Productivity increases in bank's check-processing operations have leveled off after years of big gains, according to a recent study.

According to the 21st installment of the Bank Administration Institute's annual check-processing survey, check reader-sorter productivity - measured in the number of items processed per hour - nearly doubled between 1980 and 1988.

However, between 1988 and 1992, productivity on these key pieces of processing equipment rose only 2.8%.

And as bankers try to squeeze the most our of their check-processing systems that have remained relatively unchange for over two decades, experts believe imaging technoloy will begin to point the productivity line skyward again within two years.

The BAI survey, polling 111 financial institutions, was not significantly affected by image technology, which promises to dramatically reduce the paper shuffling associated with check processing.

But many bankers and consultants believe it is only a matter of time before imaging begins to deliver processing improvements comparable only to those created when magnetic ink encoding was first introduced in the 1960s.

"It's inevitable that image technology will have a significant impact on industry costs way down the road, but not in the near term," said Ray Hodgdon, group executive with the Bank Administration Institute in Chicago. "The number of banks currently using it is just too small."

Used by Four Large Banks

As has been widely publicized, check imaging for processing deposited checks is currently being employed at four large banks in the U.S., with about a dozen more testing the technology. Banctec Inc., International Business Machines Corp., and Unisys Corp. manufacture check-imaging systems.

Such systems, which are processing significant volumes at Huntington Bancshares Inc., Signet Banking Corp., Comerica Inc., and Barnett Banks Inc., substitute computer pictures of canceled checks for the real items.

Check image in the "proof-of-deposit" area dramatically cuts operational costs by reducing the manual labor associated with entering check dollar amounts. But the systems have been slow to catch on because of their multimillion dollar price tags.

However, even without imaging, U.S. banks have been finding ways to steadily improve check-processing productivity.

According to the recently released check-processing survey, banks have substantially reduced the percentage of checks that are rejected on their first pass through a reader-sorter from 3.1% in 1972 to just 1.1% last year.

Likewise, the process of encoding checks with a magnetic ink line has become more efficient. Single pocket encoding machines, which handle the vast majority of checks in the U.S., now process, on average, 38% more items per hour than they did in 1980.

As a result of these and other efficiencies, the industry possesses an ever-expanding amount of excess capacity on their processing equipment.

In fact, experts estimate that the check-processing hardware currently installed in the U.S. is capable of handling up to three times number of items they do today.

In addition, as more institutions avail themselves of image technology, this excess capacity will likely expand even more.

Consolidation Predicted

As a result of image technology's projected impact on the industry, many experts are now predicting that this is the year for consolidation in the check-processing industry.

It is well known, for instance, that IBM is seeking financial institutions with which to found a joint venture for check processing.

Such a venture, known in industry jargon as a "check utility", would reduce the number of banks engaging in check processing by providing processing services to a number of institutions through a single facility that makes efficient use of its capacity.

A number of institutions also have been rumored to be interested in founding a check utility independent of the vendors, with speculation centering two of the country's biggest check-processing banks: NationsBank Corp. and BankAmerica Corp.

"We are definitely on the edge of some major changes," said Stanley E. Miltko, a check-processing consultant with Littlewood, Shain & Co. based in Exton, Pa.

"The number of players in this business is going to shrink in the next two years or so, and the thing that will differentiate those who stay and those who leave will be who is willing to make the necessary technology investments."

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