system - one in which the common check is replaced by electronic transactions. This is clearly the trend for the long term. Checks will make up a smaller and smaller portion of the nation's noncash transactions, but, in IBM's estimation, the absolute number of paper checks will continue to grow from about 64 billion this year to about 74 billion in 10 years. Given today's other clear trend in banking - consolidation - the need to handle paper will be even greater among the surviving banks. While check volumes grew a modest 3% in 1994 across all U.S. financial institutions, check volumes for banks with greater than $4 billion in assets (those doing most of the acquiring) grew by 8%. This suggests that the ultimate in check cost reduction - check elimination - likely will not be a factor during the next 10 years. So what can be done to lower costs and improve customer service? Two technologies that have attempted to accomplish this independently are electronic check presentment (ECP) and check imaging. While many banks are running ECP pilots, the technology still accounts for less than 5% of all transactions. There are several reasons for this, chief among them the "paper-to-follow" problem. Paper-to-follow means that while ECP can be used as an early warning system to do memo postings and fraud detection, the existing infrastructure cost for transportation and paper-handling remains. Likewise, check imaging is not the whole answer to the paper dilemma. While it offers many benefits to banks and their customers for distributing checks, it fails to solve the paper-to-follow problem. This is due to the availability and price of transmission bandwidth; shipping more than 60 billion items per year at 50,000 bytes of data per item just isn't affordable. If these two technologies have only modestly affected our goal of improving the payment system, how can we proceed? I advocate an "archive- centric" approach that uses both ECP and check imaging. In this approach, the paper is captured during prime-pass using image technology in the proof of deposit area at the bank of first deposit. At that point, a check's code line and the image are separated, with the code line being transmitted via ECP to the paying bank or the Federal Reserve. The image is stored locally or regionally in an archive for reconciliation and eventual distribution to the paying bank and its customers. This combines the benefits of ECP for economical transmission (50 bytes per item) between banks, with the superior viewing and retrieval characteristics of a digital image over paper or film. A three-step process lets a financial institution accomplish this. Step one focuses on customer-facing applications, or those that provide images and value to the bank's customer. Today many banks are already in the advanced stages of step one, with projects under way both for retail image statements and commercial image delivery. While retail image statements have been available for several years, image delivery is a newer application. It uses CD-ROMs for on-cycle delivery or telephone dial-up for on-demand delivery to corporate customers. These applications reduce paper flow, offer storage and convenience not possible with the original checks, provide dramatically faster access to individual items, and reduce costs. In addition, they represent a fee generation opportunity to the bank. Most significantly, these applications eliminate a key component of the paper-to-follow problem - return of paper to the originator. About 40 of the top 100 banks have one or both of these applications installed today. Step two begins to integrate ECP with an image archive. The emphasis here is on electronic image presentment of only the exception items. The integration sets the stage for reduced paper in clearings in the future. Payment decisions are made from ECP code lines, supported by imaged exceptions, but the paper still follows. We expect broader use of this combination of image archive and ECP in the next three years. With step two the archive in support of customer-facing applications begins to take center stage. Recent advances in tape technology make long- term digital storage cheaper than film storage. This allows us to look at research and customer service in a whole new way. An image archive allows for improvements in customer response time; better readability of a digital image versus film, particularly for endorsements; and a newfound flexibility to redesign the research process with branch, ATM, or home PC access. Finally, the archive improves the step one applications by allowing them to be operated from a central data base. This would eliminate the current practice of repassing the items. Step three is a long-term solution that completely eliminates paper exchange. It capitalizes on a low-cost, open architecture archive that allows check truncation at the bank of first deposit. All captured items are stored in a permanent archive. Expensive, time- consuming recapture passes and paper-to-follow are eliminated. Digital images can be used to replace paper in all processes. Many questions remain. Will all benefits occur if not all banks move to imaged items? Who will manage the archive; banks, the Federal Reserve, or nonbank third parties? What are the legal and regulatory ramifications? If the check processing community can successfully find the answers to these questions, it can attain lower costs, improved revenue potential, and better customer service. Mr. Emerson is a general manager of payment solutions at International Business Machines Corp.
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