The transition to imaged payments is all about rising costs, in the short term at least. That was the view from speakers at BAI’s TransPay Conference & Expo Monday speaking on the topic of “Right-Sourcing Float in the Era of Payment Electronification.”

Bill Duffy, managing principal for Dallas-based Carreker Corp., said the seismic shift in payments from paper to electronics is already having a huge ripple effect on a variety of payments collection costs – including float, clearing fees, transportation fees and related processing expenses.

Duffy said banks have been practicing “float management” for decades in order to optimize the balance among these costs. “Float management is really a misnomer. We’ve really managed more than float; it’s about managing all the collection expenses.”

While the migration to image-based payment processing is expected to ultimately reduce costs for banks, Duffy pointed out that float managers will have to both develop their new image infrastructure while deconstructing their out-going (but still necessary) paper-based payments systems.

In the short term, at least, costs will likely rise as the individual unit costs of pushing paper payments around increase as Federal Reserve offices consolidate and couriers need to move fewer paper items farther, Duffy said. At the same time, bank management teams will need to continue to commit resources and investment to their image infrastructure, he said.

As remote deposit capture, branch capture and image exchange grow in popularity, Duffy added, the entire framework of what banks pay and what they earn for various payments functions will be turned upside-down.

For example, many transaction fees charged by the bank have long been kept “artificially low, because banks have historically made money on float,” Duffy said, noting that will change as image speeds up the payment collection process and float begins to shrink. Since float management is closely aligned with bank operations, there will be ramifications in areas such as item processing, account management and deposit product management, Duffy said.

The move to image creates pressure to offer faster turnaround on payments. It also gives rise to a more complex web of different clearing options that vary based on where the payment is received (a branch, lockbox, cash vault, etc.), whether it’s coming in as image or paper, and what’s the most efficient way to handle it, he said.

In order to do a better job of managing float in the era of Check 21, Duffy offered these suggestions to banks:

• Identify and implement immediate cost reduction opportunities;
• Closely monitor float and other non-earning asset balances to identify improvement opportunities;
• Prioritize, plan, and execute steps to deconstruct fixed cost infrastructure supporting paper collection;
• Promptly leverage residual benefit opportunities from each step forward (image exchange, reconfigured sites, etc.);
• Simplify, wherever practical.

(For more on this topic, see “Can Banks Profit from Payments’ Transition” in the September/October 2006 issue of BAI’s Banking Strategies and “Leveraging the Knowledge of the Float Manager” in the January/February 2006 issue.)

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