As the volume of deposited and cashed checks converting to electronic form overtakes traditional paper clearing and settlement channels, credit unions late in adopting branch image capture are seeing courier costs skyrocket. How does a CU evaluate whether now is the time to consider implementing branch capture?
The Check 21 Act, which went into effect in 2004, created the opportunity for financial institutions to reduce, if not eliminate, the movement, clearing, and settlement of paper checks. The Act created a new negotiable instrument, a substitute check more commonly known as an image replacement document, or IRD. With the establishment of the IRD, financial institutions are allowed to convert paper checks to electronic images for processing and clearing activities.
Now, four years later, financial institutions that haven’t adopted capturing of electronic images may want to review check-processing options. Benefits of implementing a check image capture solution can include the following:
Flexibility in initial investment–financial institutions have the option of converting checks to images for either outgoing or incoming exchange to minimize initial investment in new capabilities and potential impact to staff and customers.
Lower transportation expenses–courier costs for transporting checks between branch offices, centralized processing centers, and clearing institutions can be reduced.
Reduced float expense–checks can be cleared faster as electronic images than as paper checks and image exchange facilitates a wider array of direct exchange options that can reduce average float to one business day or less.
Consistent and extended deposit deadlines–deposit deadlines in remote branch locations can be extended and made consistent with those of local branches to provide an improved customer experience.
Decreased processing costs–converting paper to image can reduce back office processing costs by creating internal efficiency opportunities for capture, proof, and exception-item processing as well as per-item costs for clearing and settlement.
Two significant trends causing a decline in check volume overall and check volume cleared via paper means have implications to how financial institutions view check processing options. First, check volume as a percent of total payment volume has declined from 84% of total payment volume in 1979 to 33% in 2006. The use of electronic payments has now exceeded the number of checks paid and the expectation is this trend will continue.
Second, the volume of check images exchanged has shown tremendous growth and according to a leading check and electronic clearing service, image exchange volume now exceeds paper exchange volume for its member financial institutions.
How does a CU evaluate whether now is the time to consider implementing branch capture?
* Understand current Day One and Day Two processing environments and related costs.
* Develop a view of the potential branch capture environment and how the remaining Day One and Day Two processes could be aligned to take advantage of new capabilities.
* Identify potential implementation costs and benefits of the new operating environment.
* Determine whether the return on investment supports a business case for implementation.
Potential benefits can vary greatly from one financial institution to another based on differences in areas such as volume and operating efficiency. One thing likely to happen is courier and transportation expenses will become more significant cost components of an item-processing operating environment in the future.
Historically, financial institutions typically use courier services that also transport checks for other financial institutions. Costs for the service are generally shared between companies using the service based on the number of pickups by route. As more financial institutions adopt branch capture and image exchange, the cost of the route will be spread over fewer companies. Therefore, transportation costs are likely to skyrocket for those financial institutions that are late adopters of branch image capture.
The bottom chart shows potential savings by category and a projection of how transportation costs will become an even more significant part of cost savings probably within the next two years.
Institution A is a large bank with high volume and a sizable branch network in mostly a single-state footprint. Institution A has an in-house processing environment and a significant investment in infrastructure geared to a paper processing environment. In this case, the majority of the benefits are attributed to improvements in back office operations for receiving, proof and capture, and Day Two processes that are a result of converting paper to image in the branches.
Institution B is a medium-sized bank with a moderate branch network and volume with a footprint in multiple states. Institution B outsources its item processing functions. In this case, the majority of benefits are attributed to float improvement resulting from image exchange and a reduction in processing costs. Moving from a paper-based processing environment to an image-based one made up a majority of the back-office savings.
The projected example takes into account the expected increase in transportation costs due to the anticipate decrease in the number of courier users resulting from branch capture over the next two to three years. Financial institutions late in adopting branch image capture will see a significant rise in transportation expenses relative to the other expenses needed to support a paper-based processing environment.
As the volume of deposited and cashed checks converting to electronic form overtakes traditional paper clearing and settlement channels, banks late in adopting branch image capture will see courier costs skyrocket. A window of opportunity of about two years exists to avoid being the last user of couriers before the cost of transportation becomes a significant cost factor in processing checks.
George Simotas is director, consulting services for Hitachi Consulting’s Financial Services Practice. He can be reached at GSimotas
