Waiting Game

By Chris Costanzo

Adoption of branch-based imaging promises cost savings, but the need to create IRDs gives banks pause.

For Thomas Rea, an executive vice president at U.S. Bancorp, the advantages of remote image capture struck home one day last January when wintry weather conditions impeded the transport of paper checks from some of U.S. Bank's branches to central processing locations.

Rea, who is based up north in Portland, Ore., suddenly realized, "If I had image capture at the branch, I wouldn't be having this problem." When checks are transformed into images right in the branch, road and flying conditions become irrelevant. As long as telecommunications lines are up, check images can be beamed electronically straight to their processing centers.

Unfortunately, Rea hasn't yet been able to act on his inspiration because of the expense and technical challenges involved in this technology. In a trend seen across the industry, Minneapolis-based U.S. Bancorp is trying to understand the requirements and ramifications of remote image capture, but for now is refraining from actually deploying it. There are, in fact, only two major banks currently moving aggressively ahead with branch imaging: Seattle-based Washington Mutual Inc. and Bank One Corp., Chicago.

This reticence is likely to break down in the future simply because the advantages of remote image capture are so obvious. To begin with, as Rea noticed, there's the convenience factor. Then there's an expense control component. Having branch employees execute the first steps of check processing could reduce the need for back-office staff, depending on how the technology is implemented. The cost of physically transporting checks from branches could also be reduced or eliminated. And branch employees would have more immediate access to information needed to complete customer service tasks or pounce on suspected fraudulent items.

The drawbacks lie in the cost of equipping the front lines with imaging equipment and the need for heavy-duty telecommunications lines to carry the images from the branches. Also, the challenge of integrating the imaging system with existing teller systems is no small matter, while adding check processing to the list of teller duties could upset existing workflows and require significant retraining.

Finally, the introduction of image replacement documents under the Check Clearing for the 21st Century Act could, at least temporarily, weaken the business case for branch imaging, since IRDs are paper and must be processed like traditional checks.

Yet these challenges can be overcome with time. And Check 21 is likely to actually strengthen the case for branch imaging over the long term. While the legislation slated to go into effect this October doesn't mandate that banks adopt imaging technology, it is considered likely to hasten the industry's movement in that direction. As more and more banks begin to image-enable their back offices and learn the basics of image exchange, the attractiveness of imaging at the branch level will only become more apparent.

"The earlier you can capture an image, the better," Rea says. "It's the best thing for us to do as an industry."

Back vs. front

Conceptually, transforming a check into an electronic image as soon as it gets deposited at a branch seems pretty straightforward. But there are actually different ways of implementing the technology, which could lead to varying results.

The simplest way to add imaging to branch operations is to deploy it in the "back counter" of the teller line. The back counter refers to the area behind the teller window where administrative duties are performed, away from customers. In a back-counter installation, tellers carry out their customer-facing duties as they normally do, setting aside checks as they receive them. Then, whenever they have a couple of minutes to spare, they run the checks through the image-scanning device at the back counter.

Unisys Corp. of Blue Bell, Pa., expects this type of installation to predominate in the United States because it does not require changes to existing teller systems. This is an important consideration, since some large banks must support multiple teller systems, usually inherited from past acquisitions. "So, back counter is simpler," says Gary Cawthorne, vice president and managing partner of Unisys' global banking division.

Washington Mutual is in the process of rolling out a back-counter check imaging system from Unisys in all of its 2,400 branches. Armando Angelbello, a senior vice president in the thrift's deposit services division, says customer service will improve because front-line staff will be able to access the images more quickly. In addition, the bank will be able to more quickly evaluate and react to suspected fraudulent items, as well as reduce the number of daily check pick-ups.

An alternative strategy is to do a "front-counter" installation, in which each teller window is outfitted with a device that scans checks. Tellers can drop checks and deposit slips into the device even as they are dealing with customers. Cost savings are potentially large because these front-counter devices would take over the proofing and encoding functions normally handled in central back-office locations.

Last year, vendor Alogent Corp., working with the consulting firm BearingPoint Inc., estimated that a front-counter branch capture installation would result in more than $45 million of net savings in one year. (The savings could be higher once Check 21 goes into effect, but the companies have not calculated that yet.) Most of those savings — about 64% — would come from reductions in the back-office proof and encoding staff.

The downside of front-counter imaging is that it must be integrated with the hodge-podge of teller systems that most big banks employ. Even so, officials at Alpharetta, Ga.-based Alogent say the industry's current branch-enhancement spending spree makes this a good time to adopt the technology, since it can be introduced along with other new systems. "When you move imaging to the front counter, the business case improves dramatically," says Brian R. Geisel, Alogent's chief executive officer.

The decision whether to choose front- or back-counter branch imaging hinges, in part, on anticipated volume. Unisys' Cawthorne says banks that routinely receive commercial deposits of 100 checks or more at a time would find it impractical to handle such volume at the front counter, but institutions that normally get deposits of five or fewer checks in one batch would be ideal candidates. Kere Lewis, a managing director at BearingPoint, says that banks should be able to handle bulk deposits of 12 to 15 checks at the teller window. "Above that, it's harder to do without affecting wait time," he says.

