanan. "There'll be transaction charges around these networks, there'll be rule sets that will have to be agreed to-either ECCHO rules or clearinghouse rules, or perhaps both."

Many banks will depend on their core processors to manage the technological aspects of Check 21, and on their regional payments associations to manage rule sets and bargaining power. Banks, either independently or through their core processors, can also connect to various networks, such as Endpointe Exchange, NetDeposit, and SVPCo, in order to extend out to their frequent exchange partners.

"Over time, you'll see some of these win and lose in the marketplace," said Buchanan. "Consolidation will occur until you end up with a couple of very large networks."