Why First Chicago Defected from IBM on Imaging

When First Chicago Corp. recently switched suppliers for an image processing system, the reason was to be first in its market with the technology, bank officials said.

The company's lead bank, First National Bank of Chicago, will test the theory that abbreviated monthly statements - carrying images of canceled checks rather than the actual items - can differentiate a bank from competitors, increase fee income, and reduce postage costs.

The pressure to be first led First Chicago to cancel a deal with International Business Machines Corp. for the imaging technology. The bank holding company opted instead to go with Dallas-based BancTec Inc. and Cincinnati Bell Information Systems Inc.

Installation by Yearend

Banc Tec and CBIS expect to have installed by yearend a system that will let First Chicago send its customers streamlined checking account statements.

IBM has maintained that its product will be ready for delivery by January, but reports from bankers testing the system for IBM do not corroborate that claim.

Fleet/Norstar Financial Group Inc. has taken over from First Chicago as IBM's lead development bank, according to sources.

But Fleet officials do not expect to be able to send image statements to customers before 1993.

First Chicago officials would not comment specifically on the IBM project, but they did suggest that the delays may have played a role in their decision to switch vendors.

Beating the Competition

"We have competitors in our region who are working on the same project," said Glenn G. Larson, a senior vice president at Chicago's No. 1 bank.

"In this environment, we've got to get the product to market as quickly as possible."

One of IBM's problems has been that it already has its hands full in trying to develop other types of imaging systems.

A major effort to automate the proof-of-deposit function in banks' check processing operations has stalled a number of times in recent months.

Sources have said that IBM's software development partner, Security Pacific Corp., has backed out of the multimillion-dollar project.

It is unclear what effect First Chicago's defection will have on that IBM project.

But sources have said it may further slow development.

A Bad Omen Is Seen

"I understand that IBM pinned its hopes for this project on three major banks," said Stanley E. Miltko Jr., an imaging consultant at Littlewood, Shain & Co., Exton, Pa.

"The fact that one of them has left obviously does not bode well."

As long as two years ago, First Chicago had expressed interest in installing a proof-of-deposit system.

But early in 1991, it decided it could not justify the cost in that business climate.

Mr. Larson said the BancTec system would let First Chicago satisfy consumer demand for image statements immediately at only 15% of the cost of a proof-of-deposit system.

And BancTec officials said their system could be integrated at low cost with IBM's proof system when it becomes available.

Evaluations Proved Out

"We evaluated the [image statement] technology, and it always worked - from a revenue perspective, from a customer satisfaction perspective, and from an investment perspective," Mr. Larson said.

By terms of the First Chicago agreement, which was officially struck this month, BancTec will provide the hardware, including high-speed reader/sorters, cameras, and image-capture devices. Cincinnati Bell will provide the software that makes the captured image recognizable by a computer.

Other banking companies - including Banc One Corp., Columbus, Ohio; the Seattle-based bank unit of First Interstate Bancorp; and Central Fidelity Bank, Richmond, Va. - offer image-based check statements. But experts said that if First Chicago can get its system running by January, it would be the first in its region to offer image statements to customers.

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