Check Images:
To Share or To Exchange?
BY CLINT SWIFT
Varying assessments of customer needs drive banks down divergent paths. The nagging question about the dueling business models: How much of the current spending will be for naught?
CONTENTS
Customers and Their Checks
Check Images: To Share or To Exchange
ARC: Billers Like It; Bankers Have Their Doubts
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SYNOPSIS | Shared and in-house image archives co-exist in the banking industry today and may for years to come. Which model will become dominant? Bankers need to ponder some key questions and plan their investments accordingly: How far and how quickly will banks move to the shared-archive model that many in the industry believe is a powerful alternative to image exchange? Will cost, control, flexibility, quality and other reservations about sharing be overcome? If image-sharing becomes the predominant model, are today's investments in image exchange wasted? The decision whether to use in-house or shared archives may hinge on what banks believe offers their best prospects for meeting customer demand for images.
Financial institutions are migrating from paper-based check exchange to digital check image exchange, if more slowly than many would prefer. But there’s another approach to the processing of a check — unavailable when in paper form — that challenges the notion that an exchange of images needs to take place at all. With image exchange, the bank where a check is deposited creates an image of the check and then sends it to the bank on which the check is drawn to effect settlement. Image-sharing, the alternative to image exchange, involves the one-time imaging of a check. The check image is then stored in a central repository and accessed only as needed.
This difference may be worth billions of dollars to
the industry. Intuitively, one can understand how image-sharing can save banks money, since there’s less storage and telecommunications expense. In addition, advocates note that returns and exceptions require paying banks to examine only a fraction of their checks – estimates range between 2% and 20%. Therefore, they ask, why exchange 100% of checks when so few need to be examined? Set, game, match? Not quite. Bankers who prefer to manage their own image archives and are sticking with the exchange model say there’s more to this issue. Their objections to image-sharing include:
- The possibility that performance of the image-sharing system could suffer when multiple banks try to retrieve images at the same time;
- Concern that the priorities of other banks might be favored when changes to the common archive are needed;
- Concern that differentiation on image-based products and services might be more difficult when images are held in a common repository.
This is the image exchange advocates’ position today. Their argument strengthens if demand for images proves to be unexpectedly high from consumer and commercial customers. They want to be able to respond quickly and comprehensively, which they don’t believe will be possible if they have to work through somebody else’s archive and bureaucracy. Dueling Business Models One year after the implementation of the Check 21 legislation, the image exchange model is dominant — so far. In that model, banks exchange check images over wires instead of exchanging paper checks via truck and airplane. This digital processing system parallels the paper process because banks have a large economic incentive to leverage existing systems and processes wherever possible.
But the potential for sharing images also exists in the various check-image archives that are available to U.S. banks today. One is operated by the Federal Reserve (FedImage Archive) and another by Fiserv Inc., Brookfield, Wis. (National Image Archive). Metavante Corp., Milwaukee, the next largest third-party processor, offers eStor.Check Image Archive Services in an application service provider model for community banks and credit unions.
The largest archive by far belongs to Viewpointe, which is owned by five of the nation’s largest banks — JP Morgan Chase & Co., New York; Bank of America Corp., Charlotte; SunTrust Banks, Inc., Atlanta; U.S. Bancorp, Minneapolis ; and Wells Fargo & Co., San Francisco. Viewpointe has headquarters in Charlotte and huge redundant databases in Boulder, Colo.; Columbus, Ohio; St. Louis; and Dallas. None of the other check image archives touts image-sharing the way Viewpointe does with its Image-Share product.
Under Viewpointe’s model, checks are imaged as soon as they are presented at a financial institution and then transmitted to a central database for storage. Checks are cleared and settled via electronic exchange of MICR (magnetic ink character recognition) line data, which includes the bank routing number, check number, account number and payment amount encoded along the bottom edge of a check. To deal with exceptions and returns, collecting banks give paying banks access to images of their items in their common central archive. Once they have access, paying banks may retrieve and use images as they need them. “Clearly, an on-demand world is where you have to get to, where basically we’re not shipping images around; we’re shipping payments,” says Jerry Chambers, chief administrative officer of Viewpointe. A related concept, often used synonymously with image-sharing, is “image on demand.” Under that model, banks share images by giving one another access to their in-house archives. Operations managers typically wince at the idea of giving outsiders access to their painstakingly monitored and backed-up data stores. But banks that regularly trade checks with the nation’s largest check processors might find it worth the effort to pursue that access because some of those individual bank archives are as large as some third-party aggregators’ archives. Charlotte-based Wachovia Corp., for example, boasts 20 billion items in its internal archive.
