Banks Prepare For Image Capture

Bank One Corp. and Wells Fargo & Co. are among a vanguard group of banks equipping automated teller machines and branch-teller stations with devices for capturing check images in preparation for exchanging them with other banks.

Bank One, which is merging with J.P. Morgan Chase & Co., is in the midst of an eight-month test of ATMs equipped with image-capture devices from NCR Corp. The bank has installed 11 of them in Columbus, Ohio; Indianapolis; and Louisville, Ky. Starting next year, it will begin installing image-capture devices on its entire fleet of 3,100 full-function ATMs. Bank One also has begun installing image-enabled teller systems in 60 branches in Cleveland and northern Ohio. Once the images have been captured at the point of deposit, the original paper checks will be destroyed. Bank One will begin exchanging live check images in lieu of paper this summer, says Earl Jennings, senior VP of transaction services.

Under the Check Clearing for the 21st Century Act, which takes effect in October, banks have the option of scanning check images and transmitting them to the banks against which they're drawn. Banks and processors currently pay couriers to haul checks across town or across the country to the paying banks.

Bank One and Wells Fargo are among 22 banks that form Small Value Payments Co., a clearinghouse that's spearheading check-image exchange. By 2006, the clearinghouse expects the majority of checks it exchanges will be done via image. Check images will be taken when checks are inserted into the image-capture-equipped ATMs; the images will then be exchanged over a high-bandwidth, high-availability private network managed by AT&T. Banks will connect to the network via circuits provided by Small Value Payments or their own carriers. Smaller banks will connect via the Internet through a secure gateway operated by the clearinghouse.

Wells Fargo next year will roll out image-capture devices in its branches, followed by its ATMs. Although it hasn't yet run live transactions, Wells Fargo will provide image-capture hardware and software to branches and tellers, as well as to its wholesale commercial customers, says Mitch Christensen, executive VP of payment strategies at Wells Fargo Services Co.

Yet many banks, even those with deep pockets, aren't prepared to commit the up-front capital needed to support that effort. Comerica, a bank with $55 billion in assets and a Small Value Payments member, is still investigating capturing images at the point of deposit, says Paul Obermeyer, senior VP and head of operations.

Five banks--Bank of America, Citibank, J.P. Morgan Chase, Wachovia, and Wells Fargo--generate nearly half of all U.S. check volume, which stands at about 40 billion checks a year. These institutions will be among the first to exchange images, either directly or by transmitting them to a central facility such as Viewpointe Archive Services Inc., a 3-year-old venture formed by J.P. Morgan Chase and Bank of America. Viewpointe houses more than 29 billion check images for various banks, and its archive is growing by a billion images a month.

As banks prepare to exchange images of checks instead of paper, they're pondering what to do with their expensive, in-house check-processing operations. The situation is especially problematic for midtier banks, those with between $1 billion and $60 billion in assets. On one hand, they're loath to give up their check-processing operations, into which they've sunk huge sums of capital and which form a core of their businesses; on the other, they're faced with maintaining those operations amid dwindling check volumes.

U.S. check volume is declining by about 3% a year because of electronic payments such as credit and debit cards. When things like conversion of checks to electronic transactions and check-image exchange are factored in, the drop in the volume of checks being processed exceeds 5%, according to research firm TowerGroup.

Against those statistics, banks have a hard time justifying continuing operation of bloated, in-house check-processing operations. Projections of a 50% overcapacity by 2009 aren't unreasonable, says TowerGroup senior analyst Bob Hunt.

One possible scenario--patterned after iPSL Ltd., a check-processing company formed by several large banks in the United Kingdom--is for the largest U.S. banks to rent excess check-processing capacity out to smaller banks, in effect becoming their outsourcers.