Experts' Crystal Ball

Is your bank ready for imaging? A panel of American Banker editors recently asked four industry experts to take up the debate.

The panel consisted of Christopher Cryan, vice president, New York-based Bankers Trust Co.; William C. Forsberg, associate, Perot Systems Corp.; William R. Moroney, president, publishing firm Moroney & Co.; and Carol Zynda, vice president, Comerica Bank.

In a wide-ranging question-and-answer session, the participants touched on the latest applications, common mistakes in getting a system up and running, strategies to convince CEOs to board the image bandwagon, and prospects for the future. AB: Times are tough, and most image systems are expensive. What makes a bank decide to take the plunge? FORSBERG: Most commonly, the point of departure is a situation that boarders on an emergency. The need to improve customer service in the credit card business is a typical example. Mortgages and loans are other areas in which a crisis can exist in customer service.

Especially if you're in a competitive marketplace, you can't keep your customers if you can't quickly answer their questions and solve their problems. In many cases, imaging offers a viable way to do that.

And once you've got some equipment in-house, and you've got some expertise, you can wade in further. MORONEY: I think the insurance industry is a good example. They've adopted a lot of imaging technology to enhance customer service for very competitive reasons. That's one of the few ways that they can differentiate themselves. AB: Once a bank has identified a problem area, how can it determine whether imaging will fit its needs? CRYAN: Banks usually proceed with an imaging project because a cost-benefit analysis tells them it's a good idea.

In terms of such an analysis, imaging probably requires as much or more rigor than any other type of technology. It certainly requires a harder look than a typical data processing project.

That's because the costs of imaging are going to be significantly larger than those to which a bank might be accustomed.

Any analysis also requires scrupulous attention to the technical side. Lots of questions pop up, for example: "Is this really what we need?"

When it comes to imaging, you need to separate the wheat from the chaff. You need to find the right imaging applications to bet on, because you're going to make a fairly significant bet. AB: Is there an advantage for those banks that ante up early in the game? ZYNDA: I think so. We've installed imaging to process checks. The fact that we're involved early means we've had the opportunity to learn about the technology and adjust to changes that have popped up. That has made the process easier for us.

For example, we've changed some of the approaches of Unisys Corp., our vendor, especially in the balancing area.

As a result, we've had a chance to make mistakes early with very little repercussions. No competitors are right behind us. So the implementation is considerably more risk-free. AB: What kinds of customer service advantages does imaging create? CRYAN: While other banks may be saying: "It's going to take four weeks to process your mortgage application," a bank that applies imaging successfully may do the same job in just four days. That's a distinct competitive advantage. FORSBERG: In the credit card business, I know of one operation that had been taking up to 20 days to respond to customer correspondence.

The process involved the mail room. There were multiple mainframe interactions. The responses had to be word processed, and staffers had to search for files and figure out where everything was.

With imaging, the department cut its response time down to two days. They did that by automating the paper flow, computerizing interaction with the mainframe, and automatically generating correspondence. MORONEY: One bank wanted to increase its mortgage lending in a big way, and it knew it could reduce its processing time through imaging. In fact, the bank was surprised at how much time it could save.

And they were also surprised at the positive effect it had on getting real estate agents to direct buyers to them. That's because they were able to quickly make a final decision. They were able to say: "Yes, we'll grant the mortgage," before a buyer had a chance to shop around or decide they don't want to buy the house after all. AB: Any caveats to banks thinking of adopting imaging? CRYAN: A bank has to look at imaging in the context of its overall technology strategy.

Technology officers have to make sure that they are not short-changing traditional data processing techniques. A lot of times, such approaches are still the best way to solve particular problems.

Imaging may be a hot item, but it's not a panacea.

That may mean before moving to convert paper to image, a bank has to ask itself: "Why is this paper to begin with? Why aren't we capturing this data downstream as electronic data?" AB: Under optimum conditions, how long does it take for an imaging system to begin to show a return on investment? ZYNDA: We expect to see a return in the first year. And we expect the system to pay for itself in two to three years. AB: How can a manager convince the CEO that imaging is a worthwhile investment? ZYNDA: For us, it was a hard sell that involved the CEO and other technology executives. That's partly because there are so few people active in check imaging. There were no ground rules, and we were traveling uncharted territory.

We had a key group of people look at image systems from various vendors. Eventually, we decided to go with Unisys Corp. The company had given image demonstrations at their plant in Plymouth, Mich. CRYAN: We did a cost-benefit analysis in 1986, and decided we would be able to get the return on investment we were looking for. Then we launched a sales effort.

