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Image exchange: get ready, here it comes.
Ron Schultz, VECTORsgi
When Check 21 goes into effect on October 28, 2004, a printed check image (albeit in a proscribed format) will carry the same legal standing as an original paper check. This new law will encourage banks to exchange images instead of paper, reducing or eliminating sorting, transportation and delayed posting costs. After a check's image is captured, the image will be transmitted quickly to another bank over a secure, managed network, shortening the traditional clearing and settlement process.
As your bank creates a strategy for moving to image exchange, some important questions will have to be answered. For instance, is it best for you to exchange images directly with other banks, or work though a third-party clearing house? What quality standards should you adopt for the images you send to other banks, and receive from them?
If you answer these and other questions correctly, build a viable strategy, and then implement it, your bank will quickly begin to see the benefits inherent in image exchange: you'll avoid the delays of ground and air transportation methods, lessen the chance of checks being lost, reduce fraud and float through faster clearings, and eliminate backlogs created by paper checks which cannot be physically transported due to weather or unforeseen events. In addition you will see benefits in reduced fraud and better customer service.
Check processing today
According to the American Banking Association, Americans write about 48 billion checks per year. That means American banks struggle with the burden of processing and transporting over 216 million paper checks, on average, each business day.
That burden probably would have continued in the foreseeable future if not for the events of September 11, 2001. That day, and its aftermath, clearly exposed the vulnerability of the U.S. financial system's dependence on paper checks. When the FAA shut down our nation's air transportation system, millions of paper checks were left waiting to be transported from one bank to another, and therefore could not be processed. It was clear a change had to be made. The idea of image exchange, proposed early in the 1990s, began to gain momentum, and that momentum culminated in the passage of Check 21.
Check imaging today
Of course, check imaging isn't new. Many banks have used images for the past several years, both to streamline internal processes and to enhance communication with their customers. Now, new imaging technologies will allow banks to leapfrog current, limited means of electronic check presentment (ECP) and initiate a new era of image exchange and its operational cost savings.
"Item images are clearly being regarded increasingly as bank assets, forming the basis for cost reduction, fee generation and competitive differentiation, said David Medeiros, Director of Research, Global Payments, for TowerGroup (a leading research and advisory firm specializing in the impact and direction of technology within the financial services industry). As implementation costs decline, banks are finding that the combined benefits from multiple uses of check images more than justify investment in the technology.
The benefits of image exchange
By adopting an overall image strategy and implementing appropriate tactical solutions, your bank can realize all the efficiencies and cost savings inherent in check truncation. You'll also be able to streamline bank processes from the back office to points of customer contact. Other benefits resulting from image exchange include:
Reduced transportation costs: The need for transporting paper checks is greatly reduced translating to greatly reduced courier charges.
A two-day return item process: Significant losses can be prevented by accelerating the return item process.
Enhanced ECP: Exceptions are processed using images. Paper products, such as Payable Through Drafts, could become a thing of the past, while Positive Pay customers will be able to access images through your service offerings.
Improved contingency for lost cash letters: You can package images and MICR data from a lost cash letter for re-presentment.
Image quality: You'll be able to ensure the quality of images you send to other banks, as well as evaluate the quality of those you receive.
Elimination of click charges: You will be able to reduce or eliminate equipment, data set and communication click charges, since paper no longer has to be passed through a sorter.
Code line correction: You can correct or complete the code line by viewing the image and keying the necessary information. This will increase the number of postable items, and reduce requests for new images or physical items from the sending bank.
Which way to get there?
Image exchange is more than simply transferring files, and banks can choose from different mechanisms for accomplishing that task. For banks that maintain, or desire to establish, their own image archive, technology companies (including VECTORsgi) have introduced software-based solutions that reside in the bank to create, send and receive images across an image exchange network. Other banks may choose to develop their own solution, using image exchange networks such as the Distributed Traffic Agent (DTA) developed by VECTORsgi for SVPCo, a third-party clearing house. In this scenario, image files are exchanged by banks directly, while summary information moves through SVPCo as an intermediary, allowing for settlement or settlement reporting.
The software solution
Emerging image exchange software products perform Virtual Capture, which simulates physical capture and results in seamless integration with a bank's capture system and item workflow. These products also generally include an image archive interface, which allows images to be archived within minutes of capture. These images are also immediately available for other applications, and can be used for image-based reject repair, reconcilement, fraud detection and returns processing.
