A year after the passage of Check 21 legislation which allows banks to exchange check images rather than the paper checks themselves for payment, some banks are hard at work building new businesses on the opportunity. Banks across the country are beginning to offer corporate customers scanners they can use to scan checks at the point of sale and ship the image to their bank for fast and efficient deposit.
The move to post-of-sale scanning has come as a surprise to the industry which expected it not to occur for several years.
“Twelve to 18 months ago, the next big thing was going to be branch capture,” said Steve Winkler, general manager of the large financial institution division at Advanced Financial Solutions (AFS), a company that Metavante acquired in 2004. AFS has built its entire check processing system on Microsoft technology. “What happened is that the distributed merchant or corporate capture jumped in front and has taken center stage, and that has caught a number of us vendors by surprise.”
A recent industry survey indicated that no bank had more than 30 to 50 merchant customers scanning checks, but the number is set to grow rapidly; one AFS customer plans to install scanners at five accounts per day.
“The home run is high dollar low volume check business, such as brokerage houses, insurance, and title companies,” added Winkler.
For companies that take in checks, generically referred to as merchants even if they are professional offices, insurance agencies or brokerages, scanning checks means they don’t have to send someone to the bank to make deposits, and they have a later cutoff time, usually 5 or 6 p.m., to get credit for the deposit on that day.
For banks, corporate customers that deposit images change the way banks compete. A Wisconsin branch office of a corporation which banks with Wachovia no longer has to drop off checks at the local M&I Bank (Metavante’s parent) or Associated Bank for next-day transmittal to Wachovia. Instead, the office can scan the checks and deposit them with Wachovia electronically. On the flip side, a Wisconsin company with operations in North Carolina could dispense with its depository accounts at Wachovia and just send deposits directly back to its home state bank.
The basis of competition has moved from that old real estate mantra – location, location, location – to a more complex arena of relationships and service.
Wachovia, the fourth largest bank in the country, is an AFS customer.
“They have customers based in the Charlotte area who do business all over the country; they are unable to touch the deposit activity for customers where they don’t have brick and mortar,” explained Winkler. “This is a way to put a scanner in a remote location and have a depository relationship with clients without having to build a branch.”
On the other hand, corporations could also buy their own scanners and then shop around for the best bank deal.
“Banks have a window here to determine who their best customers are and lock them in with contracts that are reasonable,” said Winkler.
Accepting images from merchants and branch offices carries risks. Winkler said banks need to know their clients well before installing scanners, because the system is open to fraud. A store could deposit scanned images all week and then, instead of destroying the checks, deposit them in another bank, trying to obtain payment twice for each check.
“Banks are busy rewriting depository agreements with their customers, and not all their customers will get an opportunity to scan checks.”
Point-of-sale scanning can also be used to take international deposits. Two of Wachovia’s first users were in Chile and Mexico. Accepting deposits by imaging led to dramatically lower costs and reduced settlement time.
Within banks, the potential impact of check scanning has moved the topic from bank operations to the treasury management department, which Winkler describes as a stunning change in who makes the decisions and how the decisions are made.
“All it takes is for Bank of America to come in and steal a customer and the treasury management person is on fire and needs a product right away.”
In check imaging, Metavante holds a key role after the acquisition of AFS, which serves banks from Tier II down to de novo firms, and VECTORsgi which counts 41 of the nation’s top 50 banks as customers, including such well known names as ABN-AMRO, Bank of America, Fifth Third Bank, First Citizens Bank, Harris Bank and National City Corporation.
“Metavante can serve every single bank in the country with check processing,” explained Winkler.
Sterling Benefits from its all-Microsoft Environment
“Banks our size can use Windows-based tools a lot easier and apply them across our enterprise, so we end up with a competitive advantage,” said Peterson. “For the past six years we have had an early adopter image capture technology from AFS for check processing. For awhile we were AFS’s biggest customer. And as the Wintel environment has gotten stronger, it has brought us high capacity. The big banks are all working to get their image environments up – we do more images every night than all the big banks combined.”
