By Gordon Smith
MoneyGram Payment Products
www.moneygram.com • 800-723-9777

 

  September 2008

Historically, the banking industry is one that remains closely tied to paper.  Even with the growth of online banking, electronic payments, check conversion, remote deposit, and debit/credit card usage, paper is still widely used among banks. Paper burdens financial institutions in many ways, but many have aggressive plans to reduce its usage. 

Whether for reporting, receipts or printing drafts for bill payment, banks’ dependence on paper is resulting in inefficiencies, increased risk and higher costs.  As the world looks for ways to reduce usage of paper and all the costs surrounding paper, banks will be continually challenged to find alternatives to reduce or eliminate processes that require paper.

Electronification, the process of turning paper-based data into electronic or digital form, is a term that has become acutely familiar to every bank and financial institution. As paper becomes increasingly expensive and its usage poses growing security risks, electronifying will help to free banks from paper and ultimately help them to save money, create operational efficiencies and reduce the inherent risks of printed data.

Some obvious places to reduce paper such as online banking, electronic check processing and electronic payments have received a lot of attention; however, now is the time to dig deeper and eliminate areas that are not so obvious. Recent movements such as mobile banking and even eliminating paper for deposits at automated teller machines (ATMs) are steps in the right direction that demonstrate the banking industry’s willingness to move toward electronic solutions, but there are many other opportunities.

Areas such as loan servicing, collections, operations and even commercial bank customers’ applications all provide opportunities to decrease costs as well as the potential to increase revenue, improve customer retention and reduce risk by using electronic payment alternatives.  For instance, collection areas either print or have their vendors print demand drafts for a consumer’s payment of a bill that has been received by interactive voice response (IVR) or telephone.  These applications accept a payment from a consumer and then print a draft remotely for deposit.  Consider all the information that may be printed on this draft such as the consumer’s bank account, ABA number, name, address or other personal information that poses risk of fraud.  These demand drafts are sometimes stored in or on desks, placed in files, and routed to others for decision.  This example, while about demand drafts, may be applicable to receipts, various reports employees print, exception handling processes and more.    

The answer to this problem may seem easy.  Why don’t they use electronic payments instead of drafts? Financial institutions and their corporate clients have a variety of legitimate concerns about switching to electronic payments.  However, understanding and resolving these barriers is the key to increased electronic payment acceptance and reduced dependency on paper. 

Breaking Down Barriers to Electronifying
A major reason an organization may be hesitant to move toward electronificiation and away from paper-based processes is the “that’s the way we have always done it” objection.   The processes, training, and even sometimes an organization’s own systems have grown around outdated paper processes. These organizations are often worried about the impacts of change than all the inherent risk and costs involved with paper items.  Beyond the fear of change itself, there a few key barriers which are worthy of further discussion.

Demand Drafts:
Demand drafts are just one example of where banks and their corporate clients can decrease costs, reduce risk and increase consumer satisfaction. 

The remote printing of demand drafts is one way for corporate clients and banks to receive a payment by telephone. In some industries like mortgage, automotive and collections, demand drafts not only help to collect the payment but are used when a business needs to determine if it wants to accept a payment for legal reasons such as foreclosure. Demand drafts, which are not an electronic fund transfer (EFT), are printed then routed to the appropriate persons or departments to make a decision on payment acceptance. While these manual processes can be compliant for meeting Statement on Auditing Standards (SAS) No. 70 (SAS70), Sarbanes-Oxley Act of 2002 (SOX), or other data security standards, consider the cost for becoming and staying compliant that includes all of the documentation, procedures, training, tracking, monitoring that must be put in place and maintained.  It may be costly.  In many instances, automation can reduce both costs and risks.

Others prefer to print drafts as they find the consumer protection rules around Automated Clearing House (ACH) and Reg E. too difficult and cumbersome to implement.  Demand drafts remain a convenient and an easy option to collect payments; however, it should be noted that fewer upfront rules also make it easy for those committing fraud.   Some argue, “these drafts may be more expensive, even create more risk, but in the end I can get my payment.” This works well for IVR and phone applications especially since the biller can bypass the stronger set of rules around Reg. E or NACHA. However, what works well for the most ethical business also works that well for those on the other side of the ethical spectrum.   

Another reason for the continued popularity of remotely printed drafts is the ability to get same-day credit on deposits. Banks provide an outstanding incentive for the continued use of demand drafts by allowing their corporate customers same-day credit on these items and/or their deposits.   However, banks need to ask themselves, what are the costs and benefit to the bank? Are we potentially increasing our own costs and risk? Are printed drafts really necessary to retain our key corporate customers? 

The key to reducing remotely printed drafts is finding a balance that will better serve an organization as well as satisfy its customers. Today’s technology provides solutions that can electronify these payments and provide the necessary review and exception processing necessary to manage payments along with electronic reporting that can eliminate or reduce many of the objections mentioned above.    

Legality Concerns:
Concern over the legality of electronic documents also keeps some banks from taking the leap to electronify. While many banks and businesses believe that they need paper in order to retain records for legal or business needs, there have been significant changes with federal laws and regulations that advocate electronic alternatives. 

The Electronic Signatures in Global and National Commerce (ESIGN), passed by the U.S. Congress applies to interstate and foreign transactions and deems that electronic signatures and records are subject to the same legal authenticity as their paper equivalents.

The Uniform Electronic Transactions Act (UETA), which applies to interstate commerce and is in place in every state, also designates electronic signatures and records as acceptable.

