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Improving ATM deposits

Is getting rid of envelopes better than pushing them? When it comes to ATM deposits, a handful of bank ATM owners and vendors are trying to prove that...

December 18, 2002

Is getting rid of envelopes better than pushing them?

When it comes to ATM deposits, a handful of bank ATM owners and vendors are trying to prove that eliminating envelopes will improve efficiency, cut costs and boost deposit transactions.

A handful of financial institutions (FIs), including California's Wells Fargo and the UK's Nationwide Building Society, have piloted ATMs that allow customers to insert checks and cash into the machine sans envelopes. The ATMs -- or more commonly, sidecar attachments -- are equipped with check imaging modules and bunch note acceptors.

Though costs vary, Phil Kasper, NCR's assistant vice president of the ATM Self-Service Division for the Americas, said an upgrade to a single ATM would cost "several thousand dollars." According to a Celent Communications report "The Check Stops Here: Moving Check Truncation to the ATM," costs for a large bank to upgrade 20 percent and replace 5 percent of its deposit-taking ATMs with the new technology could run up to $13 million, depending on the size of its fleet.

"You need to make sure you're doing enough envelope deposits to make a business case for it," Kasper said.

Kartik Mehta, a financial analyst for Midwest Research, a firm that follows Diebold and NCR among other companies, believes that adoption of check-imaging technology at the ATM could be a major catalyst for the replacement market. Mehta estimates that about 50,000 machines are owned by the nation's 10 largest FIs, which are likely to be early movers in the imaging space. If all 50,000 machines were replaced -- not a likely scenario, Mehta admits -- he said it would create a $1.2 billion opportunity for vendors.

By March of 2003, Kasper said all of NCR's Personas ATMs will include integrated modules and cash acceptors. Upgrades for most existing Personas models also will be available by then.

Despite the not insignificant costs, a number of financial institutions are moving toward deposit automation. According to a Frost & Sullivan report commissioned by NCR last spring, 20 percent of the nation's largest ATM deployers are already beginning to install deposit automation systems. Another 20 percent have plans to start, while 40 percent are "actively considering" and 20 percent are "interested."

Peg Bost, Diebold'sdirector of financial industry marketing, said her company got similar results when it queried 56 North American financial institutions of all sizes and types. Only 24 percent had no current plans for deposit automation, Bost said.

Image-ine that

With envelope-free deposits, an image of the check appears on the screen when a customer inserts it into the ATM, and the customer is asked to confirm the amount. An image of the check also appears on the receipt, along with a breakdown of cash by denomination. The images may be a key to getting consumers, who are notoriously more comfortable with taking funds out of an ATM than with putting them in, to make more ATM deposits.

Chris Shott, Nationwide's business development manager for self-service banking, said that "transaction volumes speak for themselves" at 140 Personas 70 ATMs equipped with Personas 72 sidecars that offer envelope-free deposits. Since last April, ATM deposits have increased by more than 30 percent at the machines, which also offer passbook updating and check printing.

Nationwide plans to roll out machines with imaging technology at more branch locations, Shott said, though only where transaction volumes are high enough to warrant the added cost.

Technology to facilitate envelope-free ATM deposits will be available on NCR Personas ATMs, like this Personas 90, by March of 2003.

Jonathan Velline, Wells Fargo's senior vice president of ATM Banking, said the images "buy a lot of comfort with customers." Velline said acceptance was high among Wells customers who used Diebold ATM/sidecars equipped with imaging technology at eight Northern California branches during a six-month pilot earlier this year.

"The first day we installed them, a man walked up and put $1,400 into one of them," he said, noting that 75 percent of customers surveyed by Wells reported being "very satisfied" and 20 percent "satisfied" with the new deposit process.

This was especially significant, Velline said, because deposit is already popular among Wells' California customers. "We were asking existing users to change their habits slightly, and we wanted to make sure that both existing and new users of deposit were happy with the transaction," he said.

According to the Celent report, ATM deposits account for only about 10 percent to 15 percent of the 12 billion retail checks deposited each year; most are still deposited at branches. Less than a third of ATM users make a deposit at least once a month, compared to 94 percent who withdraw cash.

Yet Celent believes it will be possible to move up to 40 percent of retail deposits to ATMs, which the report said would free up nearly an hour per day per teller at branches.

Going with the (work) flow

While that offers an attractive savings, industry observers agree that costs can be cut far more dramatically in the bank's back office, where check processing occurs. Opening envelopes, keying in data and running checks through sorters and encoders is a labor intensive process that does not lend itself well to automation, said Mary Hockridge, senior vice president of Carreker Corporation's image delivery, capture and storage unit.

Linking ATMs with imaging technology to back office processing operations is a definite step toward truncation, in which a digital image completely replaces the paper check for processing, Hockridge said. "The sooner you can truncate an item, the better the benefit."

One bank that expects to find out soon is Bank One, which will connect 10 Personas ATMs equipped with envelope-free technology to its ImageMark check processing system, also provided by NCR.

Dean Kontul, Bank One's senior vice president and ATM channel manager, said the Chicago-based financial institution will send images of checks deposited at most of its pilot sites in Indiana and Kentucky to its back office by the end of January. The bank plans to evaluate the program after a 90-day trial, with a larger rollout possible.

Even without full check truncation, Bank One expects to reap significant benefits by using images to jump-start its processing process rather than waiting for the checks to be collected from ATMs.

