Demat in "de" Bank: The Greater Effect of,

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Burl Humana

With the need to dematerialize or use fewer natural resources, some paper products have become thinner. In the banking industry the type of paper used for checks and deposit slips has become very thin. Each banking night, encoding machines print the amount on the bottom right corner of each check or deposit slip in magnetic ink. The thinness of paper causes the encoding machines to jam or allows transactions to slip through without being encoded throwing bank deposits out of balance. Without this encoding transaction slips cannot be read for the electronic transfer of money. As more and more bank customers use thinner checks or deposit slips accurate encoding becomes a growing problem for banks. The bank encoding machines have become outdated to deal with the problem of dematerialization in paper. Dematerialization has hit the banking industry hard.


One would not think the thinness of paper bank checks could give us a clue about world peace. However, the net effect of this dematerialization problem in the banking industry gives us a glimpse of the link between dematerialization and peace for the United States in their conflict with extreme Muslims after the terrorist attacks fo September 11, 2001.


The banking industry is the infrastructure that keeps our materialistic/capitalistic system glued together on a national and global basis. Banking is based on financial transactions that go on 24 hours a day at some place in the world. Each country around the world has banking rules for processing these transactions.

In the United States, these bank transactions are regulated by the Federal Reserve System and happen by either paper or electronic transactions. Those transactions made by paper have ABA (American Bankers Association) coding printed on the bottom of the check or deposit slip in magnetic ink. You can see these magnetice numbers at the bottom or your own personal bank checks. Machines read this magnetic coding and make the appropriate debits and credits to the appropriate accounts. In addition to our personal transactions, billions of paper transactions between banks and businesses go on every day.

These magnetic codes include fields for a serial number, bank routing number, account number, transaction number, and the transaction amount. All the numbers with the exception of the transaction amount can be preprinted on the check or deposit slip. The actual amount is hand written or printed on a check at the time of a financial transaction and then deposited for payment into a bank account. Each night after closing, all the banks in the United States encode the transaction amount at the bottom of each and every check and deposit slip in magnetic ink. This huge encoding effort goes on every banking day of the year on a nation wide basis.

When you receive your personal checks back with your monthly statment, has it ever crossed your mind how the amount actually became encoded on the bottom of your checks? Did you know every bank runs encoding sweatshops to get that job done. At night, people with flying fingers, mostly women, sit at encoding machines that are about the size and shape of an electric piano except with ten key capabilities instead of piano keys, in a large room of encoding machines. In sweat shop fashion, they input debit and credit amounts on the ten key as fast as the machine will grab the transactions slips and encode them. Once all the transactions are magnetically coded they go off to the department that reads this magnetic encoding and sorts the transactions to go back to the originating bank. Sometime in the night the banks switch bundles of transaction and receive back the transactions drawn on their own financial institution through a settlement system regulated by the Federal Reserve.

The magnetic encoding allows money to move electronically between between banks. The difficulty in encoding paper that is too light weight interrupts this transfer of money. The paper weight problem with checks is mitigated by the huge increase in electronic transactions by debit and credit cards and ACH (automated clearing house) transfers. However, I would conservatively guess more than half to two-thirds of all bank transactions are still done by paper. The paper weight of transaction slips could still be a large problem for some time to come.

So what should the banking system do? Invest in all new encoding machines? It seems unlikely that any large industry would make that kind of backward expenditure with the huge trend toward electronic transactions. It is an interesting problem.

Along came the terrosit attacks of September 11, 2001 on the United States. Together with other goals the terrorists hoped to inflict economic damage to America and directly hit the twin towers in New York as symbols of American capitalism. The attacks had a significant economic impact on the United States and world markets. The Federal Reserve temporarily had reduced contact with banks because of outages of switching equipment in the lower NY financial district. Contact and control over the money supply, including immediate liquidity for banks, was destroyed for several hours. The end result was a very shaken banking system ready to re-think how it does business. This prompted a new look at how a very old banking system should change it's ways to work more efficiently in the 21st century.

The Electronic Signature in Global and National Commerce Act. had already been signed into law by President Clinton in June of 2000. Also called the E-Sign Act this new legislation eliminated legal barriers to using electronic technology to sign contracts and to collect and store documents. This Act gave the banking industry impetus to start changing the ways it did business before the defining moment of 9/11.

By 2003 a new law called check 21 was signed into law. Change takes time and now in 2007, 6 years since 9/11 we are on the cusp of a new way that transactions will be processed by the banking system. Bank tellers will scan bank transactions and turn them into electronic transactions right at the teller window. These will be called POP or Point-of-Purchase transactions. A check presented in-person to a merchant for purchase is presented as an ACH entry instead of a physical check. Scanned transaction tickets will be physically stored by the receiving bank and never returned to the originating bank in after midnight settlement transfers. Settlement between banks will be in real time and liquidity will be immediate. There will no longer be a need for magnetic coding of transaction amounts after the banks close. The encoding sweatshops will be put out of business. The thinness of paper transaction tickets will no longer be a problem for old encoding machines and new scanning equipment can be engineered to deal with this dematerialization problem.

In their own way the terrorists unknowingly prompted new technology in the banking industry. They helped the banks deal with a large dematerialization problem by attacking capitalism with the downing of the twin towers.. Capitalism drives America's materialism. Our consumptive ways are an affront to Islam. The conflict al-Qaeda has with what America does in Islamic countries and our support of Israel has only increased since 9/11. Is there any way that dematerialization can create a joined effort between America and the Islamic world to form a mutual goal. By studying the problem of materialization we can perhaps come to an understanding of our differences.


Changing to a system where check cashing and bank deposits become a point of purchase sale resolves the issue of paper becoming too thin for encoding machines. New scanners to be used at the POP can be designed and engineered to deal with the problem of thin paper. The need to dematerialize can be seen as a goal and an answer for both the Islamic Extremists and the capitalistic system we in the western world live by. Dematerialization has hit the banking industry hard. The Islamic Extremists hit our capitalistic system hard with the downing of the twin towers to encourage us to dematerialize. From this we have found the solution to our banking industry problem. We have found a common point in dematerialization and can learn from this.

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