In addition to AFS ImageVision, the bank runs ImageDepot to maintain a seven-year archive of check data on SQL Server. Customers can view 90 days of checks through an Internet connection, while bank staff have access to seven years.
“The indexing in SQL is the same for seven years ago as it is for items from last night – we have that kind of confidence in it.”
The bank plans to continue processing checks itself, he added.
“We still consider check processing to be core to our customer service, and that is why we do it in-house.” By controlling its own check processing, the bank can add new products and services. Sterling uses AFS software to integrate financial data and check images for its customer statements.
Practical Points
For the bank customer, scanning equipment has to be simple and reliable, and banks are keeping the process simple, at least to get started.
“The application has to be idiot proof because these are not financial professionals who are scanning this information in,” said Winkler. “Push a button, slide the item, make a few decisions, and submit.”
To prepare for a future that is approaching fast, where hundreds of merchants are sending in their check images, AFS has built a Deposit Gateway, written into a SQL Server database.
“If you have 200 merchants, it will gather all the information, consolidate it, convert it to formats that can be easily ingested by the check processing system and send it on.”
Using Microsoft technology, AFS has built a portal system so a branch manager or a merchant can go to the Web and check to make sure a deposit arrived at the bank, instead of calling a bank manager to see if the funds have arrived.
With 135 branches serving customers across the Northwest, $7 billion Sterling Savings Bank competes against larger banks by providing superior, and local, services. It expects that point-of-sale check scanning using ImageVision software from AFS will provide a valuable expansion of its customer service.
“We are a relationship bank,” explained Kade Peterson, senior vice president responsible for items processing at the Spokane, WA-based bank. “We centralize very little, and only those activities that benefit from centralization and have little to do with the customer. For example, we don’t centralize customer support or decision making, which is why we have a customer base that has left the large banks in favor of us. In our culture we call that Home Town Helpful.” The home towns could be in Washington, Oregon, Idaho or Montana.
While it can’t provide a convenient branch for every commercial customer, on-site scanning will allow it to replace couriers and UPS shipments of checks with a more convenient method of deposit for customers lured by the customer service but still requiring a way to make deposits from some remote facilities. To reach one customer, a courier has to cross the Canadian border, often a cause of long delays.
“If a company has a lot of different offices, they might not find us convenient,” added Peterson. “On-site scanning removes the geographic barriers to our customers doing business with us. We think that if they have multiple relationships, they can consolidate with us rather than bringing in money electronically from other banks, which takes a day or two.”
Sterling has launched a beta project to try out customer capture of check images. The concept, said Peterson, met with mixed reactions when the bank brought it up at a client conference before Check 21 was passed.
“Either they loved it or they didn’t see a match.” Property managers, some medical offices, distributors and wholesalers would be natural candidates for scanning checks.
“We will provide a desktop scanner and charge them for it each month. The software from AFS allows them to do much the same as our check reader sorters, although it is a more user friendly capture. It provides automation correction if a check is fed in backwards, and its image quality analysis determines if the scan has created a good image. It will add up the total of their batches and refer to a control total they have given us, and then send us the deposit.”
Although check use may be slowly declining among consumers, it is thriving in the business to business markets where transactions are still mostly by check, he added.
“Accounts payable/receivable B to B is paper based. We aren’t seeing the accounting software packages building good ACH and EDI into their lower end packages. Very few of even our large customers are involved in EDI – they continue to cut checks, invoice and receive checks. Unless they have a very firm relationship between supplier and buyer, and they have the necessary technology, they are not comfortable providing account numbers.”
For now, the whole process of exchanging check images is in transition, and banks won’t see significant savings until enough customers are scanning checks and making deposits through imaging to allow a reduction in couriers and operations staff. Local clearing houses are inexpensive, but until more banks sign up with image clearing firms such as EndPoint or SVPCO, Sterling won’t see much savings from exchanging images rather than paper checks. The bank now clears seven percent of its check volume electronically from its central items processing site, said Peterson.