That involved touching base with both the CEO and other key people who play a role in shaping our technology strategy. Each person had to be convinced independently.

At Bankers Trust, the key people were those who support our IBM mainframe and the designers of our architecture, the technical framework that links and integrates our systems and components. Another person on the list was the head of financial planning and administration for the technology and telecommunications department.

We walked these executives through the finer points of imaging. We tried to prove to them the technology was a logical extension of our capabilities, and that it had greater potential than some of the more traditional data-storage methods, such as microfilm and microfiche.

The CEO, had a say at the end of the process, but he was one of many. Any chief relies on a cabinet of trusted advisers, so we had to target those people and bring them on board. AB: How did the analysis proceed? CRYAN: In the early stages of analysis, we looked at notes from conversations with vendors. Then we tried to put the costs and benefits in a tangible form, so people would trust that they were accurate. AB: What is the hottest imaging application right now? FORSBERG: Document, or file-folder imaging systems, which convert documents to electronic form. (See article on file-folder imaging on page 5A.) This is the area in which the most productivity gains can be made.

File-folder software can help to automate the flow of work having to do with customer inquiries, loan servicing, mortgage administration, and other areas. That means when an employee is finished processing a file or document, it is automatically moved along to the next person who needs to see it. AB: Is one reason for file-folder's popularity that it's generally more affordable than check imaging? FORSBERG: Absolutely. Check imaging systems - typically which begin at several million dollars - are a "bet the ranch" type of proposition. Once you get involved, you're depending on imaging to keep track of all financial transactions at a bank.

Also, you can't get the maximum benefits of check imaging unless a substantial portion of the entire banking community gets involved.

By contrast, with document imaging, you can start small and build. Once you install a local area network - into which a file-folder system's workstations are linked - you can always add new applications to the network. AB: For what kinds of things is Bankers Trust using file-folder imaging? CRYAN: One of our business lines serves as custodian and trustee over mortgages. It processes the documentation behind mortgage-backed securities.

After we scan paperwork into our mainframe computer, the system analyzes a file to ensure the mortgages and documentation conform to the standards for mortgage-backed securities. Our job is to wade through the pools of mortgages.

We started out in the business several years ago, and did some deals manually. At that time, we struggled to process an MBS with 6,000 underlying securities. But now, we can easily handle securities with 150,000 underlying mortgages.

That's because our staffers review an image of the document, instead of looking at a piece of paper. The latter approach can cause all sorts of problems. Frequently, documents are misfiled or lost, especially if they are handled by five or six people. AB: What kind of an effect did imaging have on the mortgage custody business? CRYAN: File-folder gave the business a big boost. That's because the business involves a fair amount of nonconforming loans. Typically, these problem loans require a lot more processing than loans that conform to federal guidelines.

But we knew we had to be well-automated. So we looked at the options and imaging was the only one that seemed like it could have a dramatic impact on the process. AB: Does Bankers Trust have any other file-folder applications? CRYAN: Yes. We also recently brought on-line workstations in the corporate trust department's shareholder relations area. Employees in the area field and answer questions from bond holders.

For example, we might be hired as the paying agent for a bond. In that case, we would make all payments of principal and interest, and maintain appropriate records.

In addition, some workstations with imaging capabilities recently came on-line in our human resources department. They will keep electronic folders on our employees. AB: Didn't the mortgage custody department have a big test early on? CRYAN: Yes. As we were bringing our system on-line, a huge deal was coming to market involving $2.2 billion in assets being sold by the federal government. And we were hired as the trustee and custodian for those documents.

That was our first deal using the image technology. I believe it was the biggest deal that ever came to market in the mortgage-custody arena. AB: Is it true that in terms of file-folder imaging, the largest productivity gains come from changing the way things get done? CRYAN: Yes. At least that's the case in our mortgage-custody business, where the process is entirely automated. Documents are automatically moved along from one person to another.

Under a manual process, employees can decide to avoid difficult tasks. They can shove a piece of paper at the bottom of a pile, pass it to somebody else, or forget about it completely.

But in the imaging world they work through a structured process. They have to deal with items in an order that managers help to define. So there's a vastly superior ability to structure and control a workflow process. AB: And that's the source of most productivity gains? CRYAN: That's right. In mortgage custody, we estimate productivity gains between 25% and 30%. AB: What's hot on the check imaging side? FORSBERG: In the high-speed world, image statements on checking accounts and credit cards have gotten the ball rolling. American Express came out with their application, and I think everybody is trying to figure out how to catch up. AB: Is Comerica providing image statements? ZYNDA: We hope to be doing that soon. Today, we're processing unencoded items in a limited volume. But as the system stabilizes, we will be growing that volume. AB: In terms of check processing itself, what percentage of your volume are you running through the system? ZYNDA: We are fully encoded in clearings. That's pre-encoded work that we get from other banks' proof departments.

