Image Processing, a technology that promises to level the mountains of paper bankers have to cope with daily, has only just begun to pay off for a few of the banks that have installed it.

Viewed as costly and time-consuming to install, image processing is nevertheless slowly gaining ground in paper-intensive areas such as check processing, mortgage origination, and consumer and commercial lending.

Banks are using image capture technologies to perform one of two basic functions: high volume transactions such as check processing, where thousands of items must be handled quickly, or storage and retrieval in areas such as mortgage applications, consumer loans, or letters of credit.

According to the 1993 American Banker/Ernst & Young Survey of Technology in Banking, more check imaging projects have been completed, and more are in progress, this year than in 1992.

Thirteen percent of those questioned said they had completed projects to install check image processing systems in 1993, compared with just 4% in 1992. More banks, 27%, said they had imaging projects in progress in 1993 than in 1992, when 20% said they had such projects under way.

All banks said they were at least considering installing image processing. In 1992, 2% said they were not.

1991 was actually the breakthrough year for check image processing. Huntington Bancshares Inc., Columbus, Ohio; Comerica Inc., Detroit; and Signet Banking Corp., Richmond, Va., began processing high volumes of checks through systems that use check images for the purpose of proofing and encoding them.

Others, including First Chicago Corp., Fleet Financial Group of Providence, R.I., and First Tennessee Bank, of Memphis, produce statements for consumer and corporate customers that contain the images of checks rather than paper checks themselves.

Even BankAmerica, which alone of the biggest banks had decided not to rush into check image processing, said earlier this year that it would continue a check image processing pilot started by Security Pacific Corp., with which BankAmerica merged in 1991.

Bankers believe that image processing will not only cut expenses dramatically, but also help them generate fee income and improve customer service.

"The real payoff in image is not the expense cut, but the additional product development that it makes possible," said Rick Sellers, president of Huntington Treasury Management, the processing arm of Huntington Bancshares.

Check processing, the more complicated and costly image technology, has garnered the most attention over the past year. Bankers believe they can save millions of dollars using image processing to speed the check sorting, proofing, and encoding processes.

But the technology is limited to the highest-volume facilities of the biggest banks. Smaller banks have the option of out-sourcing their check processing to service bureaus, several of which already offer or plan to offer image processing services. So far, however, there have been few takers.

Banks that have actually taken the image processing plunge say now that they are capturing images, the technology is starting to change their business in unexpected ways.

The banks say that the potential for new products and improved customer service based on faster processing is the real boon, although they are reluctant to discuss the nature of the new products.

Consultants say imaging also could make it easier for banks to share check processing facilities, because by accelerating the work flow it can get the work out the door faster.

The technology for high-speed check image processing is still new. The first machines able to decipher handwritten amounts were installed at banks in 1992.

More advances in technology are expected next year. International Business Machines Corp., which hit numerous snags in developing its image processing platform, has begun to deliver crucial pieces of software. Its leading test bank, Mellon Bank Corp., Pittsburgh, expects to be operational by early next year.

Unisys Corp. plans to introduce new products that will enable banks to put check images onto a CD-ROM, a high-capacity data disk, making them easier to transfer.

Huntington, Comerica, and Signet say that image processing has cut their check processing costs, improved processing time, and given them better funds availability.

Huntington says it has met its goals for imaging, and has cut the encoding staff in its main Columbus processing center by 20%.

Comerica and Signet have found it easier to consolidate check processing centers as a result of their imaging systems. Signet has eliminated three of its five centers since 1991, and expects to save $6 million to $7 million in check processing costs over a five-year period ending in 1995.

But converting to an image-capture system is a time-consuming process, and banks have had to iron out kinks.

"You learn a new class of exceptions that tend to make you inefficient or cost you money," said one check processing executive, who asked not to be identified. "In the old check world, we had them down to a science, but now we're trying to find new tools to understand the process."

The use of file folder technology is also on the rise. Advocates of the technology say that such systems could be used to eliminate paper throughout an organization. But to date, most of those banks using the technology are still testing it in small, self-contained areas. Wachovia Corp., Winston-Salem, N.C.; and PNC Bank Corp., Pittsburgh, are among the leading banks installing file folder systems.

Until recently, "banks haven't known how to get involved in imaging," says Frank L. Zaubi, a group executive in the operations division of Wachovia. "They've had to buy huge processing systems. We've searched for smaller ways to get involved."

Wachovia has three imaging projects under way: one to develop an advanced wholesale lockbox system, one in retail banking, and one in check processing.

"Imaging allows you to look at all the processes you go through and really redo the process," Mr. Zaubi says. Wachovia will create electronic images of the thousands of checks received daily at its wholesale lockbox sites, using the images instead of paper for tracking, storing, transmission, and retrieval of information.

The project, still in test phases, will go into production late this year, Mr. Zaubi said.

Wachovia also has an ambitious project to install what will eventually be a central repository of images for its retail bank. In July, the bank plans to roll out the image system to a handful of branches.

There are currently 250 separate applications of file folder technology in banks, according to this year's survey, 50 more than the 1992 survey reported.

But it seems that banks are not installing file folder image systems as rapidly as they expected. The 1992 projection indicated 1,200 systems would be installed by 1995, a target unlikely to be reached at current rates of installation.

Of banks questioned, 47% said they had already installed, or planned to install, imaging systems in the consumer loan area; 30% said they would install imaging in the credit card area; 29% in mortgage loans; 29% in trust; and 23% in commercial loans.

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