Banks Face Excess Capacity, Experts Say

A decline in check volumes will leave banks with excess capacity over the next five years, according to research conducted by Meta Software, a provider of integrated consulting and software solutions, and Global Concepts, a payment systems consulting firm.

If the various check conversion initiatives (i.e. ARC, ECP, image exchange, POP, etc.) take off as expected, then there will be an explosion in excess capacity. Even with a relatively small decline in check volume it will be increasingly difficult for banks to maintain their unit costs as excess capacity builds up.

The problem cannot be solved through outsourcing, bank mergers, or large investments in new technology, but will require aggressive reengineering of operations to efficiently handle the decline in check volume.

Global Concepts recently announced its 2002 payment study as a follow up to the check study it completed for the Federal Reserve, in which it demonstrated that check volume is considerably lower than expected and is declining conservatively at 2 percent per year, said Allen Lipis, CEO of Atlanta-based Global Concepts.

"In the next five years, check volumes will be at least 10 percent lower and, based on our analysis, excess capacity will increase by more than 50 percent."

Check processing requires that people and equipment working multiple shifts be efficiently organized in order to complete the work in a cost-effective and timely manner. Banks have proven over time that they are extraordinarily efficient in managing this process. However, some amount of excess capacity is inevitable.

Meta Software has found that the banks can achieve no more than 85 percent utilization of variable cost components, such as staff resources, and are faced with a much lower utilization of fixed cost components such as equipment and real estate, said Bob Seltzer, CEO of Cambridge, Mass.-based Meta Software.

"Given the 2 percent annual decline in check volumes, and the possibility that the decline could accelerate in the near future, excess capacity has the potential to grow exponentially," Seltzer added.

The expansion of excess capacity will have a significant impact on unit costs for those banks that don't establish a management process to aggressively remove both fixed and variable capacity, and make the necessary investment to address internal inefficiencies and industry check conversion initiatives.

The ABLE partnership combines Meta Software payment-specific workflow simulation modeling software and supporting analytical services with Global Concepts payment systems performance benchmarking and best practices expertise.

For more than four years, a wide range of banks has successfully applied ABLE to increase productivity and improve customer service in check and remittance processing operations.