It's probably no surprise that Keycorp, the most geographically dispersed bank in the country, has an obsession with maximizing the efficiency of its check clearing operations.
With affiliates in seven Federal Reserve districts and 13 states (soon to be 14 once an acquisition of Bank of Boston Corp.'s Vermont operation is completed), the Clevelandbased banking company is employing PCbased software to ensure it gets the most for its money when it clears close to 2.5 million interbank "transit" items a day, valued at approximately $1.3 billion.
"We have been using an analytical tool that allows us to accomplish transit check clearing optimization throughout our operation," said Anthony Gerevics, group manager of corporate float and transportation management for Key Services Corp., the bank' s Buffalo-based technology unit. "Basically the software calculates where the best end points are for us to send checks which are not drawn on Keycorp bank affiliates."
Since last October's Keycorp-Society Corp. merger -- which created the nation's 10thlargest bank holding company ($64 billion of assets) -- Key Services Corp. has been clearing close to 55 million transit items a month, more than twice the pre-merger volume. And Keycorp officials said the extra volume has been absorbed without additional costs. The system, called Check Services Model, was developed by Littlewood, Shain & Co. of Exton, Pa. It allows the bank to store the pricing and fund availability information for all of its clearing options and provides the analytics to determine the cheapest place to clear the items.
"We currently have stored over 330 different schedules on our machines," said Mr. Gerevics. "The schedules contain particular bank information for pricing and fund availability for various types of items.
"If we have a large-dollar check here in Buffalo and it is drawn on a bank in California, I would probably want to get that money as quickly as possible presuming the fees to clear the check offset the funds availability gain," Mr. Gerevics said. "The system helps us determine where the best place to clear the check is, based on the fed funds rate."
One example of the information contained on the system is a file which stores every Federal Reserve district' s consolidated funds schedule.
By having this detailed information at their fingertips, Mr. Gerevics and his staff of three analysts are able to determine how much it will cost to clear a check, when funds will be made available through the regional Federal Reserve Bank.
"There is a published schedule which tells me when I can expect availability and what the cost per item is," he said. "In addition to the Fed, there are other entities which compete against the [central bank] for the check clearing business.
"There are a number of national players who are out there trying to generate business from a correspondent bank perspective and their schedules are also in the model," he continued.
The bank also stores various schedules from other banks across the country that have specific cash-letter products which take advantage of the presence in a local environment. "Wells Fargo and First Interstate, for example, will take items drawn on the California clearing house for 'x' number of cents per item," Mr. Gerevics said. "We store those schedules for the specific items as well as the schedules from banks in other regions of the country in an effort to take advantage of niche markets."
Once the schedules are in the model, the bank can look at its volume mix on the micro or macro level to determine the cheapest location for clearing the items in a specific region of the country or even a specific city. "In some cases, we say this is the entire mix of items for the particular location," Mr. Gerevics said. "We put the information into the model and ask the system to run the data against various schedules.
"The model will then calculate which is the optimal clearing entity based on funds availability and pricing," he continued.
Mr. Gerevics and his staff, depending on what part of the country they are working on and what type of items they are looking at, pick five schedules of various clearing opportunities to determine which one the bank should utilize.
The system is only capable of running five schedules at once and in some cases the analysts perform multiple iterations of the system to ensure all options are analyzed.
Mr. Gerevics said the operation runs the model for all the bank' s affiliates on a quarterly basis to ensure the operation is maximizing efficiency.
On a daily basis, the analysts look at specific areas of the country where changes have been made in the schedules. The new information is analyzed to determine the impact of the new pricing or fund availability changes.
Since 1992, when Key Services first started using the system, Keycorp has seen savings of roughly $4 million a year in processing costs.
Mr. Gerevics expects the savings to be even greater once the full impact of the merger is assessed.
One of the benefits the system has offered since the merger with Society is that it does not require the operation to add staff to handle increases in the amount of items being processed.
"The merger has increased our volume from pre-merger numbers of 25 million items a month to 55 million," he said. "We have taken a more functional approach to the operation than Society did and that allows us to optimize their locations as well."
Carol Berger, managing director of research at Salomon Brothers Inc., said the use of the check clearing tool is an example of management' s clever approach to the merger.
"Management is looking at every function and picking the best tools of each operation and melding them into the new entity," she said. "The use of the system is an example of how the merger is working well and how management is fine-tuning specific areas of the operation for the benefit of the entire operation."
Key Services also uses the system to determine price and profitability of potential and existing customers requiring the clearing of large numbers of transit items.
"If we have utility company that is clearing thousands of items a day, we want to make sure we are recovering our costs and are profiting from the relationship," Mr. Gerevics said. "We will take a profile of the customer's deposit mix, run it against the model, and determine what our fixed and variable costs will be to handle the customer's business. "The information is then passed on to the pricing people and they in turn make sure the pricing is appropriate to our costs," he said. "The system gives us the opportunity to look at the deposit mix, see where the checks are drawn and what the costs of clearing the items will be so we can set our prices accordingly to be competitive in the marketplace."
