Time to Take Another Look at Branch Capture?

ABA Banking Journal, July 2010, by Gary Stein

Five developments make it worthwhile for banks with large branch networks to revisit capture decision.

Banks no longer have to decide whether to convert checks to images—just when. Almost every bank in the U.S. exchanges and settles images today, and 99% of all check payments are now processed in image format. In March of this year, the Federal Reserve closed its Atlanta paper check processing site leaving the Cleveland office as the last remaining facility. Banks that still process and exchange paper and are beyond driving distance to Cleveland must now send items via air and thus have increased risk to their settlement process due to weather delays, etc. For everyone else, the move to image based settlement and clearing has helped to bolster the case for branch image capture. Once a financial institution decides to convert paper to images, the decision must be then made as to when and where images are to be generated and the paper is to be truncated. Imaging at the beginning of the workflow—i.e., at the branch, ATM, or via RDC, the client site—eliminates the need for physical transportation of payment items and reconciliation of the paper item and teller entry, therefore minimizing handling costs and risks.

An increasing number of merger and acquisition opportunities will create more demand for branch capture. Merger activity is expected to pick up as banks look to achieve greater efficiencies. Mergers will help to ease the case for implementation of branch capture by creating attractive opportunities for consolidating item processing centers. Banks utilizing branch capture technologies require fewer back office resources, equipment, and facility space and are able to spread processing volumes throughout the day as images are generated. Thus, banks combining branch networks are more likely to be able to process all items through a single, existing operations center when most or all of the branches are imaging. Because capture removes the need for physically transporting paper payment items across any distance, operations center consolidation is viable for out-of-footprint acquisitions as well as in-footprint mergers.

Major technical hurdles and related expenses are diminishing. Many large banks have held off on replacing antiquated frontline technologies due to the cost associated with implementation across vast branch networks. However, Celent predicts North American IT spending will approach $50.9B in 2010, an increase of about $600 million from 2009, with virtually all of the 2010 growth coming from new technologies versus maintenance of existing systems. Transaction processing, in particular, is a keen focus across the industry, and we anticipate that institutions that have not done so already have or will contemplate replacing outdated and offline teller systems. Teller platform upgrades typically enable the introduction of teller capture by requiring banks to replace teller station hardware and software. The result is that the incremental cost for deploying teller capture is much less significant and the business case is easier to justify. The branch capture business case is also aided by a decline in the price of scanner hardware by approximately 75% from when the technology was first introduced. Additionally, communications costs between branches and operations centers is far less expensive now than in years past. A study by Northwestern University shows that the 2009 cost of data transmission is approximately 45% lower than it was in 2004, or about the time when Check 21 first made branch capture a consideration.

Branch capture can enhance the customer experience.  Deposit service charges as a percentage of average assets have declined steadily from a peak of 38 basis points in 2002 to 29 basis points today. As a result, many banks have refocused their growth strategies on relationship development, and specifically, to increasing retail banking profitability via deeper cross-sales, higher average balances, and greater customer loyalty. A number of institutions are looking to create and nurture primary customer relationships by providing a differentiated experience that resonates with targeted customer segments. In addition, much of the industry is seeking to rebuild customer trust and meet expectations set by other retail businesses. Branch capture can help to improve the customer experience by supporting faster deposit settlement, funds availability, later branch operating hours, and the sharing of transaction information across channels. Furthermore, teller capture enables frontline staff to resolve item exceptions with the customer present and reduces the need for making and communicating back office adjustments after the fact. Perhaps most importantly, teller capture can enable faster window processing and shorter customer wait times. Jack Henry’s Goldleaf Financial Solutions, a branch capture solutions provider, claims that teller capture reduces frontline keystrokes by as much as 80% related to processing paper transactions. 

Changes in customer behavior will limit deployment costs. Check volumes are dropping precipitously as card and electronic channels claim an increasing share of all payment activity.   According to The Nilson Report’s December 2009 issue, U.S. check transactions fell from 27.59 billion in 2003 to 19.86 billion in 2008. The ten year decline is expected to hit nearly 50% by 2013, when Nilson forecasts check volumes of 14.85 billion. All other forms of paper payments—cash, money orders, official checks, etc.—are headed in the same direction. Many banks report branch teller volumes to be flat as new customers mask declining per customer activity. This trend is one likely driver of another significant observation:   CPG analysis of SNL Financial data projects a 2010 reduction in net new branches, marking the first time in over a decade that industry-wide branch closings may outnumber de novo openings. While a change of pace in the second half of 2010 could alter this outlook, the industry is facing an unquestionable slowdown in branch network expansion. Couple these trends with the push by many banks to drive more customer self service, and at least one component of the cost of branch capture implementation—the number of deployments—is probably not likely to increase anytime soon. (At the same time, check volumes are not declining so fast that consideration of branch capture is moot.)