Imaging systems abound, but eliminating paper across all channels may be easier said than done
As long as paper forms-checks, invoices and legal documents-remain a convenient and cost-effective manner of conveying information, banks can hardly expect to remove paper from the financial system. That's where the art of paperless processing comes in: to find the best place to convert analog writing to digital data, and to figure out how to make that data accessible to the people who need it most.
Indeed, each distinct customer channel and transaction type calls for a different processing method. For example, the method for handling checks at a bank differs from lockbox processing, and taking checks at the point-of-sale differs from doing so over the phone or on the Internet.
But the underlying technologies have similarities that some organizations have begun to exploit. Drawing on their capabilities as image repositories, banks have been extending their archives to new uses, joining image exchange programs and encouraging customers to participate in programs that can increase efficiency, reduce risk, and bolster competitiveness.
Realizing a return on investment is an essential part of any image strategy. For Deutsche Bank, workflow improvements provided those tangible financial benefits. In the past, situations as simple as a misplaced check could bring an entire operation to a grinding halt. "In the traditional workflows, you had to stop, go out and collect all this information, and bring it back so that you could continue what you were doing," said Mike LaCava, head of U.S. customer access, global cash management, Deutsche Bank, New York.
Now, with the aid of imaging technology, Deutsche Bank researchers rarely have to leave their workstations. As a result, a process that had taken 15 to 20 minutes now only requires three to five minutes for an experienced researcher. "They have the ability to request the image from the archive for both the deposit slip and the check image, and bring it up on the screen in the midst of working on a particular case," said LaCava.
What's more, images can be incorporated into standard processes. "There are a couple of items within this sort of workflow where you know you always want to look at a check or a deposit slip," said LaCava. "You don't have to make the person ask for it-you can just have it there."
Quicker access to better information makes for improved risk management. "The bottom line is finding out what that adjustment was, and correcting it so that you're not exposed financially," said LaCava. "In the end, the client sees the benefit because their account is now made whole."
The image archive contains much more than just check images. The format-independent, Internet-accessible platform also holds report data in COLD (Computer Output to Laser Disc) format, lockbox coupons, compliance forms and customer statements. "It could go beyond that to any industry-standard files," said LaCava. "Image, video, music-that's not what we're necessarily doing yet, but it's not precluded."
Another important function of the archive is to provide an always-available source for producing customer documents-even though industry archives might hold the same information. "I have really got to feel 100 percent confident that when my client asks me for an image, I can provide them with that image," said LaCava. "You can trust what you control."
While centralized archives work well for inquiring about a single check or customer, they're less suitable for certain other tasks, such as handling requests for CDs containing check images. "You're not going to get that sort of throughput to produce CDs directly out of a centralized remote archive, while everybody else is banging at it for other reasons," said LaCava.
But improved service is just one of the benefits of archiving. "The biggest value, once you've got this in place, is the ability to integrate what's in the archive with other information," said LaCava.
CHECK IT OUT
The greater variety of documents contained within an archive, the higher the potential for integrating the information contained within, according to IBM, which provides a wide range of outsourcing and technology services to Deutsche Bank. IBM counsels financial institutions to look beyond the business unit when considering image and archive strategies.
However, only a few have actually taken concrete steps in that direction. "There are a small number of banks that are starting to look much more holistically-for retail and wholesale-at the question of taking paper out of the system," said June Felix, general manager of transaction solutions at IBM, Armonk, N.Y. "It varies dramatically by bank."
While image archives are no panacea, they do have the potential to support several major initiatives underway at virtually every large financial institution. "Everybody is looking to streamline and reduce costs in their payments infrastructure," said Felix. "That is a very common theme, whether it's transforming paper to electronic or whether it's reducing redundancies."
In the U.S., a major focus for bank executives has been preparing for "Check 21," the Check Clearing for the 21st Century Act. In order to optimize their check processing operations, banks have been considering several points along the chain of collection for truncating checks into digital files.