Image-Sharing Questions Many bankers and solutions providers who deal with archive issues use the terms “image-sharing” and “image on demand” interchangeably. For discussion purposes, they say, the critical distinction is between image exchange and any form of archive-based sharing. In image exchange, check images are pushed from one financial institution to another. In image-sharing (or image on demand), financial institutions pull the images they need from an archive when they need them. Executives of the networks built to facilitate image exchange agree that image on demand, which seeks to minimize exchange, is a viable model. But basic questions persist about the state of image exchange:
- How widespread will adoption be?
- What’s keeping the industry from getting there?
- Will today’s investment in image exchange ultimately be for naught?
Jeff Vetterick, general manager of the Endpoint Exchange network, owned by Metavante, says it’s one thing to recognize the elegance of a concept such as image on demand, but quite another to think that the industry is going to get there soon. “A tremendous number of financial institutions ( FI s) like the idea of keeping the archive in-house, and with 20,000 FI s out there, it’s inevitable that some will,” he says.
On the other hand, Chambers says he believes Viewpointe took a major step last year when it brought in the full check volume of Morgan Chase and Wells Fargo. Now, 11 of the nation’s large banks store more than 25 billion images in the archive each year, adding 100 million a night. Viewpointe says its archive contains 60 billion, or 60% to 70% of the check images in the country, in one location. “That gives us the launching board to go into an image-sharing environment,” Chambers says. Fred Herr, senior vice president, Retail Payments, at the Federal Reserve Bank of Atlanta, agrees that image on demand is a viable solution. But he expects both image exchange and image on demand to be part of the nation’s future check-processing solution.
Image on demand is part of a long-term strategy at SVPCO , the image exchange system created by the nation’s largest banks and an affiliate of The Clearing House Payments Company, New York. But Susan Long, senior vice president, says she believes that image exchange and image on demand will co-exist “for quite some time.” But she adds: “I would never put a date on it because I don’t think that, even among our owner banks, we would have a consistent answer.”
Image Exchange Questions If image on demand is a viable option, will today’s billion-dollar investments in image exchange be thrown away? At BAI ’s TransPay Conference & Expo in May, Chambers said, “If we get to an (image-sharing), truly electronic check payment environment within three to four years, a lot of it will be throw-away. If it takes us 10 years to get there, very little of it will be throw-away.”
The Fed’s Herr notes that banks already have their choice of several image archives with national aspirations. The participants in those archives inevitably will receive checks drawn on banks that do not participate in their archive. To enable banks to reach all the endpoints they need to, the archives will need telecommunications or other connections among them. For exactly that reason, Viewpointe has an ongoing relationship with the Fed and is working on technical, func tional and operational agreements with other large exchanges, says Viewpointe spokeswoman Jennifer Lucas. SVPCO ’s Long also believes that banks’ investments in im- age exchange are necessary, even over the long term.“The networks are scalable up and down,” she says. “So whether you have a lot of checks or a few, as long as you’re moving some checks, you’re still going to need that network infrastructure.”
A certain amount of inefficiency, including extra cost, is inescapable during the migration from paper checks to electronified checks, says Robert Hunt, senior analyst at Needham, Mass.-based TowerGroup, a subsidiary of MasterCard International.
“Every payment system is less than fully efficient,” Hunt says. “Substitute checks are inefficient compared to exchanging check images.” He says a much more important factor industry-wide is the savings lost by large and medium-size banks that send but do not yet accept check images. Those banks often defer to corporate customers that want their paper checks back or prefer first to harvest the new business and fees offered by image-related products such as remote deposit capture. While image exchange networks and shared archives can be seen as competitors, Endpoint’s Vetterick says they’re actually complementary. Exchange can be seen as a bridge to a future environment in which image on demand might predominate, he says. Indeed, some of the nation’s largest banks are supporting both exchange and sharing. SVPCO and Viewpointe have owners and customers in common, including Bank of America, BB&T Corp., Winston-Salem, N.C. ; First Horizon National Corp., Memphis; Chase; National City Corp., Cleveland; U.S. Bancorp; and Wells Fargo.
Taylor Vaughan, senior vice president and manager of cash management services at First Horizon, says his bank—Viewpointe’s first non-owner member — relies almost completely on the shared archive. Customers who retrieve images online get them directly from the Viewpointe shared archive. The bank does batch retrievals from the shared archive when it’s time to create statements. First Horizon also relies on Viewpointe images for generating time-sensitive returned check files. Vaughan says Viewpointe programmers worked like a department of First Horizon to provide the tools to do online retrievals and image statements. Bank of America, one of Viewpointe’s founders, is working with Viewpointe on a next-generation archive that will enable the bank to also rely almost completely on the shared archive, says John Feldman, senior vice president, image transactions & payments. Meanwhile, Cullen Frost Bankers Inc., San Antonio, is an institution that is pursuing all its options. The $10 billion-asset locally owned Texas bank is both a non-owner customer of SVPCO and an image exchange customer of Viewpointe. In addition, it sends two million items a month directly to Southwest Corporate Credit Union of Dallas.