We're currently processing an average of 175,000 items a day. Some days, the figure is more than 200,000 items.

In unencoded work, we're averaging 6,500 items. Those items go through data correction. AB: What are some of the technical issues involved in converting to check imaging? ZYNDA: From the hardware standpoint, the biggest change is in power encoding. That's making sure every item is encoded with the dollar amount, account number, and serial number.

Under our old system, operators keyed in missing fields manually. AB: Why are so few banks taking a shot a high-speed imaging? CRYAN: One thing is that you have to have tremendous volume to offset the initial cost. So it's predictable that a high-volume operation like American Express would have the incentives and returns to make the technology pay off. AB: What's the prognosis in the area? MORONEY: Applications in payments processing and check processing will ultimately provide both the greatest dollar savings and the greatest enhancement to customer service.

As a result, most bankers will eventually have to get high-speed imaging. Large banks will have to buy it, and smaller banks will have to obtain it through service bureaus.

The development of check imaging likely will take the same course as that of automated teller machines. In the early stages of ATM, only a few banks got involved.

So initially, the big cost savings promised by ATM proponents just weren't there. The problem was you needed a nationwide network to get optimum cost efficiency. AB: Will banks eventually charge customers either for imaging statements or for requesting more traditional bundles of checks? MORONEY: One recent study found that a large number of customers found the idea of image statements convenient. The majority of them, as you'd expect, were debit card users and younger, more affluent customers.

The study also found most of the people who liked image statements would be willing to pay for them.

As with ATMs, I suspect banks initially will provide image statements for free. Then later, they'll begin to charge for them. AB: How are employees coping with imaging? CRYAN: Some people hate it, while others love it. Most people are somewhere in between, and they come to adapt to it. But on the whole, there's been a dramatic cultural change. AB: From an employee's point of view, what is the biggest change? CRYAN: For one thing, there's a sheer physical difference. People who used to spend a lot of time running around the building are now linked to their desks, and spend much of their time staring at a computer. AB: What are the most frequent complaints? CRYAN: Lots of people start with a distrust of computer systems. They think: "I'm going to have the customer on the phone, and I won't be able to find the information I need." AB: How are banks coping with this problem? CRYAN: We're doing a fair amount of retraining. That retraining involves some cultural preparation for the new environment. ZYNDA: Comerica tried to get an early handle on any problems by getting people who would be working with image involved in the testing of the system.

Also, the items processing area invited departments we work with for a tour of our operations. And we put together a video to introduce imaging to our branches.

Every employee in the items-processing area - including sorter and computer operators, balancers, and reconcilers -- had to be re-trained. In essence, we've engaged between 150 and 200 people.

As a result, where proof operators used to handle paper, now they sit, look at a screen and key in amounts. Their production has doubled, but you'll hear things like, "This is the most boring job I've ever had."

To compensate, we're trying to be more flexible with work schedules and provide more breaks. In some cases, we've changed furniture to keep our people more comfortable.

AB: What are some of the more interesting imaging applications you've seen? FORSBERG: Some involve the combination of image and facsimile machines.

In some instances -- for example, when a home office receives a fax from a branch office -- the transmission goes right into the imaging system and never gets printed. Going back the other way, a communication can go back out to the branch and print up on the office's fax machine.

We're also seeing the combination of image with expert systems to tackle customer service correspondence.

In that area, most letters fall into a certain category. For example, a typical mailing might say: "I sent in my check, but the payment wasn't reflected on my credit card bill."

An expert system can check a mainframe database to verify such a claim. And it can automatically initiate a response that's ready for the appropriate employee to sign. ZYNDA: In the balancing area of check processing, we also use an expert system. In our Unisys package, the system will go in there and pinpoint items, saying: "This credit should be a debit, or vice versa."

On the check side, another interesting application is character recognition: the ability to read a handwritten amount. MORONEY: There are also unique applications for file-folder imaging. According to one story I heard, a bank in the Midwest used imaging to catalogue its art collection. (See article on page 4A.)

Several years ago, the story goes, the daughter of a longtime bank customer took a liking to a bronze statute in one of the bank's branches. She offered the branch's manager $25 for the piece.

In turn, the manager relayed the query to corporate headquarters, which riffled through a stack of three by five cards that comprised the bank's records on its art collection.