Ideally, each paper document would be handled by the bank once and only once. That's the approach taken by IBM with its recently-released Image CPCS (Check Processing Control System), a prime pass image capture system using a Linux-based middleware layer for storing and managing check images. "Very often, when banks take check deposits, either in a branch or at an ATM, they then have to transport those checks to a central site and start the whole imaging process," said Geoff Emerson, director, IBM Financial Solutions. "Now, it's possible to have a better business case for actually capturing the check there at the branch or ATM, and letting the transaction proceed based on the electronic information that you've captured."
After digitally capturing items and making them portable within a bank's own network, the next logical step is to make those same images available to other banks. In anticipation of Check 21, the bank-owned venture SVPCo has begun to implement an image exchange among several major U.S. banks. "We can move forward to some extent without Check 21 being in place," said Hank Farrar, president and chief operating officer of SVPCo. "But Check 21 is going to make all the difference."
SVPCo intends to act as an inter-bank network for check images. "A bank will send us images of all the checks they capture, and we will worry about where they go," said Farrar. Digital destinations will include the Federal Reserve, other banks' archives, centralized image archives such as Viewpointe, and other image exchanges such as those planned by third-party processors such as EDS and Fiserv.
Along with making sure that SVPCo connects with the largest origins and destinations for check images, the venture also has a stake in ensuring a steady flow of image traffic from several other sources. "The biggest focus out there right now is on lockbox," said Farrar. "In any of these initiatives-whether it be point-of-sale conversion or whether it be lockbox conversion-image is going to play a role in those processes."
Still, as long as customers still write checks and merchants can safely accept them, banks have to be prepared to handle the clearing and settlement process. But it's a nice trick when the bank can convince the merchant to stop the paper trail at the cash register.
Point-of-sale check conversion was the original mission of SafeCheck, a two-year-old venture formed by banks and EFT networks. SafeCheck can determine whether a checking account is open and consumer-owned, whether it has sufficient funds, and look for stop payments against the check number. But it has yet to make much headway at the point-of-sale. "The basis of our company, which was POS check conversion, continues to be valid and continues to be an opportunity," said Anne O'Toole, executive director of SafeCheck. "Whether it's a five-year or a 15-year opportunity, we'll know a little better a couple of years from now than we do today."
One barrier has been the competitive landscape at the point of sale, served by players such as Telecheck for verification, and by companies that provide collection services for returned checks. For the most part, banks have been relatively distant from merchants. "Banks who own the access to the deposit accounts, or the ACH system or the EFT system, aren't really in the business of selling check services to merchants," said O'Toole. "You've got the banks building this infrastructure but nobody on the selling side really agreeing to use it."
Furthermore, both check writers and merchants can benefit from the float from a check, and aren't quite ready to let it disappear. "Say grocery stores on Thursday night-everyone's in there writing checks, but they get paid on Friday," said O'Toole. "Grocery stores know this, the check writers know this."
"You don't really get a lot of bad debt at the grocery store, because you get a lot of repeat customers," added O'Toole. "They don't want to obligate a consumer to use the equivalent of a debit card."
And for most merchants, eliminating checks wouldn't necessarily eliminate paper. "As long as they have currency, they've got a paper process," said O'Toole. "Right now, there's still enough money being made by those middlemen in the paper world that they're not really compelled to move things to electronic."
Indeed, other channels-telephone and Internet-have so far provided the largest growth for SafeCheck. For instance, its PhoneCharge service allows customers to pay utility bills using the information printed on a paper check. Although the service doesn't actually check for available funds, the utility benefits largely by verifying the account in advance.
"It's not so much the risk of the payment, it's so they don't get involved in day-two processing," said O'Toole. "Most of the time, consumers are paying for services already rendered."
The next step would be to instantly convert checks through online channels into electronic payments. "There's a lot of interest in that area," said O'Toole. "Our biggest challenge has to do with financial institutions getting comfortable with fraud management by the users of the service."
UNLOCKING THE BOX
Checks don't just end up in cash registers. Consumers also write paper checks and send them in paper envelopes to companies' lockbox processors. Originally established to provide national companies with regional collection points for checks, the lockbox business has evolved into a race to convert paper checks into digital files.
Credit card companies, utilities and telecom providers are increasingly scanning customers' checks into image files and then converting them into automated clearinghouse (ACH) transactions.