Banks that opt for a back-counter device to handle large deposits should ideally try to handle the proofing and encoding functions there as well, Lewis says. But he warns that more experience needs to be gained on this front. Because larger deposits are more prone to error and take longer to research if they are out of balance, a bank might be better off pushing the proofing and encoding of such items to a centralized processing center, he says.

The optimal solution for some banks may be a hybrid installation, with big deposits being handled in the back and smaller ones at the front counter. This is more or less the approach that Bank One has taken. Deposits of five items or less are scanned immediately, with bigger deposits dropped in a bin and handled later. This approach, of course, creates two different work streams and will likely require additional training for tellers.

Do Nothing Mode

Although only Bank One and Wamu are moving ahead with branch image capture right now, large banks in general seem aware of the potential. According to a recent survey by Salisbury, Md.-based ESP Consulting Inc., 83% of 23 banks with $20 billion or more in deposits plan to be doing some branch image capture by October 2005.

But much of the rest of the industry lags behind. In the larger ESP survey pool of nearly 500 banks of all sizes (from $250 million in assets and up), more than half had yet to determine what hardware or software upgrades would be necessary to support check imaging in the branch. Only 17% said they are currently evaluating branch automation software vendors for imaging requirements.

Telecommunications networks will likely require upgrading to support the transport of check images from branches. But less than half of the banks in the ESP survey have evaluated their networks to determine if they can support check imaging. "Small banks are not even aware that this is an issue," says Leon Majors, ESP's president.

Majors says the industry is still debating whether check imaging needs to be integrated into platform systems, teller systems, both or neither. Fueling the debate is the fact that the branch automation market has splintered into a number of providers, with no dominant vendors taking a stand on how integration with check imaging should occur. "Each one of these issues creates uncertainty," Majors says. "The normal mode if there's uncertainty is to do nothing, and that's what we're seeing."

Citizens Financial Group Inc. of Providence, R.I., for example, is about one year into a three-year, $100 million effort to upgrade its branch systems. While the company has not ruled out deploying branch image capture, that's not part of the current project. "We have very busy branches with high transaction volumes," says William K. Wray, an executive vice president and chief information officer of the $64 billion-asset bank. "The idea of customers waiting in line while tellers image checks is just not appealing."

In recent months, however, some progress has been made in aligning branch automation systems with new check imaging needs. In November, for example, Alogent announced partnerships with three companies — Harland Financial Solutions and TouchPoint Solutions, both of Atlanta, and Holland-based Getronics N.V. — aimed at bringing check imaging functionality to those companies' respective teller systems. "Adoption is not yet there," says Alogent's Geisel. "But the interest level has skyrocketed."

In a twist on the idea of capturing images in the branch, some banks are taking advantage of the upcoming Check 21 law to automate check deposits for their corporate customers. First Tennessee National Corp., for example, is supplying these companies with hardware that lets them scan checks at their premises, then send the images to the bank. The service could provide customers with faster availability of funds, cost savings from not having to use an armored car to transport paper checks and productivity gains from not having to send employees to the bank to drop off checks.

Tom McGuire, a senior vice president and the enterprise operation services executive at J.P. Morgan Chase & Co., says the use of image replacement documents or IRDs under Check 21 will likely influence the pace at which banks adopt branch image capture. IRDs are pieces of paper created from images of checks. Image-enabled banks may be forced to create IRDs when dealing with banks that are not capable of accepting electronic images or with customers who indicate they prefer to receive paper checks instead of images.

According to McGuire, this introduction of IRDs into the processing system temporarily undermines the case for branch image capture. If Morgan Chase, for example, were able to transmit images captured in its branches directly to central processing sites, without having to create any IRDs, then branch-capture technology would pay off. On the other hand, if the bank captured images in its branches but still had to reproduce 90% of them later in the form of IRDs, "the economics are not there," McGuire says. "So there's a need to pace our investment in remote image capture against what the industry is prepared to accept."

Paul Obermeyer, a senior vice president and the manager of operation services at Comerica Inc., echoes McGuire's concerns. The gradual phase-out of IRDs and the emergence of image exchange between banks is a "fundamental requirement" for remote capture to occur, he says. "Once you have a vibrant image exchange environment, remote capture is much more financially attractive."

Obermeyer adds that Detroit-based Comerica plans to test the technology in some of its California branches and that "branch capture's time will come in probably two to four years."

Lewis of BearingPoint, on the other hand, argues that IRDs need not impede adoption of branch-image capture, noting that a lot will depend on how much it costs to create IRDs. In BearingPoint's view, that cost will likely be no more than that of presenting a traditional paper check. "Assuming that IRD production can be done at equal to or less than the cost of presenting a physical check, that clears the way for branch capture," Lewis says.

With so many uncertainties remaining, most bankers are likely to continue taking a wait-and-see stance toward branch imaging, at least until Bank One and Wamu have fully demonstrated real-life benefits on a large scale.

Ms. Costanzo is a Brooklyn-based freelance writer.

Copyright © 2004 by Banking Strategies, published by BAI.

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