But an element of competition may intrude at some point. Experts say a company such as SVPCO could play a central role in engineering image on demand. It could, for example, become a source of check location data, helping banks find the checks they need in each other’s archives. Likewise, Viewpointe has an exchange card of its own to play. By enabling financial institutions to connect their archives to its archive for image exchange, its Pointe 2 Pointe product competes today with the exchange networks. Four banks that wanted to exchange files with Viewpointe members have signed up for the service. By providing the option to download image files to their in-house archives instead of just sharing access to view them, Viewpointe becomes an image exchange enabler like the switch networks of Endpoint Exchange; Fiserv; Metavante; SVPCO and others. Assessing the Tradeoffs If image-sharing has long-term advantages over image exchange, why isn’t it a no-brainer? Alenka Grealish, manager of the banking group at Boston-based Celent Communications, notes that a shared archive is by definition an external operation. In effect, a bank’s decision to rely on a shared check archive is a deci sion to outsource. And that decision is rarely easy, Grealish says, as it involves trade-offs among costs, control, flexibility, quality, effort and other business and technological considerations.
Grealish believes that two factors could impact how banks structure their archive capability: How quickly image processing reaches critical mass in the financial services industry, and what banks believe it will take to respond to strong customer demand for images. “Customers’ demand for images will grow, placing greater demands on the archive,” she predicts. Indeed, the reservations about image-sharing among some bankers who have analyzed in-house and shared-archive models seem to center on that demand and the best way for banks to meet it. David Harris, vice president, technology operations, at Fifth Third Corp., Cincinnati, had previously worked for Cleveland-based KeyCorp. He says both banks opted to go in-house for strategic reasons involving the many ways the banks believed they would want to use the images. He notes that image-sharing is a viable option if the primary criterion is operating efficiency. But even then, Harris is not sure that time-sensitive services such as payee line positive pay, which extracts payee data from a check and compares it to a list that the customer provides, can work continuously at Fifth Third’s required service level in a central-archive environment.
“A shared archive involves a consortium of banks, all of which can be expected to be accessing the same repository at about the same time, pulling items en masse,” he says. “You could run into some performance issues over time. And where will the archive’s priorities be? With its biggest customers. We have to have control over the levels of service and quality for our customers.” First Horizon’s Vaughan says it’s always possible that a local archive could be faster than a shared one, but he says First Horizon has not run into that problem. Viewpointe spokeswoman Lucas says banks and their customers are performing more than 2 million sub-second retrievals a day without a hitch. Mindful of the concerns, she says, the archive paid a third party to compare response times of Viewpointe banks’ online banking check-image applications against those of banks that did not participate in the archive. She says the study found that the applications of Viewpointe customer banks performed as well and often better than those of non-customers. Strategic Decisions For Fifth Third’s Harris, efficiency is only part of the story. Fifth Third also values service to the customer and the ability to differentiate with creative products, he says. He believes a shared archive will limit a bank’s ability to differentiate image-related products and services in ways that an in-house archive does not. At Wichita-based InTrust Financial Corp., which also plans to keep its in-house archive, Jim Simon, vice president of operations, is concerned about performance issues, too. He cites the quick response time needed to do signature verification at the teller window. Similarly, he says, duplicate items are a challenge in the image environment, and InTrust checks every item every day to see whether it has been presented before. He wonders whether that would be possible consistently using a shared archive.
Proponents of the shared approach describe their decisions as strategic, too. Bank of America built an in-house archive for its controlled disbursement product during the mid- 1990 s. The project was successful, according to Feldman, but it couldn’t create the industry standards or provide the cost leverage needed, so the bank teamed with Chase and IBM Corp., Armonk, N.Y. , to create Viewpointe.
Feldman says Bank of America is putting more than 40 million items a night into the archive and has loaded more than 30 billion of the archive’s 65 billion items. In a recent month, staff and customers pulled more than 20 million ad hoc retrievals out of the database. “We find the architecture to be sound and it has excellent availability and retrieval times,” he says. Opting for shared archive also was a strategic decision for First Horizon. Vaughan says the bank reasoned that if all the images were in one place for Bank of America and Chase, and if Viewpointe could get just a couple of more large banks to join, almost all images would be in one spot. When image processing reached critical mass, there would be less need to create communication lines to move images back and forth, Vaughan says. How quickly will image-sharing ramp up? In June, First Horizon, which had been sharing images through Viewpointe with Atlanta-based SunTrust Bank, began sharing images with Bank of America, too. And that’s only the tip of the iceberg, Viewpointe’s Lucas says, noting that Viewpointe’s five bank owners have committed to sharing 100% of the items deposited by one and paid by another within 18 months. “That’s 2.5-3 billion items a year. The ramp-up has already started. A lot of paper is going to quickly vanish,” she says.
CONTENTS
Customers and Their Checks
Check Images: To Share or To Exchange
ARC: Billers Like It; Bankers Have Their Doubts
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