An emerging technology to watch

Abstract

Check imaging, which includes data entry, data balancing, and power encoding, can eliminate the need to manually store, encode, or render checks, resulting in drastically reduced processing time and cost savings. With image-based check processing, checks are scanned by a high-speed document sorter/reader. A high-resolution image of each check is captured and saved for further processing. Only 4 banks in the US and one in Canada have fully converted their check processing operations to image-based systems - Barnett Banks Inc., Comerica Inc., Huntington Bancshares Inc., Signet Corp., and The Royal Bank of Canada. Given the volume of checks in the system, postage savings are enough to defray a portion of the investment in the technology.

There is money to be saved in check processing operations. Increased competition continues to press banks to contain costs and improve operating efficiency. Sound planning and good management practices surrounding both check truncation and image processing applications can result in significant savings.

The former can eliminate the cost of mailing multiple paper checks to customers. The latter, which includes data entry, data balancing and power encoding, can eliminate the need to manually store, encode or render checks, resulting in drastically-reduced processing time.

With image-based check processing, checks are scanned by a high-speed document reader/sorter. A high-resolution image of each check is captured and saved for further processing. Truncated checks are not returned to the customer (reducing the cost of mailing the statement), rather, photocopies, or reduced images of the checks, are printed on a format that allows several check images per page.

Only four banks in the United States and one in Canada have fully converted all of their checks processing operations to imaging-based systems. Barnett Banks Inc., Comerica Inc., Huntington Bancshares Inc., Signet Corp. and The Royal Bank of Canada are running fully-integrated image-based check processing that can capture, process and store check images (offering full proof of deposit functions). In the meantime, several other banks are looking at checking statements that can include near-photographic images of the canceled checks, rather than the checks themselves.

Given the volume of checks in the system, postage savings are enough to defray a portion of the investment in the technology. Up to 54 check images can be included in a one-ounce image statement at the cost of 32 cents (prior to any postal discounts). The same statement would cost 78 cents if regular checks were mailed. By mailing an image statement, actual postage costs could be reduced from 40 to 60 percent.

Other savings arise from consolidation of check processing facilities; elimination of filing, conventional check processing equipment and the check stuffing element of the statement-rendering process, as well as sorting of paper checks. In fact, the average check is physically handled 15 to 25 times during the processing cycle. Check imaging greatly reduces this cycle.

With the labor savings offered by power encoding systems associated with imaging added, the cost savings potential is even greater. An average power encoder can encode dollar amounts or routing information for 18,000 checks per hour. In conventional check processing, the typical check encoder handles about 1,400 checks an hour.

Imaging systems can automatically recognize machine print (omnifont) characters, handprint numeric, image-based barcode and other characters. The end result is the reduction of data entry labor costs and enhanced throughput. The recognition algorithm that reads free-form handwritten amounts currently has a 45-50 percent success rate encoding the dollar amount without the need for human intervention. Checks that cannot be read are diverted onto a computer display terminal and dollar amounts are key entered by an operator. Operators and system components can process the images as opposed to paper checks, resulting in more efficient document handling.

Instead of encoding information as it comes in, banks can also selectively power encode high dollar amount checks eliminating float or priority items that must be "turned around" immediately.

Pricing strategies for imaged statements vary. Some banks charge for the service to earn a return on the investment. Others deter customers from requesting checks be returned by raising fees. Some banks try to attain quicker results early on and pay for it with reduced operating costs rather than increased fee income.

Marketing appeal of image statements is not the main reason for offering them. Improved check processing, reduced mailing costs and increased fee-based revenue are benefits that should drive the decision. However, full use of check imaging is contingent on financial justification, consumer acceptance, future technological innovations, appropriate state and federal legislation and regulation. According to the Association for Information and Image Management (AIIM), expenditures for imaging technology by banks have steadily increased since 1980.

The American Bankers Association (ABA) 1993 National Community Bank Operations and Automation Survey indicated that 38 percent of all banks with assets of $100-$249 million plan to introduce check image statements by 1995. Document Solutions Inc. (Birmingham, Ala.) has been offering its software mostly to community banks since 1992. As a rule, Document Solutions projects 40 percent savings in postage for community banks using its software and claims a minimum of four-years to payback the investment. The actual postage savings is largely dependent on, among other things, the number of commercial accounts the bank has. Commercial account statements are heavier to mail, so the more a bank has, the greater the potential postage savings.

