Once the domain of high-tech theorists, image processing today is beginning to transform significant parts of the banking business. The benefits are fairly straightforward: less paper to handle and store.

Not so apparent -- but truly significant -- is the fact that imaging is causing real changes in the way banking tasks are carried out.

"Moving to imaging involves a major reengineering process on the part of banks," said Alan Lipis, president of Global Concepts, an Atlanta-based technology consulting firm.

Worth the Effort

Tossing out old ways of doing things to embrace imaging may be painful at the outset, but the reward can be big in terms of operational cost savings and additional revenue streams.

Right now, banks are using image technology to perform two basic functions. First are high-volume transaction tasks like check processing, where thousands of images must be handled quickly. Second is "file-folder" systems that store detailed and often voluminous data such as mortgage applications or letters of credit.

Imaging is attracting the most attention in check processing operations. Each year bankers are inundated with an estimated 55 billion paper checks. Through imaging, they foresee hundreds of millions of dollars in cost savings. For the most part, the savings are expected to come from reductions in back-office staff and moving money through the system faster.

"Image processing is the fundamental technology that will affect banks' check operations over the next five years," Mr. Lipis said.

Not surprisingly, computer vendors are eager to get a piece of the action. The main players are International Business Machines Corp., NCR Corp., Unisys Corp. and Banctec Inc. As a group, they have check image systems being tested or in production at more than a dozen banks.

Installations Mounting

Clearly, banks are paying attention. According the American Banker/Ernst & Young 1992 Technology Survey, almost one-quarter of the banks polled said they had completed or were installing a check image system. Implementing the technology was a high priority for 41% of the banks, while only 35% had little or no interest.

Most of the banks are using imaging to sort, encode, and balance deposited checks. Some are also using it to produce checking account statements with laser-printed copies of canceled checks.

The biggest cost savings are likely to come on the clearing side, known as proof of deposit. But producing image statements to be mailed to customers can save on mail charges. What's more, the statements are a tangible benefit a bank's customers see -- and so far appear to like.

"If you talk to bank operations people, they say proof-of-deposit is the way to go," Mr. Lipis said. "If you speak to the marketing department, they all want image statements."

The marketing types seems to be winning out, at least for now. The 1992 technology survey found that 96% of banks are considering offering image statements, while 84% said they were looking at the technology for proof-of-deposit functions.

Waiting for IBM

Despite all the activity, major obstacles remain before check imaging becomes a way of life in banking. One reason is that IBM is still testing its proof-of-deposit system, and many bankers with close ties to Big Blue want to see what the company has to offer before making a decision on which company to go with, Mr. Lipis said.

Another problem is sticker shock. For a major bank, a barebones system can cost several million dollars. "Some people are waiting for IBM, but others don't want to put up the money," said Greg Schmergel, a consultant with Ernst & Young in Boston.

Partly because of cost, many banks may turn to outsourcing their check operations as a way to avoid the investment, he predicted.

Also, it should be pointed out that basic imaging systems for community banks can be had for as little as $100,000.

Imaging is likely to be given a boost by the current wave of bank mergers. "Many banks are wrestling with consolidation right now, but once that's over, the fewer, bigger banks that remain will be able to take advantage of their volumes of scale to offset the cost getting in," said Mr. Lipis.

Eliminating the Encoding

One of the key technical features of check imaging is the computer's ability to read handwritten characters. Under the existing check-clearing system, data entry clerks must encode checks with the amount paid, a time-consuming and error-prone process.

Imaging has the potential to change all that. "Amount recognition is important to bankers because it's a big labor-saving technology, and vendors have made a lot of progress in this area," Mr. Schmergel said.

Indeed, NCR and IBM systems can now read more than 50% of the handwritten checks processed, he added.

While check-image systems appear to offer banks a high-risk, high-reward scenario, file-folder systems have been seen as low-cost method to test the imaging waters. This year's technology survey identified 200 file-folder applications currently in use at banks, with the consumer lending, credit card, and mortgage areas being mentioned most.

"Despite the cost pressures, we are seeing banks make consistently larger investments into file-folder technology," said Chuck McDonough, a consultant with Arthur Andersen in Detroit.

Rethinking the Work

These investments are triggering considerable rethinking of basic processes. "The technology can get complicated and banks run into nontechnology problems that apply to the flow of information," Mr. Schmergel said. "Once you start to install a file-folder system, you begin to ask, |Who is getting these images and why do they need them?'"

Though potentially profitable, this redesign of workflows through the organization can be time consuming. "Bankers are incredibly naive if they think can install a file-folder imaging system in six months," Mr. McDonough said. "It takes at least two years."

But the eventual payoff for file-folder systems is big in both improved employee productivity and better customer service. Mr. McDonough observed that in the credit card area, file-folder system can help banks give answers to customer queries in hours instead of days. "With the banking industry as competitive as it is today, imaging can be a great weapon."

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