The bank turned down the sale, because the cowboy was said to be a $200,000 piece sculpted by Frederic Remington. But the hassle of flipping through unwieldy paper cards-and a decision to take inventory of its 1,500-piece collection-convinced the bank to create a document imaging database.

It took them about six months to put the system together. And ultimately, auditors were able to determine the collection's value.

This is a good example of how a small investment in imaging can save hundreds of times its cost.

AB: The price for basic file-folder systems starts at around $50,000. Will many small banks install such systems? MORONEY: I don't think smaller banks have the problems that would drive them as quickly to imaging as larger banks. Nor do they have the same volume-driven potential for savings.

Ultimately, as the price of equipment continues to decline, at least some small banks will make the move. But when you talk about small banks, though, under $5 billion is one category. And under a couple hundred million is another category.

The latter are really small banks, and many of those don't even have a PC. They've gotten along fine so far without one. CRYAN: The price of file-folder gear already is beginning to come down. That includes desktop scanners -- which convert documents to images -- and optical-disk systems that store the images. This is a trend that will help out small banks.

The upshot is this: The low end of the market is starting to round out. More banks are using personal computers and central processing units, and they've got peripheral components geared to link up with the PC.

As a result, some image applications are coming in at $60,000. Two years ago, that was unheard of. FORSBERG: And because the cost of optical-disk storage units is coming down, there's likely going to be another interesting change in the market. Probably by yearend, the overall cost of using optical disks as a storage medium probably will be less than the microfilm technology.

Previously, if you were just going to do a store and retrieve application, you'd still use microfilms. But starting next year, I think, even many small banks and businesses will be doing that on optical disk.

AB: Is there a substantial problem with standards, the technical specifications that allow systems and equipment to communicate with each other? FORSBERG: There are a lack of standards because each imaging vendor has kind of rolled their own. However, the CCITP fax standards are starting to become standard, so a lot of vendors can at least convert to those because they have to.

But I think it's a manageable problem at this point, and I think the standards will start converging. And it will eventually be a resolved problem. But I think it's to the point now where you can cope with the lack of standards and they're starting to come together. CRYAN: Banker's Trust has defined a fairly narrow architecture for that exact reason -- to avoid the problem of incompatible boxes. And so it hasn't been much of a problem with us.

The limitation, I think, is the fact that we still have a proprietary format designed by FileNet. And to the extent the system is closed, that will limit its potential expansion.

AB: How fast is the market growing? FORSBERG: A study just came out which shows that while other technology areas are flat, image technology is growing. MORONEY: Another indication is the amount of mail we're getting. At times, we stopped answering the phone and put our answering service on to screen calls, because the volume was incredible.

Moreover, while most trade shows are shrinking, a recent imaging trade show had 50% more exhibitors than the year before. And while most of the big vendors were targeting such areas as defense, science, graphics, art, and publishing, all of them had financial service applications.

AB: But the fact that there are more exhibitors doesn't necessarily mean there are significantly more buyers, especially among banks, correct? MORONEY: That's true. Banking is not what I would call the cutting edge.

I think right now most banks have a general philosophy: "We are not going to invest." And it's going to stay that way as long as the banking industry is in such terrible financial condition.

AB: How big is the bank market? FORSBERG: I can't give you a dollar figure.

I agree: There aren't many banks going forward saying, "we're going to do this in a big way." But especially on the document side, things might be about ready to break loose.

Vendors are calling on users and getting them excited. They're selling the benefits of a stand-alone technology. They say: "If you buy this imaging system, it doesn't really have much to do with the glass house and the mainframes."

Now, things are starting to get integrated, and the world's coming together. And I think now you'll see both the users and the MIS organization saying: "This makes sense, but not as an isolated part of our business."

People are beginning to think more globally. They're saying: "We don't have to buy a separate set of workstations and PCs to run image applications. This is all part of our strategic information plan."

AB: What sorts of trends would support any industry expansion? FORSBERG: One thing, as we mentioned, is the price of hardware.

And because of the trend toward open systems, some computers and fast microprocessors are becoming almost a common item now.

In an open system, such as that designed by Unix Corp., the operating system is an agreed-upon standard. As a result, users can develop applications on any vendor's hardware, depending on who has best price.

Another thing that will make imaging increasingly more cost efficient is the move toward a client/server model.

In a mainframe-based system, a large computer rules a world of dumb terminals. But client/server says: "We're going to give you a PC or workstation with lots of power."

Because of that, more people are getting workstations as a part of a company's overall strategic plan. And adding imaging on top of a workstation is a lot less expensive than having to start from scratch.

