ECP in Todays Changing Payments Environment: Comerica Banks ECP Experience

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ECP in Todays Changing Payments Environment
Comerica Banks ECP Experience

• John R. Beran
• Executive Vice President
• Chief Information Officer
• Comerica Inc.
• BITS ECP Forum
• January 14, 2003
• Birmingham, Alabama

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Agenda

• General Payments Background
• Today's Changing Payments Environment
• Implications for Checking
• Industry Experience to Date
• The Comerica Experience
• Early ECP History (1993 - 1999)
• Expansion of ECP through SVPCo
• Benefits of ECP
• Next Steps for ECP Comerica
• A Note on Key Partners
• Summary Conclusion

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Background Payments Is Big Business

• Total industry revenues 2000

Film/Music
Airlines
Payments
Software
PersonalComputers
Commercial Banking
Telecom
Source McKinsey Payments Practice
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Payments Is Big Business, cont.

• A 1999 Federal Reserve study showed that
  payments revenue contributed more than 41 of
  operating income at the 25 largest bank-holding
  companies (BHCs).

Payments-Driven Revenue as a Percent of
Operating Revenues Top 25 BHCs
40
Source Laurence J. Radecki, Banks Payments
Driven Revenues.
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The Payments System Is Changing Rapidly
Buying Out Wells, eBay Intensifies P-to-P Fight
American Banker 3-11-02
Check Use Falls Fed to Cut Jobs American Banker
12-30-2002
Withering Check Volume Needn't Threaten Deposits,
Fee Revenues American Banker  11-8-02
Wachovia Tech Exec Finding Check Imaging a
Surprise Hit American Banker 2-25-02
Early Feedback Tepid on Check Truncation
Plan American Banker 1-14-2002
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The Changing Payments Landscape Infrastructure

• Client interface/support activity is increasingly
  separable from payments infrastructure.

Traditional Product Delivery Silos
Customer Interfaces and Client Support
Banks Non-Banks
Core Payments Infrastructure
Banks BCEs Only
Credit Card
ATM/ POS
Check
ACH
Cash
Fedwire
CHIPs
BCE Bank Controlled Entity (e.g., Visa, NYCH)
Source BITS Meta-Architecture Work, 1998.

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Today's Changing Payments Environment Economic
Drivers

• DDA balancesover the long termare falling.
• Check volume is falling in absolute terms but is
  still high. Checks are 60 of non-cash payments,
  down from 85 twenty years ago.
• Checks will be an important payment vehicle for
  years to come.
• Merchants are seeking lower-cost transaction
  alternatives
• Customers are being steered to lower cost card
  vehicles.
• Authorization requirements for ACH truncation
  have eased.
• Major merchants (ex Wal-Mart) are rolling out
  POS check truncation and conversion nationally.
• Payment behaviors are changing with
  infrastructure consequences.
• Advancing technology is enabling new payment
  alternatives.
• There are new op-risk issues post 9-11

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Implications for Check Costs

• If, as expected, check volumes continue to fall,
  banks may see significantly increased unit costs
  in an unmanaged scenario. A focus on reducing
  costs is essential.
• If enacted, the proposed Check Truncation Act
  (Check 21) will require additional investment in
  check infrastructure.
• Because checks may now clear through conventional
  means, the ACH, and even debit networks, FIs must
  ensure that fraud filters are deployed uniformly
  across all back-end channels.

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Implications for Check Enhanced Services

• Enhanced checking services can be provided
  through image technology.
• online access to check images
• image statements
• periodic image records provided on physical media
• Better integration of checking activities with
  online banking may offer enhanced ability to
  encourage other online activity, increasing
  loyalty and cross-sell.

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Industry experience to date

• Estimated short-term benefits of ECP for larger
  FIs may approach 1,000,000 per year for every 10
  billion in deposits.
• Reduction of Labor Costs
• Reduction of Float
• Reduction of Transaction Costs
• Moving the physical paper is limiting the
  benefits of check electronification.
• Approximately 80 of large FIs are in ECP
  production.
• Only about 10 of mid-size institutions now
  support ECP, indicating special size and
  environmental implementation issues.

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Industry Experience to Date

• For smaller FIs, the combination of image based
  processing and a coordinated regional roll-out
  may be the key to achieving economic benefits
  from ECP.

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Comericas Experience
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Early ECP History

• 1990 ECCHO Formed
• 1993 Comerica joins ECCHO
• 1995 ECP implemented at the Detroit Clearing
  House Association among 5 major clearing banks
  (Comerica, First of America, Michigan National,
  NBD, Old Kent), BankBoston Wells Fargo
• ECCHO Rules provide foundation
• Importance of Critical Mass
• Early implementation ahead of the industry
• Pioneered Perfect Post concept

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Expansion of ECP through SVPCo

• Comerica joined SVPCo 1999
• Migrated ECP Operations to SVPCo in 2001
• included ECP exchanges with BankOne and ABN/AMRO
  (Standard Federal and MI National)
• New send/receive partners
• La Salle National Bank (ABN/AMRO), National City
  Bank (Detroit), Key Bank (Columbus), 5/3 Bank
  (MI), and Wells Fargo (Minneapolis, MN and El
  Monte, CA)
• Expanding ECP to Comerica California Processing
  Sites in 2003

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Benefits of ECP

• Typical Benefits Associated with ECP
• Banks
• Accelerated Posting
• Expanded Fee Income Opportunities
• Customers
• Reduced Risks
• Quicker Action on Returns
• Comericas experience
• Accelerated Posting (expected)
• Processing Optimization (unexpected)

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Comericas Experience

• Accelerated Posting (expected)
• Improved float management
• 84,600 items per night totaling 84 million (avg.
  size 998)
• Cumulative benefit of more than 20 million
  pre-tax since implementation in 1995
• Simplified Benefit Estimate Model
• Improved processing efficiency (unexpected)
• Integration of paper and electronic flows
• Pioneer of Perfect Post concept
• Only post those items that will NOT reject from
  nightly DDA cycling

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Next Steps for ECP Comerica

• New Local Exchanges
• Identification of new exchanges in existing
  markets
• SVPCo Image Exchange Pilot
• Vanguard group of 7 banks (Comerica
  participating)
• Planning for image exchange by Q1'04.
• Image Exchange will be a key driver
• Impact of pending Check 21 Legislation
• Allows expanded geographic scope
• More efficient processing model
• Requirements for Effective Image Exchange
• Image-enabled prime capture
• Comprehensive on-us image archive
• Integrated Day 2 processing

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A Note on Key Partners

• Significant Industry Expertise Exists
• Carreker provides ECP "CheckLink" ECP
  application.
• Integrated on both Unisys and IBM platforms.
• Unisys provides image-enabled paper capture
• CSC provides image archive and links to Hogan DDA
  application.
• Comericas technology staff provides integration
  with inbound files to Hogan.
• SVPCo staff provides consulting and planning
  services to capture ECP benefits.

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Summary and Concluding Thoughts

• ECP is proven and reliable.
• Significant expansion of ECP is likely.
• Customer preferences will drive the industry
  toward greater use of electronic processing
  alternatives AND improved efficiency.
• Now is the time to climb aboard the ECP train!

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For Additional Information

• John Beran
• Executive Vice President and CIO
• Comerica Incorporated
• 313-222-3331
• john_beran_at_comerica.com