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The Few The Proud The Image-Enabled
BY KAREN EPPER HOFFMAN
The country?s largest banks have invested in an estimated 150 ATMs capable of imaging deposits ? and plans are in the works for many, many more. Windows and triple DES upgrades are also driving others? plans to take advantage of cost savings while enhancing service.
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SYNOPSIS | Wells Fargo & Co. and Bank of America Corp. were first to invest in imaged or envelope-less deposit at the ATM, and now they?re expanding beyond their pilots. Other institutions are curious and launching their own pilots. High investment costs (trailing required Windows and triple DES upgrades) and consumers? low reliance on the ATM to make deposits give some pause. Analysts look for a take-off in 2008.
Imaged deposits ? also called envelope-less deposit ? at automated teller machines (ATMs) is a technology that?s ever so slowly gaining traction with its early adopters. An estimated 150 bank-owned ATMs with imaging capability are available today for consumer use. That?s a tiny fraction of the 396,000 (200,000 bank-owned) ATMs that analysts count in the U.S. market, but it?s a number that?s expected to climb.
Imaged deposit provides several benefits. It can eliminate the need for multiple trips by staff or third party personnel to empty the ATM of deposits several times a day. Needham, Mass.-based TowerGroup Inc. estimates envelope-free deposits cost 40 cents per transaction compared to between $1.50 and $2 with an envelope. Teller-handled deposits cost $1.40 per transaction, according to TowerGroup.
Expecting to collect deposits via image and not physically, institutions can more easily justify placing ATMs in areas distant from their branches, which helps expand their ATM networks. There’s also the reduction in fraud, since banks aren’t hit by as many empty deposit envelopes for which they’ve provided credit.
But — and what may be the source of hesitation — upfront costs are high. Adding imaging capability to an ATM can cost between $10,000 and $15,000, according to Madhavi Mantha, senior analyst with Boston-based Celent LLC. Imaged depositing requires that ATMs incorporate new hardware like different cash and check acceptors, scanner and printer (for printing an imaged receipt).
Given that a new ATM can cost between $30,000 and $40,000, imaging would represent a significant additional expense per machine. The struggle to build a business case, according to Boston-based Dove Consulting, is in the fact that only about 8% of all ATM transactions involve deposits.
Nonetheless, Wells Fargo & Co. and Bank of America Corp. have been piloting small numbers of image-enabled ATMs and they report favorable response from consumers. As these early movers increase their commitment and other financial institutions launch their own ATM imaging pilots, analysts look for the number of image-enabled ATMs to more than double by the end of this year.
Imaged deposits may not represent a slam dunk for financial institutions, at least not yet, but they will certainly be on the radar screen for the next few years.
Playing Catch-Up
Will the imaging of deposits at the ATM become commonplace? It’s possible, according to experts who point to developments already occurring with ATMs. In recent years, it became apparent that most banks would need to upgrade their machines to comply with new requirements for better accessibility under the Americans with Disabilities Act (ADA) and better security with the triple data encryption standard (DES), as mandated by the card associations.
This, combined with IBM Corp.’s decision to discontinue support for its outmoded OS/2 operating system — long the most popular for U.S. ATMs — led most banks to consider moving to Windows or Web-capable systems for their ATMs. Wells Fargo has already moved its entire fleet of more than 6,500 ATMs to Windows and TCP/IP, also known as Transmission Control Protocol/Internet Protocol, the basic communication language or protocol of the Internet.
“Most banks had not been investing much in the ATM channel for years. Now they’re faced with playing catch-up just to get their channel up to par,” says Jonathan Velline, senior vice president for ATM banking at Wells Fargo.
It had seemed natural to many industry observers that implementing imaged deposits would be a part of this massive overhaul. Indeed, imaged deposit received a major boost with the October 2004 passage of the Check Clearing for the 21st Century Act, which opened the door to the acceptance of image replacement documents (IRDs) and therefore a more widespread use of imaging.
And yet, it’s slow going. Wells Fargo, for example, has about 60 ATMs with imaged deposit capability, all within a contiguous market near the San Francisco Bay area.
Wells Fargo’s approach to developing its ATM channel has always been to make it “an extension of the branch,” rather than just a means for customers to make withdrawals, Velline says. Therefore, 90% of the bank’s ATMs already take deposits, even most of its bank-owned off-premise machines. While some banks say that they will equip only a portion of their ATM fleets with image capabilities, Velline says that eventually all of Wells Fargo’s deposit-receiving ATMs will add the feature. The timeline, he says, has not been finalized.
Bank of America Corp. started with a pilot of 20 image-capable ATMs in the Charlotte, N.C., area in June 2005 and recently (March 2006) added another 35 in markets in the Carolinas, according to Kirk Lindsey, senior vice president for ATM product development. He says BofA anticipates a “pretty aggressive rollout” of image capabilities at the bank’s other ATMs this year. By the end of 2006, he expects that 20% of BofA’s 12,000 deposit-accepting ATMs will be image-enabled. (Bank of America owns 16,700 ATMs; 12,000 of them take deposits and about one-third are Web-enabled.)
While New York-based JPMorgan Chase & Co. has been testing imaged deposits for more than two years, only 20 of its 7,300 ATMs in Indiana, Kentucky and Ohio offer imaged deposits, according to spokesman Tom Kelly.
