Reverse Flow

By Robert Hunt

New technologies make a case for redirecting some check-related tasks from the back office to the point of customer contact.

Now that the enabling legislation has been signed into law, pressure is building to prepare for October, when depository institutions will finally be allowed to substitute electronic images for paper checks. But even as banks gear up for new operations, they confront more questions on what to do with traditional ones, especially back-office check processing.

Clearly, the back office will come under pressure as the volume of paper checks continues to decline and per-unit processing costs rise. And this squeeze comes at the same time that many institutions are reinvesting heavily in their branch networks. To offset these trends, substantial cost-savings in back-office operations will be needed.

Typically, such savings have been realized through departmental automation projects. But this approach falls short in instances where new technologies are not fully exploited; in such cases the entire processing operation needs to be reviewed. With check processing technology, one implication is that more work should be shifted to the branches and call centers.

By moving processing operations to the front lines, institutions can take advantage of recent advances in check imaging, workflow automation and electronic messaging. Customer claims and check proofing are two operational areas where this process reengineering could yield significant early results. The potential benefits, both in efficiency and service, would be enormous.

There is a price for progress, however. Upfront costs are difficult to justify at a time when investment dollars are needed elsewhere and bank earnings remain under pressure. Then there are the organizational and cultural obstacles. Reworking procedures centered on traditional paper-based processing will require a major reengineering effort — inevitably disruptive to current operations and bank personnel. Organizational politics also intrude since back-office units will lose responsibilities and budgets.

Yet these obstacles can be overcome, and the advantages will go to those management teams that look to the long-term benefits and are willing to commit the necessary time and resources.

One step is to create cross-organizational reengineering teams that gather information on the capabilities of the new technologies and then build consensus about what can and should be done. The new vision should be just that, new, and not couched in terms of how things used to be done. A plan can then be devised to take the company, in whole or in part, to that desired state.

The magnitude of the effort should not be underestimated. But dealing head-on with technological transitions is essential as the industry continues its shift from paper-based to electronic payments. Institutions that can reduce their transaction processing costs while improving customer service certainly will be better positioned for the competitive environment ahead.

Automation Trend

For many executives, one important question is why, after so many years of centralizing operations in the back office, should the industry now consider relocating some processing activities to the branch and the call center. The answer lies with the functionality of new technology and the implications for improved efficiency and customer service.

Precedents extend back to the 1970s, when the introduction of remote terminal access and branch platform automation allowed customer accounts to be opened directly at the branch, freeing employees from having to forward a form to a central data input area. Similarly, Internet banking and check image technology have given customers direct access to copies of their paid checks, replacing the cumbersome process of calling the bank and waiting several days for the mailed check copy to arrive.

In both instances, banks reduced operating costs and improved customer service by moving tasks from the back office to the point of customer contact. This process can be taken to the next level by leveraging recent advances in check imaging, workflow automation and electronic messaging technology.

Handling customer claims for mis-posted checks is an excellent example. Most banks currently fall back on paper tickets and microfilm copies to resolve customer claims for mis-posted checks. As customers make claims at the branch or call center, reps must laboriously fill out forms which are then forwarded to the back-office department responsible for claims and adjustments.

Employees then enter the data into a departmental system, locate the microfilm for the relevant day's processing, and find the film copy of the item in question, which shows whether the customer was wrongly charged. If the customer was charged in error, the clerk creates a paper credit to the customer's account and an offsetting general ledger ticket. Additionally, an advisory or notification is created for mailing to the customer. The correcting transactions are then inserted into the daily posting process, and the credit advisory/apology is received by the customer several days later.

A number of banks are now using image technology and workflow automation to reengineer this process. Claims received by the branch or call center personnel are entered directly into the institution's claims and adjustment system, which prioritizes and assigns the case based on staff availability and the type of claim.

Large dollar items or key customers, for example, may be given priority handling. After accessing cases electronically, back-office staff can retrieve images of suspect items from the bank's image archive database, decide on adjustments and use electronic transactions to correct accounts and create customer advisories.

Banks using such image-based claims systems typically report annual cost savings of between 35% and 50% on this type of activity. Further, service quality is improved through the prioritization of claims and the electronification of adjustment entries. Management can review work-in-progress and implement supervisory approval of certain transactions based on the experience of the clerk or dollar amount of the item.

The Next Level

While this kind of departmental automation is helpful, it fails to challenge the traditional separation of tasks between the front and back office. The operations personnel responsible for the project typically view the workflow automation as a back-office efficiency tool and not as a means of true process reengineering. The customer contact areas resist taking on added responsibilities that might reduce the number of calls that can be handled on a daily basis.