At Bankers Trust, Chris, I'm sure you had to buy all the workstations and networks and hook everything up. CRYAN: Right. FORSBERG: So there's two things going on here. One, the cost of hardware is coming down. Two, progressive banks are designing an infrastructure that is a prerequisite to imaging. CRYAN: Another thing that will benefit imaging is the reduction of telecommunications costs.

That's a big factor, because the amount of data involved in an image transmission is extremely large, compared with more conventional types of data. As a result, the cheaper it gets to move large volumes of data, the cheaper it will be to do imaging.

But there are limits to the kinds of things we're talking about. For example, imaging systems are never going to be as affordable as PCs. There are certain things inherent in image technologies -- like telecommunications -- that are likely to remain relatively expensive. AB: What is the most important thing that banks need to know about imaging? CRYAN: Banks should look at image processing as one component in an overall technology bag.

And the technology has to be used in the right combination with data processing. When it is, it's got tremendous power to enhance productivity. ZYNDA: Don't underestimate the change that you're going to go through in introducing an image system. The technology will change operations throughout the entire organization.

Probably the most important thing you could say to bankers about imaging today is: "Stop wishing it wasn't happening." AB: What does the picture look like ten years down the road? FORSBERG: On the document side, as we've discussed, I think imaging eventually will be built into the applications that run on computers.

On the high-speed side, development will take the same path as that of ATM machines. By that, I mean it took about 10 years to go from a point where there were isolated, experimental ATMs, to a point where you almost can't run a bank unless you have the machines. CRYAN: I agree with the highspeed prognosis.

But document imaging, I think, will be a niche technology. It will be a piece of an overall puzzle -- a part of the workstation, and part of the overall technology available to an end user. ZYNDA: From the check standpoint, I would see a time when we could supply checks to our branches, and images of checks to our departments. Customers would be able to come in if they need a copy.

I also think there will likely be less paper circulating internally within banks. Images as statements will be more readily acceptable. And the cost should be comparatively affordable. MORONEY: By the turn of the century -- at least at big banks -- both file-folder and high-speed image applications are going to be the norm, rather than the exception.

By then, the big issue probably will be how banks can enhance their marketing opportunities by allowing customers more ready access to information stored on images.

For example, it's quite possible that eventually consumers will be able to call up an image of a check at home. Perhaps they'll even be able to call up related information from a database outside the bank. AB: Any parting advice to banks mulling whether or not to take the plunge? MORONEY: Many banks right now are thinking: "I'm glad I don't have to worry about it right now because we really can't afford anything new like this."

While that may be true, I think there's a danger that too many of them are not even bothering to watch the technology and stay current with it.

Even if a bank can't afford to install imaging -- or there's no immediate, competitive pressure to do so -- it may wake up one morning and find it is a couple of years behind competitors that were willing to take the plunge.

At some point, I think, banks are going to have to look at the industry leaders in imaging. And they're going to say: "We just can't let them get this far ahead."

When they do that, there's going to a flood of demand. And this roundtable probably will be talking about why vendors can't get banks up and running fast enough.

PHOTO : WILLIAM R. MORONEY foresees a parallel between the growth of imaging and the way banks adopted ATMs, slowly at first but then gaining widespread acceptance.

PHOTO : WILLIAM C. FORSBERG says a main impetus for imaging will be the need for institutions to stay competitive in customer service.

PHOTO : CHRISTOPHER CRYAN says the banks that are going to invest in the new technology will do so because cost analysis points in that direction.

PHOTO : CAROL ZYNDA and William R. Moroney agree there are advantages for banks and other businesses that install image technology ahead of their competitors.

PHOTO : CAROL ZYNDA says image systems mean big changes.

PHOTO : Christopher Cryan is a vice president at New York-based Bankers Trust Co. He is also a technology project manager in the firm's corporate trust and agency group. Mr. Cryan is a specialist in digital image processing applications.

PHOTO : William R. Moroney is president of Moroney & Co., a publishing and consulting business headquartered in Glen Echo, Md. He is publisher and founding editor of Financial Imaging News, a monthly newsletter that covers products and developments at financial services companies.

PHOTO : William C. Forsberg is an associate at Perot Systems Corp., a Herndon, Va.-based integrator. Working in the company's Dallas office, he manages open systems projects, including those involving data processing applications surrounded by image and office automation.

PHOTO : Carol Zynda is a vice president in the items processing department at Detroit-based Comerica Bank. She also manages the bank's items processing software support, and is working to implement an item processing system manufactured by Unisys Inc., Blue Bell, Pa.

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