Andrew M. Orent, vice president of the Americas ATM business for NCR Corp. of Dayton, Ohio, reports that his company has been working with about 100 banks on envelope-less deposit pilot or rollouts of ATMs, although many of those are smaller banks or credit unions. He says he’s starting to see the technology cross over in terms of popularity as “one or two of the larger banks” are moving from pilots of 15 to 20 ATMs to larger deployments of several hundred machines this year.
One case in point is First Horizon National Corp., where plans are being made to pilot deposit imaging this year. “We look at it as the next main advancement for our customers,” says Mike Feehan, senior vice president of customer contact, adding that the Memphis, Tenn., bank is already in the process of upgrading its fleet of about 500 ATMs to Windows and triple DES security.
Customer Benefits
The bankers who have taken to imaging early say that they’re pleased with the results. Velline of Wells Fargo says customers seemed to be comfortable with the new technology from the get-go. “When we first deployed the (image-enabled) machines, a lot of our customers were coming up to them, already prepared ... and realizing it was going to be different,” Velline says.
Lindsey says Bank of America’s initial pilot in Charlotte elicited a 10% increase in customer satisfaction. In Bank of America’s pilot, deposits increased 40% at the imaging ATMs over what the bank had previously seen at these locations from users, he adds.
One advantage for customers is that they receive a receipt printed with an image of their check as proof of their deposit. “Envelope-free deposit makes for a better consumer experience,” Velline says, adding that consumers like the “validation they receive” seeing the image of their checks printed on their deposit receipt.
And, according to Velline, the ATMs’ ability to accurately read the deposited checks helps. He says his bank has about a 90% accuracy rate with the imaging systems reading checks. Peg Bost, director of financial industry marketing for Diebold, says some of Diebold’s clients have realized “read rates” of more than 90% with imaging a mixed group of checks.
Early adopters also report cost savings from freeing up staff from needing to handle ATM deposits in the branch and not needing to pay for an armored courier for multiple ATM pick-ups.
Reduced fraud is another benefit. Since the image provides proof of deposit, the opportunity for customers to deposit an empty envelope and enter a false amount on the screen at the time of deposit is limited. Silva of TowerGroup says that some of his clients find that as much as 10% of all their ATM fraud comes from people depositing empty envelopes into the machines. TowerGroup estimates that ATM fraud cost U.S. commercial banks more than $240 million in 2004.
But even the analysts and bankers who are bullish on the growth of deposit imaging realize that it’s likely to be a long, hard slog for the technology to reach mass adoption. Advocates, they acknowledge, could use a stronger business case.
Tony Hayes, vice president of Boston-based Dove Consulting, contends that the cost savings to be derived from making ATMs take imaged deposits “is theoretical rather than real.” Most of the ATMs that take deposits are located at or near bank branches, which reduces the benefits from fewer pick-up runs, notes Hayes. Building a business case based on these cost savings will be even more difficult, he says, as check volume continues to shrink.
With such a small portion of deposits coming through the ATM, most banks are opting to focus their imaging investments on the back office, where they feel they can derive more cost savings. None of the bank pilots that Mantha reviewed for her study uses the check image for settlement — the image is still converted to an IRD — so the banks are “only reaping a portion of the potential benefits,” Mantha says.
“If a minority of those checks is coming from the ATM, I’m going to focus my efforts where I get more of my checks... and on the settlement side,” Mantha says.
Even Bost of Diebold, a long-time advocate of imaged deposits, agrees. Banks that do not have their back office imaging infrastructure in place “are not seeing as much of a savings,” she says.
Moreover, experts say, banks that do commit to imaged deposits will need to do more than just install new hardware and software. Much like the early days of the first ATMs in the 1970s and early 1980s, banks will need to hold customers’ hands through the process of adjusting to the envelope-free way of making deposits.
“Customers must be trained on the ease of use of this channel and must be given incentives to deposit their checks and cash at the ATM, for example, by receiving extended deadlines for logging in deposits, or by having their funds released more quickly,” Mantha says.
The Celent analyst adds that banks should use this new feature to allow customers to split their deposits across multiple accounts. Also, she urges financial firms adopting imaging to target small business owners as primary users of this technology, since they tend to use the ATM more often for deposits and would appreciate more flexible deposit options.
“A lot of people may subscribe to the idea that ‘if you build it, they will come,’” worries Bost of Diebold. She says banks will need to revisit their early ATM adoption plans — especially if they’re trying to encourage customers who have thus far avoided ATMs for deposits. Bost suggests banks mail small-value checks to customers, so that they would be rewarded with a few dollars for making a deposit at the newfangled ATM.
Lindsey says that Bank of America has used “ambassadors,” or branch concierges, to walk customers through making a deposit at image-based machines. The bank also offers brochures discussing the new ATMs, and features information about imaged deposit at the corporate Web site, as well as information at the ATM screen itself.
Both Celent and TowerGroup predict that the selective pilots of envelope-free deposits at ATMs will continue through 2007, and widespread adoption will not kick in until 2008. In the meantime, Celent’s Mantha says banks will focus on conducting image capture at higher-volume locations like the branch and corporate customer sites.
“The move toward check imaging at the ATM will be an evolutionary rather than a revolutionary change,” Mantha says. “But it is nonetheless an important transformation because of its potential to dramatically lower banks’ costs and improve service by giving customers quicker access to their money via the critical ATM channel.”
Questions or comments about this article? Post them at the Banking Strategies blog.
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