CHICAGO - After two years of delays, International Business Machines Corp. announced Monday that it would deliver key components for its check image system by yearend.

The IBM system is designed to reduce check-processing costs by at least 20%.

Proof-of-Deposit Delays

The closely watched project encountered the lengthy delays over its crucial "proof of deposit" function, which lets banks sort and balance deposited checks by replacing paper items with digital images.

BankAmerica Corp., Mellon Bank Corp., KeyCorp, and Royal Bank of Canada will be the first institutions to install the image proof-of-deposit system, starting in December, IBM officials said.

With the announcement, made here at the Bank Administration Institute's annual conference on image technology, IBM executives hoped to put to rest nagging questions rasied when the project bogged down after the technology company initially promised delivery in 1990.

The delays cost IBM the early lead in check imaging - Unisys Corp. has had image proof-of-deposit technology in full production at Comerica Inc., Detroit; Huntington Bancshares Inc., Columbus, Ohio; and Signet Banking Corp., Richmond, Va., since early this year.

Bankers and industry experts believe that IBM's announcement brings a sorely needed legitimacy to the nascent technology.

Building Market Momentum

"An announcement like this adds momentum to the whole marketplace," said Stanley E. Miltko, senior vice president at Littlewood, Shain & Co., a consulting firm based in Exton, Pa.

In addition to IBM and Unisys, NCR Corp., a Dayton, Ohio - based unit of AT&T Corp., and Banctec Inc., Dallas, are developing image proof-of-deposit systems.

A critical element of IBM's check image technology is its ability to "read" automatically the handwritten dollar amounts from check images. In most check-processing operations, data entry operators manually input the dollar amount from each item.

Character-recognition software allows IBM to cut the number of these time-consuming entries in half.

Key to Savings

"Almost all of the hard dollar savings that you will see from check imaging come from [proof-of-deposit], and almost all of the savings hinge on character-recognition rates," said Gilbert E. Arbuckle, senior vice president at Pittsburgh-based Mellon Bank Corp.

Mellon, one of the four banks that codeveloped the proof-of-deposit applications, processes about a half-million items per day. It will gradually migrate that volume to the new system and expects to be running "significant" volumes of production work by the second quarter of 1993.

Bankers not involved in the IBM project indicated that the availability of character recognition would play a big role in which proof-of-deposit system vendor they might choose. The Unisys system now in production does not yet have the ability to read handwritten dollar amounts. "The character recognition is what everyone is waiting for," said one New England banker.

The sophisticzted IBM technology will eventually allow for a number of new banking applications because it was developed separately from the check image-capture system, said Dr. Louise D. Nielsen, director of document and check image systems.

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