Early Image Exchange Pays Off

BS&T: What's the history of electronic item processing at Frost Bank?

McKnight: Frost Bank has been at the forefront of electronic item processing for many years, partly because we have a huge downstream correspondent banking base. We run a lot more checks than the average $13 billion bank. We were an early member of the Electronic Clearing House (ECHO) and began doing electronic check presentment (ECP) in the early 1990s. We then got very involved in the Check 21 legislation, mostly through ECHO.

BS&T: Are you the bank's "payments czar"?

McKnight: I did help lead the bank's payments strategy through the implementation of Check 21, but have since backed away from doing much of the day-to-day operational tasks. Today, I have responsibility for technology and all deposit operations, including item processing.

BS&T: What are the key payments challenges facing Frost Bank?

McKnight: The biggest challenge is that we are 30 months into the Check 21 legislation -- we're beyond the theory and into the reality of how it works on a day-to-day basis. We're faced with the normal challenges of using a new product and doing business in a new way. Fully operationalizing the capture and exchange of images is a challenge. Like a lot of other people, we've spent a lot of money and effort on this. We've moved more of our exchanges from paper to electronic, but it is a process that will take some time.

BS&T: Where is Frost Bank on the check-electronification continuum?

McKnight: We've installed most of our software. Now we are just going through our customer base to determine who can exchange with us. We're ready to go; it's just a matter of getting partners tested.

BS&T: Are your partners at all resistant?

McKnight: No. What takes time is making sure you test thoroughly since there are opportunities for mistakes. The testing includes not just exchanging with another bank but making sure the item goes through the Federal Reserve.

BS&T: Have you been at all surprised by the industry's progress on Check 21 initiatives?

McKnight: Check 21 has gone quite well. But those of us who have already gone through ECP have a clear advantage since there are a lot of parallels in the testing processes. We're also already familiar with the "gotchas" that occur with image exchange. I'm thankful that we went through the ECP process because it's made image exchange quite a bit simpler.

I'm disappointed -- but not necessarily surprised -- with the number of operational problems with processes such as creating duplicate IRDs (image replacement documents). We all knew that turning an item into an image and then turning it back into a piece of paper would be a problem. But it's even more of a problem than I thought.

BS&T: Are you leveraging remote deposit capture?

McKnight: We've been offering remote deposit capture (RDC) for about a year and it's been going pretty well. Like any new product, the customers like it at first, and then they think of ways to tweak it. Right now we're looking at making the proper enhancements.

BS&T: Have you marketed RDC aggressively?

McKnight: We've marketed remote deposit capture aggressively to our existing customers, but we haven't as yet used it as a lead in our prospecting. We have had some customers that had done business with us in one city but were unable to do business with us in other cities because we didn't have a presence in that location move their full relationships to us. But I don't think we've gained any brand-new customers because of remote deposit capture.

BS&T: What are the major benefits of remote deposit capture to the bank?

McKnight: Since the customer is imaging the item in its offices, we've eliminated some operational processes. There's also less opportunity for an out-of-balance condition because the items are only being handled one time. Although it's still a challenge to turn those images back into a quality piece of paper and get them out the door, receiving transmissions earlier in the day as a result of RDC helps.

BS&T: Do you have any future plans for RDC?

McKnight: We will perhaps be a bit more aggressive in offering RDC to our customers. At some point we will use RDC as an opportunity to get new business.

BS&T:Who are your major technology providers?

McKnight: Our core system is from Fidelity National Information Services (FIS; Jacksonville, Fla.), which we run in-house. For item processing and image capture we use a mix of products: ImageMark Transaction from NCR (Dayton, Ohio), CPCS from IBM (Armonk, N.Y.) and VECTOR from Metavante (Milwaukee).

BS&T: How far is the banking industry from a paperless transaction flow?

McKnight: We're a ways away from zero paper; I don't see that happening over the next 10 years. What will happen -- and we're already seeing it with the Federal Reserve -- is that banks will be price-incented to use images. Price will certainly have an effect on decreasing the amount of paper generated, but we will never completely get rid of it.

BS&T: How far is the industry from an enterprisewide view of payments?

McKnight: Having an enterprisewide payments view is extremely important and will come quickly to the banking industry. All of us are having such a difficult time combating fraud. If you are doing a really good job of looking at your paper, fraudsters will try ACH. And if you are doing a good job of looking at ACH, they will try some other method. One of the major advantages of having an enterprisewide view is that you can find patterns. We need to figure out how to put payments across all lines of business so we can do a better job of predicting and stopping fraud before it happens.

We're looking for some way to do enterprisewide payments. We don't have an answer, and there's not yet a product that we can buy off the shelf, but I believe there will be.

BS&T:Will any current payments methods disappear?

McKnight: The problem with the payments industry is that we've come up with new payment types but we haven't gotten rid of any of the old ones so our backroom shops keep getting bigger -- we've added processes that have eroded our savings. We're not doing payments as efficiently as we can.

As an industry we're going to have to be proactive and figure out how to do away with some processes. We probably won't see payment types such as ACH or checks go away -- instead, we need to be able to process all payment types and check for fraudulent transactions the same way -- we shouldn't care where the payment came from.