The Rise of the EPO?

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21 November 2013
Bob Meara
While Bitcoin captures the imagination of millions, another electronic payment mechanism has been slowly gaining momentum without much notice. Unfortunately so, because it holds significant promise. I’m referring to the Electronic Payment Order (EPO). EPOs are one of a small variety of checks – but without the paper. Originated electronically, EPOs are processed, clear and settle as check payments indistinguishable from images of what once were paper checks. The idea is more than sensible – it’s brilliant! Consider banks offering check disbursement services; plenty still do. Disbursement files are created (electronically obviously) from corporate clients and sent to their bank. These files are then used to create large numbers of paper checks subsequently mailed to recipients, introducing significant cost and delay. Once received, these same paper checks are captured via RDC or lockbox operations and subsequently destroyed. The image files are then used as the negotiable items. It begs the question, why bother with the paper step at all? Checks have endured the ages despite a bevy of electronic alternatives. Think about it: all the benefits of checks with: - Lower cost - Immediacy of electronic delivery - Significantly reduced risks of forgery or duplicate presentment What’s not to like? Well, two things… Risk:Like paper checks, EPOs are susceptible to fraud, and as we know all too well, the check payment system isn’t particularly good at mitigating fraud. Thus, EPO risk mitigation needs to be integral to any EPO creation mechanism. Fear not! One innovator offering electronically originated check-like instruments is VerifyValid. Check makers can create EPOs individually or using CSV origination files. Receivers can either print documents locally (and presumably scan them for deposit) or keep them digital – with a suitable arrangement with their bank. VerifyValid ensures the legitimacy of each item, transmits items securely and eliminates any meaningful risk of duplicate presentment – if the print step is omitted. Admittedly, I’m no fraud expert, but VerifyValid’s approach seems overwhelmingly superior to printing paper checks – despite the FFIEC’s assertions to the contrary. (Am I the only one that thinks their logic has flaws?) Law:Apparently, regulators can’t decide whether EPOs should be regulated under Reg. CC (like the rest of checks) or under Reg. E (like consumer electronic payments). The crux of the argument against regulating EPOs under check law is that unlike checks, EPOs originate electronically. Really? I find it amusing that there is no similar consternation around the proper regulatory framework governing electronically initiated checks created in the disbursement process mentioned earlier. After all, those payments originated electronically, but existed as paper for a short period of time. The paper check step adds cost and increases risk, but contributes no value whatsoever. A good discussion around EPOs can be found here. Call me an EPO proponent. Still, I would understand some EPO reluctance on behalf of our highly regulated banks, given the perceived reputational risk. But offering EPO services wouldn’t be the first innovation that began its life on questionable legal footing. Consider Uber. Patently illegal in many cities, Uber courageously challenged the status quo and is winning. Its recent success in California is well documented. If put to the test, EPOs may gain proper and reasonable legal footing. I hope so. The B2B use case is particularly compelling when combined with "virtual lockbox" solutions. But will there be a courageous bank willing to challenge the status quo? I’d love to hear what you think!

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