“We capture the images and send them to the banks that are members of EndPoint Exchange, and the paper stays at Sterling for us to destroy. We have already saved significant amounts on transportation.”
A New Lease on Life?
Checks Get Fast and Cheaper
The future.
You walk into a big box electronics store like Best Buy or Circuit City at 10 p.m. for a Midnight Madness sale. You pick out a handsome plasma TV, write a check on one of the nation’s largest banks, such as Wells Fargo or Bank of America. Before you get home an hour later, the money is out of your account and in the retailer’s for same-day credit.
That future is not so far away.
VECTORsgi has combined check imaging and the new rules of Check 21, which allow banks to transfer images of checks rather than the physical checks, plus a bit of its own technology to make same day deposits possible. And one of the banks it works with is planning to accept same-day deposits up to 11 p.m. Pacific time.
This gives a whole new meaning to the term “bankers’ hours.”
Paradoxically this is not at all what VECTORsgi, a Metavante company, started out to do. In its preparations for Check 21, it focused on exchanging images between big banks rather than on capturing them at the branch and transmitting the images to headquarters. About two years ago the company began looking at extending image capture to corporate customers, including large retailers.
Being a little late to the game didn’t hurt.
“We built an application from the ground up to do corporate capture,” explained Phil Yarborough, vice president of ePayments and corporates for the company. “All the other products were written to automate tellers and branches, and then when the focus shifted to corporations they had to take the products they had already built and dummy them down. Ours was designed for large retailers that had hundreds of locations.”
The differences show up in a couple of ways. VECTORsgi’s corporate image capture was designed to work over a company intranet.
“Many larger retailers won’t allow access to the Internet from their stores. They set up all their communications from the stores to headquarters.”
In addition, VECTORsgi’s software tracks incoming checks down to the individual cashier level. For the typical grocery store that takes in 500 to 600 checks per day – 50 percent of its revenue – that simplifies reconciliation and quickly uncovers any cashiers working with outsiders to pass phony checks.
But the same day deposit works from a service that VECTORsgi set up on its own.
Banks have a choice with VECTORsgi of two versions of the software – one sends all the deposits to a single bank, while another sends the images to VECTORsgi’s AdVance Image Deposit – a rules-driven Windows server that can direct the deposits to the check-writer’s home bank for an “on us” deposit.
VECTORsgi market studies show grocery chain stores, for example, pay $0.35 on average to process every check. The company estimates using AdVance Image Deposit to deposit check images instead of paper checks will reduce the cost to $0.25 to $0.27 per check.
Our hypothetical large box electronic retailer is apt to have lines of credit with four or five banks. A national chain might have accounts with Bank of America, Wachovia, Wells Fargo, and Citibank, for instance. Using AdVance Image Deposit, it can send its checks to VECTORsgi which deposits any check written on one of those major banks with that bank, so the funds are immediately available to the retailer, cutting out the two or three day float.
A Citibank customer’s check would be sent to Citi, and the funds transferred to the retailer, just as if the electronic store’s manager had walked into a branch with a check from a Citi customer. Checks from First Community Bank of Poynette, WI, can be sent to yet any of the major banks or directed to a bank that handles all other checks; from there the processing time would depend on whether the banks involved cleared the payment by image or paper. Because it acts like the bank of first deposit even though it is a clearing house of sorts, VECTORsgi can also produce a reconciliation report for the retailer.
The company runs its technology on Microsoft – Windows 2000 or XP at the stores with SQL Server as the database and Windows Server for its AdVance Image Deposit operation.
Several banks are in pilot with the software now and a larger retailer planned to begin a pilot in late summer.
Curiously enough, the result of fast deposit to “on us” accounts could make checks a more popular instrument for retailers.
“Checks will be less expensive than cash, which retailers have to count, bundle and ship, and a lot less than credit cards with their three to four percent fee,” noted Yarborough. “This may be the lowest cost option a retailer has.”
“Banks are being dragged into this,” he added. “They tend to either see it as a defensive move or a land grab, because the technology lets them go outside their footprint with this application.”