Check 21 or The Check Clearing for the 21st Century Act encourages use of technology in the financial industry.  Effective as of October 28, 2004, Check 21 created an alternative financial instrument or “substitute check” that is the legal equivalent of the original check. 

In addition to reviewing the latest rules and regulations related to electronic documents, two of the best resources for any organization embarking on the battle to electronify paper will be an attorney and a certified records management professional.

As the use of electronic records increases and becomes more readily accepted, some of the misperceptions about electronic data are beginning to fade and banks are realizing how electronic records can actually improve the security of private information and serve as an acceptable medium for evidentiary purposes.

Less Paper Means More Green
It is important to evaluate the cost of paper.  Simply put, paper costs money. There are a number of hidden costs associated with paper that alone should convince banks and corporations to consider electronifying as much as possible. While paper checks are in decline for many reasons, looking at some of the costs attributed to checks can help shed light onto other processes that use paper today.  Some of these costs are obvious and some not, finding all the costs is a challenge. 

These costs start with the printing, packaging, and storage of checks as well as maintaining inventory and distribution. To those receiving checks, they generate their own costs such as the time to prepare a deposit (endorse checks, prepare deposit slip, run a tape, etc.) and the time to take the deposit to the bank. 

There are also the costs of taking in the deposit, running a tape, and correcting any errors.  The cost of processing a paper item through the clearing process including any problems that arise due to keying, MICR, or other errors. In addition, if the check was printed, then there are additional costs considering a printer, ink supply, connectivity, and software that may breakdown.  Even more costs may also come into play during the printing process to fix common problems such as a jammed printer, unplugged cord, no ink, out of sequence, paper alignment, and much more.   

Fraud and security issues also come into play and impact the cost associated with paper.  Paper checks can be lost, stolen or incorrectly coded. Checks can also be damaged or have the potential for fraud as they can be altered.

Lastly, paper requires overhead, which ultimately costs money. Banks need to consider the costs of management, insurance and facilities.  Less paper means more green in many ways.  Less paper means more green to your bottom line.  Less paper means a greener environment.   Less paper means a greener path to compliance with stronger electronic processes and less risk.   

Less Paper Removes Risk
Less paper means different and often fewer risks to an organization.  Electronification does change the risk and can require more sophisticated technology to process and secure data resulting in a different set of risks.  However, electronification is just a specific form of automation. As processes are automated, potential points of failure that are inherent in manual processes are removed.  By reducing these points of failure, we effectively remove certain risks out of the process. 

Returning, to the demand draft example, if the physical item is never printed, then someone just walking by cannot pick up the item and deposit it into a personal bank account.  If the demand draft was automated, someone would need to gain system access, find an item, and then change the place in the system to make the deposit.      

What happens to all this paper?  Keeping sensitive and critical information secured is essential to an organization today.  If employees are following all the standards, policies, and procedures around securing paper, then the risk is managed. Storage and destruction of this data must also follow similar policies and procedures.  How many of these manual policies and procedures can employees effectively remember and comply with during their hectic business day? The more that business automates, the more paper it eliminates, the more risk it eliminates and the more time employees can focus on generating revenue and serving customers.  

Consider the earlier example of a demand draft being printed for bill payment. Look at all the risk from the data printed on the item, to the manual handling, the need to void, route and process these items.  Eliminate the paper, eliminate its risk. 

Making the Break From Paper
How many banking professionals know of an exception process that starts for the lack of resources or because of projects that were put on hold?    For instance, if a project team cannot get the resources to integrate its payment vendor into its core systems, then automated facsimiles, e-mails, and other methods are used to move data in various print-ready formats like PDF, text and others so that the customer can balance, research, and manage the vendor.  In many cases, this leads to newly printed items like reports, special databases, new manuals or exception processes that can bring unintended risks to a business.

Banks and businesses continue to generate paper due to lack of resources. Quite frankly, a lot of these hidden projects may not generate revenue and the cost savings alone is not always the best business case. When creating a business case, banks should start with revenue and cost saving, but also weigh the risks, security and legal issues of manual and paper-bound processes.  Using a combination of these can lead to a strong business case and successful project.  

With heightened awareness and recent changes to legislation surrounding consumer privacy, paper will continue to be a growing area of liability across all industries. For these reasons, as well as environmental challenges and government’s call to action to reduce usage of paper, it’s evident that banks in particular need the tools and resources to help them automate processes that have been paper-ridden to date. 

Following is a short list of the internal experts who are essential to help banks move forward in their efforts to reduce paper. Professionals in these areas can be some of the biggest allies to helping an organization move to more automated processes with less paper.
•    Legal
•    Records Management
•    Data or Information Security
•    Privacy Office
•    Compliance and Regulatory
 
Summary
Electronification will continue to play a major role in the future of banking, helping banks to save money, create efficiencies and improve customer satisfaction.  As electronic records become increasingly accepted in the financial marketplace and the banking public grows increasingly comfortable with electronic transactions, banks need to adapt to remain competitive. By evaluating the many reasons to use paper today, banks will continue to be leaders on an important journey that will ultimately prepare the industry for the future.

About the author:

 

 

Terms:
Electronification:  process of turning paper-based data into electronic or digital form
Truncation: removing the paper check from its processing flow (e.g., Check 21)
Conversion: process of turning a check’s MICR data into ACH
Imaging: process used to capture, store and reprint images using software-based computer systems and hardware
Document Management System (DMS): computer systems to track and store electronic documents and/or paper documents   

 

MoneyGram—Executive Summary on Page 63  

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