Bankers who hoped to cut their check processing costs through imaging technology may have been chasing a pipe dream.

A study by the Advisory Board Co. has indicated quite the opposite result: Using imaging through the critical proof-of-deposit stage can be up to 40% more expensive than conventional check processing.

For the most efficient banks in the Washington consulting firm's survey, image processing cost 3.06 cents per check versus 2.19 cents per conventionally processed item.

These findings created controversy when presented last week at a Bank Administration Institute conference, prompting some bankers to ask whether they should make further investments in the highly touted systems that were supposed to reduce their back-office expenses.

Critics of the report called it outdated, in that it was based on year- old responses by first-generation check-image banks. But bankers experienced at imaging said the cautionary tone was dead-on.

W. Allen Brown, director of operations in the technology unit of Barnett Banks Inc., said the company had "over-optimistic expectations" when it began imaging several years ago and "underestimated what it would take to accomplish them."

Barnett, which is considered a pioneer in this area, fully converted its proof-of-deposit operations to imaging last year.

"Would I do it again? Yes," Mr. Brown said. "Would I lower my expectations? Yes."

Other bankers echoed the faith that imaging can be cost-effective but that the payoff may be more difficult to achieve than expected.

Large banks originally were lured to the technology because it promised to slash costs in proof-of-deposit, a labor-intensive activity requiring much manual data entry.

But early adopters said big savings from image proof of deposit have been slow to materialize. This delay has given rise to other fee-generating applications that could help justify the systems' cost.

"There has been a change in the approach banks are using," said David Medeiros, consultant at the Tower Group in Wellesley, Mass. "Rather than waiting for the payoff, banks are using imaging to pick off niche applications."

Over the years, such "niche" uses as retail customer statements and corporate cash management services have become increasingly popular. Statement imaging - returning images to customers in place of canceled checks - has made considerable inroads at community banks, which report widespread customer satisfaction as well as reduced mailing costs.

As a result, many bankers said, delaying investments in check imaging is not an option, but they want more cost data.

The debate over imaging's benefits boiled over at the Bank Administration Institute's conference in Orlando. Before an overflow crowd of bankers and equipment vendors, representatives of Advisory Board asserted that the technology's promise for POD had not been realized.

"There was this assumption that all would work better than it actually did," said Chel Cavallon, a senior consultant on Advisory Board's staff who presented its findings at the conference. He spoke in a telephone interview afterward.

Jack Guynn, president of the Federal Reserve Bank of Atlanta, added his voice to those calling attention to the high costs of imaging.

In his keynote address, Mr. Guynn said, "The cost of transmitting full images and warehousing them in multiple locations just does not seem to make economic sense with the current state of the technology."

Vendors of check-image equipment and services (The top three are International Business Machines Corp., Unisys Corp., and NCR Corp., according to Tower.) acknowledged that POD savings may be difficult to obtain.

But they noted that an imaging system usually features applications beyond POD that can streamline workflows and increase fee income.

"People tend to use imaging and POD interchangeably," said Geoffrey Emerson, IBM's general manager of payment solutions. "POD is very focused on cost savings. But IBM is defining imaging as a much broader concept."

Mr. Emerson said several banks are dipping their toes into imaging for purposes of fee generation.

Of the 19 major institutions that have signed up with IBM, a majority have requested imaging applications for corporate cash management and statements during the last year, he said.

National City Corp. is one. The Cleveland banking company has installed an imaging application specifically for cash management customers.

"On a stand-alone basis, it is cost-justified," said Jean Voorhis, assistant vice president and product manager at National City.

When banks use imaging for niche applications, they are better prepared to use it for POD in future, said Mr. Emerson.

Barnett's Mr. Brown added that, once an imaging investment has been made, it makes financial sense to expand the number of applications.

"I now have a system with potential," he said. "I can make leaps in productivity with imaging. Before, I could make only steps."

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