Kontul cited gains in overall efficiency and fraud reduction, noting that back office employees can use images to begin reviewing checks to look for fraud indicators, such as unusually large deposits or suspicious accounts. According to the Celent report, check fraud accounts for $1.5 billion in losses each year. Envelope-free deposit has the potential to eliminate up to half the fraud, the report said.

Carreker's Hockridge said that financial institutions could also use images transmitted from the ATM to complete a variety of tasks related to "on-us" checks, including placing holds, validating funds and even posting funds.

Another big savings could result from reduced armored car runs, Kontul said. Because checks and cash are stored in separate bins after deposits are made, bank employees or another less costly courier service can be used to collect checks on a daily basis while cash runs can be scheduled with less frequency.

Indeed, Kasper said that for most of the financial institutions that have completed business modeling sessions with NCR, cutting armored costs and increasing back office efficiency were the two biggest drivers for implementing envelope-free deposits at the ATM. Some FIs believed they could cut their labor costs by up to 70 percent, he said.

Diebold's Bost said that 38 percent of the FIs questioned by Diebold cited efficiency improvements as the most important consideration in their deposit strategies, while another 21 percent mentioned cost control, and 19 percent enhanced customer service.

Leaping ahead with legislation

Another impetus for financial institutions to adopt envelope-free deposits is a piece of pending legislation, called the Check Clearing for the 21st Century Act in the House and the Check Truncation Act in the Senate. The Celent report calls the Act "the cornerstone of the check deposit handling revolution."

Essentially, the legislation would allow financial institutions -- by mutual agreement -- to exchange digital images with each other rather than paper to process checks. This would result in a dramatic cut in transportation costs. For those that opt not to receive checks electronically, "substitute checks" could be created using the images.
 
The Act has been championed by the Federal Reserve, which processes 40 percent of all checks in the U.S. According to Louise Roseman, director of the Fed's division of operations and payment systems, just under 22 percent of checks processed by the Fed in 2001 were presented electronically.

Fed Chairman Alan Greenspan first submitted a letter to Congress detailing the advantages of check truncation in December of 2001. The Act was introduced in the House in September of and in the Senate in October.

While the Congressional clock will run out before any action can be taken this year, Roseman believes there is a good chance the Act will be passed in 2003.

She said that legislators were impressed by "an unusual amount of consensus" among industry groups such as the American Bankers Association, the Credit Union National Association and the Independent Community Bankers of America during hearings earlier this year.

"It's one of the few times I think we've seen the credit unions and the bankers agree with each other so strongly," she said. "There was a very broad consensus that the underlying concept is one that would really improve the payment system by reducing cost, increasing efficiency and improving customer service."

Congress will closely observe pilots that are currently underway, Roseman said. "Even though the pilots aren't operating under the legal framework that would be provided by the legislation, they will show operationally that this can work."

While Bank One's Kontul said the Act "adds fuel to the fire" for adopting automated deposit technology, he said Bank One's primary reasons for testing the functionality were the opportunities to enhance customer experience and improve operating efficiencies.

Network news

Bank One selected its initial pilot sites in part because the way the ATMs are networked will make it easier to monitor activity on both the front and back ends. After a month or so of testing by employees at a corporate facility in Columbus, Ohio, Kontul said the bank is pleased with the initial feedback. Bringing the back office into the picture, however, "adds another level of complexity," he said.

Kevin Carroll, ATM product group manager for Concord EFS, said that NCR and Concord, which drives Bank One's ATMs, developed a specific application on NCR's APTRA software platform to create the connectivity between the ATMs and ImageMark.

The two companies continue to tweak the application, including creating unique message formats for cash and check deposits rather than the "envelope emulation" being used in the Bank One pilot. More specific messages will make it easier to research customer disputes or other problems, Carroll said.

Like other applications based upon a Windows-based platform, Carroll said there are fundamental differences between the traditional states and screens environment, with more "intelligence" required at the ATM itself. A TCP/IP connection is optimal -- although not required -- for transmitting images, he added.

Won't happen overnight

Some ATM deployers, like Wells Fargo, will take a conservative approach to linking their ATMs and check processing operations because of the cost and complexity. While costs are coming down, a check imaging and archiving system could cost between $15 million to $25 million for a large FI, according to the Celent report.

"The investment is going to be so huge, you can't do it overnight," said Velline, who noted that Wells plans to undertake more pilots in the next 12 months. Wells recently purchased an ImageMark system from NCR.

Because many FIs have not made significant investments in back office imaging technology, however, they won't need to upgrade legacy equipment -- as many will have to do with their ATMs. "Starting from scratch gives you a rare opportunity to re-engineer the process," said Carreker's Hockridge.

Another issue, Velline said, is that several groups within the bank would have to join forces to create the business case. "It's such a big end-to-end project, that it would be hard for one group to drive it. The ATM group can't drive it alone; neither can the front office or the back office."

Internal politics can certainly complicate matters, said Diebold's Bost. "We attended a meeting with both the item processing group and the retail group at one FI, and we had to introduce them to each other."

Despite the challenges, NCR's Kasper believes that many FIs will welcome the opportunity to reduce -- and eventually eliminate -- the paper from their check processing operations. "Our future plan is to put a paper shredder in the ATM depository," he joked.

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