Taylor Vaughn doesnt necessarily want to create new sales and communications channels with business partners and customers. Vaughn just wants to bring his companys existing channels into the 21st century.
Vaughn has good reason to do so. As vice president of cash management at First Horizon National Corp., a bank based in Memphis, Tenn., with $35.2 billion in assets, he oversees more than 2 million personal and commercial checks zipping through the banks financial systems every day. That amounts to a lot of paper. Vaughn said he wants to reduce it to none.
To slash paper use, Vaughn steered First Horizon to image exchange—that is, processing electronic images of checks rather than the real McCoys. First Horizon has pushed the idea since 2001, allowing customers to view processed checks online. Last year, the bank took another step forward when it became one of the first to exploit new legislation allowing banks to swap images among themselves.
“We said, Ah, this is a dream come true—now we can exchange images with other banks,” Vaughn said. “Now if a check comes into our bank and we put it on our sorter, we dont have to put that check on an airplane and deliver it.”
The benefits for First Horizon are enormous, Vaughn said. He estimates that the bank saves 0.75 cent to 3 cents on each processed check, thanks to reduced postage, paper and transportation costs. At approximately 2 million checks per day, the annual savings can top $10 million.
Despite the savings, however, moving from paper to image exchange gives most banks pause. Not only do banks need costly new hardware and software, but they also need to create new controls and procedures for previously manual tasks such as handling bounced checks and to create common standards for data exchange. Above all, banks need the proper legal framework allowing them to treat an electronic image just like a real check.
That framework did not arrive until last year, when Congress enacted the so-called Check 21 legislation to allow image exchange. That late start, coupled with high startup costs, has led most banks to take their time in adopting image exchange.
Not First Horizon, Vaughn said. It saw the potential of streamlined communications channels four years ago. “We recognized that there was no legal framework at that time to do this, but we thought it made perfect sense,” he said. “The framework would be there one day.”
A crucial partner in first Horizons efforts has been Viewpointe Archive Services LLC, a Charlotte, N.C., company that acts as an electronic clearinghouse for check processing. Since 2001, Viewpointe has worked with First Horizon and other banks to promote image exchange and to act as a central repository for check images.
The scope of Viewpointes operations is impressive: It has a database of more than 44 billion check images, each 26KB in size. Customers include the largest names in banking, such as Wells Fargo, Bank of America Corp. and JP Morgan Chase & Co., and while Viewpointe has only 11 customers, it issues 65 percent of the checks written on any given day in the United States, the company estimates.
Viewpointe provides the technology infrastructure so that First Horizon and other banks have a place to send check images. Each bank is responsible for capturing images on its own; Viewpointe stores the images and steers various data files to the proper destination, so banks know the images are available to be seen, processed and shared.
“We work bank to bank, trying to figure out what is the most cost-effective way to move to electronics,” said Jerry Chambers, Viewpointes CEO. “This is a sharing capability were developing for our 11 customers.”
First Horizon went to work early. Its first step was to install new cameras on each of its 12 IBM 3890 check processors that can capture front and back images of every check that comes their way. Then came communications software provided by Viewpointe, which sat in First Horizons mainframe and shipped images to the Viewpointe archive daily.
By early 2002, Vaughn said, First Horizon began offering access to check images to commercial customers. Customers already had long been able to see a list of check numbers as they were processed; now they could click on a number and call up an image of the check itself and even burn the images onto a compact disc. First Horizon developed the Web interface internally with a tool from Viewpointe that linked into its image archive.
While all that sounds simple, few banks rushed to embrace image exchange as First Horizon did.
A Major Investment
“The investment from the banks is fairly sizable,” Chambers said. The total cost of installing new cameras, software and controls procedures can easily run to tens of millions of dollars. “This was a major, major expenditure,” he said.
Viewpointe itself, meanwhile, leans on IBM for its architecture. The database (approximately 10 petabytes, executives said) runs on pSeries servers and the DB2 database system, using IBMs On Demand Business application. Storage is managed on IBMs Shark direct-access storage devices.
Introducing customers to electronic check images was a good start for First Horizon, but until one year ago, the bank still had to print and ship paper copies of processed checks to other banks; images had no standing under the law. Check 21 legislation, which went into effect in July 2004, granted that standing. Vaughn calls such bank-to-bank operations “the Holy Grail of a common archive.”
As soon as Check 21 enabled electronic-only transactions, First Horizon launched such a program with Atlanta-based SunTrust Banks Inc., a $165 billion bank that also uses Viewpointe for image archiving.
How does image archiving work? Say a First Horizon customer deposits a check drawn from a SunTrust account. First Horizon captures an image of the check and stores it in the Viewpointe archives. Then, rather than ship a paper copy of the check to SunTrust, First Horizon sends a data file that alerts SunTrust to the transaction and includes an index number to find the image, plus instructions for payment. SunTrust then presents that information to Viewpointe, giving an index number that lets SunTrust call up the image and process it as a normal paper check.
Simple in theory, yes—but still very complicated in practice, Chambers warns, because of the inertia that comes with decades of processing checks by paper. “For banks to take advantage of Check 21, they have to wean their customers off getting the paper back, and they have to retool their back room,” he said. In particular, overhauling those back-office operations “is all over the map.”
At First Horizon, the hardest task was adapting other bank IT systems to accept images rather than paper, Vaughn said. New software had to tell other systems that electronic files had been substituted for paper, and the bank had to ensure that no duplication would happen if the paper somehow did get processed. “That was nowhere near as simple as we thought it would be,” Vaughn said.
First Horizon purchased a virtual sorter from Sterling Software Inc. (since acquired by Computer Associates International Inc.) to receive and route electronic images, and the sorter affected other bank controls.
For example, an electronic file could be returned as a fraudulent check, so First Horizon had to amend its anti-fraud procedures to cope with images rather than paper. “Thats a high level of manual labor,” Vaughn said.
Ultimately, Chambers said that banks will push the capture of check images further toward “the point of first presentment,” such as when a consumer writes a check at the store.
“What First Horizon wants to do, and what a lot of players want to do, is to use the Check 21 law so that commercial customers can digitize checks and make electronic deposits,” Chamber said. That will let banks expand their geographic reach to practically anywhere in the United States, since their transaction channels will be shuttling data rather than paper.
Not bad for building a 21st-century sales channel.
Matt Kelly is a freelance writer in Somerville, Mass. He can be reached at [email protected].
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