To achieve more substantial savings, therefore, workflow automation should be viewed not as a departmental issue, but rather as part of a bank-wide effort to improve customer service. Processes should be automated and the remaining tasks that must be performed by the staff simplified. Essentially, banks need to take the reengineering process to the next level.

Staying with the example of handling claims for mis-posted checks, when workflow automation is viewed as a bank-wide process improvement, it becomes apparent that branch or customer service personnel could retrieve the image of the item in question, recognize that the customer was charged the wrong amount, and press one key to create electronic adjustment transactions.

The customer would be notified of the correction at that moment and receive a personal apology from the contact person. Also, the customer could be queried to see if he or she would accept an electronic advisory in lieu of a mailed one. If so, the advisory would be automatically e-mailed, further improving the process.

When these steps are followed, customer service is improved significantly and the cost savings for this type of activity rise to an estimated 75% annually.

Realistically, not every transaction can be handled at the point of customer contact. Even in the above example, skilled back-office personnel would still be needed in instances requiring research. But the work-flow automation could determine when this requirement comes into play and provide electronic routing to back-office personnel with the requisite expertise.

Given the effective use of image technology and workflow automation, approximately 75% of customer claims could be handled at the point of contact. Customer service on the remaining items could be improved by using the workflow automation software to assess the claim from a customer relationship viewpoint.

By using dollar amount limits, a database of previous claims, and the relationship history of the customer, the system could instruct the contact personnel to provide provisional credit to the customer in most of these cases. The claim would then be routed to back-office personnel for appropriate follow-up.

Deposit Processing

Another area where the combination of image capture, workflow automation and broadband communications provides banks with an obvious back-office reengineering opportunity is the processing of customer deposits received at branches.

Vendor studies indicate that retail deposits can be imaged and proven at the teller station without affecting teller wait times. Image recognition software can now process both the legal and courtesy amounts of the check, as well as the magnetic ink character recognition line. "Legal amount" refers to the totals written out; "courtesy amount" is the numerical representation. Additionally, the software can verify the customer's account number, inform the teller of a deposit error and ensure the receipt is issued for the correct amount.

This electronic process could replace the current procedure, which involves transporting branch deposits to a back-office site for entry on proof and encoding equipment.

As in the case of customer claims, not all the work can be processed at the point of contact. Large commercial deposits will still need to be captured at the branch back counter and then transmitted to a remote work site for data entry and proof. But operational savings can still be extracted from these deposit transactions by electronically routing the images and data to a low-cost site or outsourcer, as opposed to a local proof site.

Organizational issues surface in this example as well, as bank branch and operations management probably will resist the transfer of these additional duties to the teller. Both will logically cite the training needed, the time required to correct deposit errors, and the cost of the image-capture equipment. These arguments, however, don't consider the capabilities of automated proof software, workflow automation to guide the teller and the declining costs of image capture hardware.

Change Management

For managers, the critical consideration in process automation should be customer service. Automating deposit corrections in the back office doesn't really impress customers that much because they can't see the improvement. Discovering an error in the branch while the customer is present, by contrast, both improves customer service and reduces operational costs. In fact, this reengineering may actually allow some staff to be shifted from the back to the front office, thereby improving service in the branch.

To accomplish such transformations, banks need to infuse their organizations with a change management culture, which begins with cross-organizational reengineering teams educating themselves on the availability and capability of new technologies. These teams, which can include outside experts, then should perform a "blue sky" analysis that doesn't take into account existing processes. In other words, if you were designing your transaction processing operations from scratch with the technology that currently exists, how would you do it?

Obviously, the answer will look a lot different from the existing structure, which has developed over many decades through incremental improvements to existing procedures. By addressing the critical issues of cost-effectiveness and customer service in this analysis, the reengineering teams can develop an optimal model to be compared with the organization's current processing structure. The question then becomes: how can the new model be implemented, in whole or in part, by using technologies such as check imaging and workflow automation?

A leaner back office, with more functions pushed to the point of customer contact, will emerge from this exercise. While the back office will survive, it will become a much smaller organization, consisting primarily of exception resolution specialists and process automation and reengineering experts.

Mr. Hunt is a senior analyst at TowerGroup Inc., a Needham, Mass.-based research and consulting firm.

Copyright © 2004 by Banking Strategies, published by BAI.

back to top