"In the paper environment, it could take seven to 10 days to get a return item notification back," said Marcie Haitema, president and CEO, JP Morgan Chase ACH. "If your company is managing risk carefully, that's a long time to wait."
JP Morgan Chase, in conjunction with J&B Software, Blue Bell, Pa., has established a firm foothold in the market for accounts receivable check conversion (ARC) at retail lockbox providers. For lockbox operators and their customers, ARC offers a quantum jump in speed.
"In the electronic arena, the ACH returns come back in a matter of a couple of days," Haitema added. "The benefit on the risk management side is substantial."
When a check is converted to ACH, the regulations governing the transaction change from those governing checks (e.g., the Uniform Commercial Code) to those governing electronic transactions (e.g., the National Automated Clearing House Association or NACHA, and the Federal Reserve's Reg E).
Hence, once the checks are converted into ACH transactions, they can be destroyed rather than returned. Although the majority of consumers seem unfazed by changes in the check conversion process, corporate entities have yet to be convinced.
For example, the Association for Financial Professionals (AFP), a Bethesda, Md. trade group, had a chilly response to a NACHA proposal regarding the truncation of corporate checks.
"If corporate checks were converted to ACH debits, it would disrupt many of the cash management controls and cash management practices that corporations use," said Arlene Chapman, senior consultant, technical services, AFP. "They would have to manually match an ACH debit to a check issued."
NACHA then suggested that corporations could "opt-out" from check conversion by printing an "auxiliary on-us" field onto their checks. Still, AFP remained unmoved, stating that payers, not payees, should retain control of the manner of payment. At the very least, companies should have to "opt-in" to ACH conversion rather than the reverse, the organization suggested.
In addition, many corporate treasuries are uncertain about the ease of implementing the auxiliary on-us field, and of its effectiveness.
"What if a check gets through, even though it has an auxiliary on-us field?" asks Chapman. "Our members then have to be able to make sure that they have debit blocks and filters on their accounts, to prevent the unintended consequences from happening."
Corporate treasurers might relent if the ACH and check systems were connected to a greater extent than they are now. Specifically, when a company submits a list of checks written to the bank through a positive pay service, that list should apply to the payment regardless of how it travels through the financial system.
However, rationalizing the payment methods would have a cost that neither banks nor corporations seem willing to bear.
"There's no linkage now between the positive pay systems and the ACH systems," said George Thomas, president and chief executive officer of Electronic Payments Network, a unit of the New York Clearing House Association. "None of the banks really want to make an investment there."
Defining the Standard
TowerGroup lists five gaps that must be bridged in order for companies to exchange remittance information with anyone:
- Accounting software vendors must agree on a standard core set of data.
- Corporate A/P and A/R departments must find the standard acceptable.
- Banks must agree upon the format for the data.
- Banks must upgrade systems to accommodate the standard.
- Payments networks must be capable of transmitting the standard.
If transforming paper checks into electronic documents seems tricky, consider the problem of foreign trade.
Trade finance includes not just the buyer and the seller, but also the insurance companies, freight forwarders, shipping companies, consolidators, inspection companies, and government bureaus involved with each shipment (see Feature Story). Also, recent homeland security initiatives have made access to shipping information very important.
"The problem that we're trying to solve is really multi-layered," said Dan Scanlan, head of trade product management at Bank of America. "You can range anywhere from six to 12 parties in a typical transaction, and trying to get all those parties on the same page, in terms of electronic capability, is a very difficult thing."
For its part, Bank of America, Charlotte, N.C. , in conjunction with S1, developed a trade finance purchase order processing system (known as POPS) that helps the bank to manage letters of credit, documentary collection and open account transactions on behalf of its customers and their trading partners.
With its information repository, the bank can provide both buyers and sellers information about the status of their transactions. For instance, exporters no longer have to jump through numerous paperwork hurdles in order to get production moving out of the factory. "They've gone from 10 to 12 phone calls and five to six courier runs, to sitting at the PC, loading up the master form from the letter of credit directly, and then creating the shipping documents from that," said Scanlan.
On the importer side, many companies have been looking for banks to outsource their entire back-office trade capacity. "We're seeing a great deal of interest in having the bank take over this function," said Scanlan.