Most of the new image exchange technology provides standard ECP processing (ECP with paper to follow), which allows some banks to immediately realize the benefits of early presentment and prepare for full image exchange. Required matching paper items (originals or substitutes) are transported later, and are reconciled with the previous night's exchange file.
The presentment capabilities of these new software solutions allow banks to leverage any existing investment in capture technology, whether at branch, ATM, lockbox, central or distributed sites. They allow exchange files, including MICR information, to be transmitted and received, and transactions posted, before DDA cutoffs. Generally, they also include flexible image capture format options which can be tailored to meet a bank's specific needs.
The DTA approach
The Distributed Traffic Agent (DTA) developed by VECTORsgi for SVPCo has already garnered considerable support from major players in the financial world. In fact, the Federal Reserve Banks and SVPCo have agreed to leverage their respective investments in technology infrastructure to support the exchange of digital check images through the DTA.
The DTA is particularly well-suited to banks that have already implemented a current image capture system. Such banks can enroll in the service today and begin exchanging images in a few short months it provides immediate access to all the banks currently on the SVPCo network.
But the service can be equally beneficial for banks that aren't quite as far along in image capabilities. VECTORsgi can supply any necessary software for the creation and receipt of image exchange files. This software integrates to a bank's posting system, handles image quality analysis on both incoming and outgoing cash letters, automates the reconciliation of images to MICR data, and provides for interfaces to the bank's adjustment system. Either way, the DTA represents an immediate, easy and cost-effective means of exchanging images.
Image is everything
As image exchange becomes a reality, image quality becomes increasingly important. The new image exchange software products include controls that analyze the quality and accuracy of incoming image data captured by other institutions. The best of these products identify poor images through the use of proprietary image-quality algorithms and recognition engines. This image capture workflow supports the review of suspect images captured by the client bank or by other institutions, and enables an automated return when necessary.
What to look for in an image exchange solution
What key attributes should a check imaging system include? Most experts agree that these are critical:
Simplicity: Look for a single, common platform for all Day One capture streams. Such platforms include dynamic routing capabilities which will help banks manage different workflow environments.
Supportability: A single platform will reduce training and support requirements and you'll have fewer vendors to rely on for support.
Easy upgrades: Using a common platform and applications simplifies this process considerably.
Interfaces: A common capture platform will reduce necessary interfaces to a core transaction system such as IBM's CPCS.
Availability: Distributed architecture should ensure that check images are available to whoever needs them at any time.
Quality: Banks using the new imaging systems are experiencing missing image rates as low as one for every fifty million checks processed. A high quality of image capture rates, and the resulting accuracy of archive population, should be a high priority for banks seeking to implement an image capture system.
Functionality checklist
In order for your bank to reap the full benefits of image exchange, any solution you choose should include the following capabilities:
- Send and receive electronic MICR files
- Send and receive electronic image files
- Perform image validation and quality assurance
- Edit MICR data
- Post MICR information
- Populate an image archive
- Cross-reference sequence numbers
- Handle substitute checks (IRDs)
Ready, set, go
As banks prepare for the era of large-scale, inter-bank image exchange in connection with check truncation legislation, the need for a complete solution to check image management capture, quality control, storage, retrieval, transmission and receipt becomes critical, added David Medeiros. These capabilities, and in particular their seamless incorporation into check operations not as an add-on technology but as an integral part of core check processing will be essential for banks that want to remain competitive.
How a bank deals with Check 21 will define how efficient its check processing operation can be, and by extension, how well it can differentiate itself from its competition. Clearly, image exchange offers substantial opportunities for streamlining and simplifying check processing. Today, banks have available to them several options in implementing image exchange, all of which will help them reap the rewards created by Check 21 quickly, conveniently and cost effectively.
Ron Schultz is Manager for Special Projects for VECTORsgi, a leading provider of financial transaction processing, image exchange, currency control, reconciliation and e-commerce solutions to financial institutions and corporations around the world. The world's largest banks depend on VECTORsgi products and services to help reach objectives such as operational streamlining and the implementation of check image technology. VECTORsgi's software products, VECTOR Solutions, have been licensed over 2300 times. 21Ready, from VECTORsgi Consulting Services, provides management consulting and business practice improvement that helps financial institutions become ready for image exchange and become more profitable. For more information, visit www.VECTORsgi.com .
First published on BankersOnline.com 11/24/03
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