A market survey in 1991 indicated that 60 percent of customers surveyed were willing to accept check image statements. Unity Bank & Trust Co. (Rocky Mount, N.C.) was the first community bank to install an image-based check processing system in 1992. Over 98 percent of the bank's 10,000 customer accounts accepted the image statements without objection. Those who did question, generally objected to the size of the check images on the page, which can easily be re-programmed.

According to the estimates from the Federal Reserve, the cost for banks to receive and process their inclearing checks (approximately 59 billion annually), is well over $10 billion. These figures certainly suggest that new approaches to reducing the labor intensity and paper magnitude of the check system could be quite cost effective.

Banks working toward a paperless future will have a dramatic impact on the process of printing checks and bank statements, as well as the design and operation of statement rendering equipment. The business check marketplace provides more than $1 billion in annual revenue for the forms manufacturing and check printing industries.

Magnetic ink character recognition (MICR) printing is a major component of the $450-million North American continuous check printing industry, which is dominated by forms manufacturers and check printers. MICR printing, introduced in 1959, is used to speed check processing through automated clearing systems.

In the U.S., banks, as a trade group, are the biggest users of first class mail (95 percent of bank mail is first class). Postal expenses generally run about 2.5-3 percent of bank operating expenses.

Image processed checks are stored the same way as conventionally processed checks. Accounts receiving image statements, instead of actual checks, are re-run through the image platform in order to print them onto paper for mailing with the account statement. Checks' images are automatically put in account number order by the imaging software and printed by check number, up to 18 checks per statement page (three columns of six checks each).

Optical disk storage is being used by several banks as a statement storage method, but is still considered too costly for long-term check storage when compared to microfilm. With microfilm, production costs are low, but data retrieval is comparatively slow. Banks are required to retain records of account transactions for seven years under the Uniform Commercial Code. Optical disk storage can maintain massive amounts of information and make it available almost instantaneously.

Like most new technologies, capital investment is a major consideration in early stages of deployment. Installing an image item processing platform can run well into millions of dollars with a projected payback period of more than four years. However, costs tend to decline over time and a shorter return on investment could be realized in the future with improved image technology. With so many banks expressing interest in image technology, IBM is leaving "user exits" in its software, allowing individual banks to customize the software on their own.

Others turn to third-party providers such as Check Solutions Inc. to customize and support the technology. Another option is to outsource image processing to one of the growing number of providers.

Many banks consider themselves to be on the leading edge of technology, but not all can afford it. That is where the outsourcing alternative comes in. Banks considering implementing check-image processing or offering check image statements can use any of a number of providers to pilot test technology.

The Federal Reserve is helping direct some image technology efforts to establish interbank applications so that the entire industry can profit from it. The Fed is working with banks and vendors to develop systems that can interface with each other to save a complete check image and deliver it to other bank's image systems. Additionally, the ABA is working with several industry groups, including the Accredited Standards Committee (formerly the American National Standards Institute), to develop check image interchange standards.

In an imaging environment, a bank would receive images of checks drawn on it to aid in decision-making (such as pay or no pay decisions or signature verification) in lieu of the actual documents. Because the most important check information, account numbers and payment amounts, are captured and transmitted early on, there is no pressing need to transport checks physically to the paying bank.

ECP (electronic check presentment) diminishes the need for speedy delivery of checks and, therefore, saves transportation costs. ECP enables a depository bank to forward electronic information concerning check transactions to a payor bank. The payor bank can electronically notify the depository bank that it intends to return an item the next morning. The paper checks follow later.

Regulation CC, on the books since 1988, specifically requires banks to release funds in two days on local checks and five days on non-local ones. Currently, an addendum to Regulation CC states that a bank presented with a check can deliver that check to the payor bank and have it paid that same day. These rules can highlight the need for electronic check presentment. Imaging and electronic check presentment are transforming the entire check clearing system, which now relies almost entirely on the movement of paper between deposit and paying banks.

The inevitable, full-scale check-image processing, will became a reality, beginning with truncation of paper checks at the bank of first deposit. Electronic exchange of digitized check images will ultimately replace presentment of physical checks as electronic check clearing and image-to-image communication among banks become more common.

Many legal, technical and financial barriers have yet to be crossed, but the potential gains appear to support a trend in that direction. The good news is that the banking industry is searching for methods to become more competitive by making the paper-based system more productive, not just by cost reduction, but by strategic positioning.

Alonso Abugattas is an operations analyst for Pitney Bowes Management Services, a wholly-owned subsidiary of Pitney Bowers Inc. and a leader in outsourcing of business support services which includes mail, reprographics, facsimile, records, electronic printing and imaging management. PBMS is headquartered in Stamford, Conn.