The Changing Face of Billing

by Joseph Devlin

"The typical paper-based billing process is made up of a series of time-honored steps handled in sequence by various manual and computer-aided methods. First a firm's billing information is aggregated, stored and sourced for billing data. Then actual paper bills are printed, mailed and delivered. When received by customers, these bills are then reviewed, exceptions are noted and contact with payees may be necessary to resolve differences. Next, checks are written, records are maintained, postage is applied and payments are delivered. Finally, the biller and the payer's bank or financial institution exchange payment data for in-stream account reconciliation." - from "Buy Now, Pay Now: Internet-Enabled Billing Comes of Age," Zona Research, March 2001.

Sounds complicated, huh? It's expensive, too. The round-trip cost of generating a single paper bill, invoice or other form of remittance and processing the payment and paperwork that comes back is approximately $1.90, according to Jupiter Communications in New York.

Remittance technology providers are chipping away at payment processing costs with better automation software and more powerful optical and intelligent character recognition engines. But the best way to cut the cost of billing is to do it all electronically. Analysts such as Jupiter estimate that billers could save almost 80 percent (for paper, postage, handling) per payment, approximately $1.20 per bill, by using electronic bill presentment and payment (EBPP). U.S. businesses could save nearly $18 billion per year.

So, why isn't this already done? On average, billers now receive only about 12 percent to 18 percent of their payments electronically, according to Zona, Redwood City, CA.

For the last several years, analysts have trumpeted the arrival of EBPP, but there have been significant strategic impediments involving the complex relationships between billers, consumers and financial institutions.

Numerous studies have shown that consumers and businesses want their bank to be the one to consolidate their bills online. Yet most bills don't originate at banks. Credit card companies, telecommunications companies, utilities and retailers, meanwhile, resist releasing customer information to financial institutions so that the information can be presented on a single Web page.

Few companies want to outsource this task to a third party because it reduces the biller's control of its customer data and customer interactions. Billers want to interact with customers online to take advantage of cross-selling and upselling opportunities, but this is more difficult if these monthly interactions are hosted on a bill consolidator's Web site.

"Banks were smart to stay away from EBPP for a year or two until the smoke cleared," says Errol Hau, director of product marketing at CheckFree, a leading provider of electronic billing and payment services. "To get into EBPP, you need to go out and partner with half a dozen companies to put together an end-to-end solution. What the banks decided to do was to just dabble in it. They started by giving people online bank statements with bill payment capabilities. The assumption was that the actual bills would remain on paper."

Coping With Mixed Payments

EBPP will eventually provide a huge leap in efficiency over traditional remittance processing. But even if you set aside the issue of customer adoption of EBPP, online payment vendors are a long way from providing direct electronic links to every payee. Even the largest online payment brokers still send out many paper checks. CheckFree, for one, estimates that 40 percent of its payments are made on paper. This mixture of paper and electronic payments can create real headaches for lockbox operations and remittance processing vendors.

"The problem is that the paper stubs shipped out by online payment brokers don't look anything like stubs shipped out with the original paper bills," notes Jeff Vetterick, vice president of marketing at Advanced Financial Solutions (AFS), Oklahoma City, OK, a major remittance processing technology provider.

It wouldn't be so bad if each check was applied to a single bill and was accompanied by a single stub in a machine-readable format. "But it's not realistic to expect the CheckFrees of the world to send out 10,000 separate checks to any one payee each month," says Vetterick.

Instead, online payment consolidators cut postage and processing costs by batching payments; a single check arrives along with a list of all transactions covered by that check. These lists almost always need to be keyed manually. From the remittance processor's perspective, it's a nightmare.

"The problem is compounded by the fact that every online payment consolidator uses a different format for the payment list - typically formatted on 8-1/2-by-11 sheets of paper or on long sheets of greenbar," says Vetterick. "None of this stuff can be handled normally through the usual high-speed transports. Unless new processes can be put into place, all of it gets handled as an exception."

Advanced Financial Solutions solves this problem by handing it over to a module they dub "DREAM" (Dynamic Reject Auto-Correction Module). The software was originally designed to automate MICR (magnetic ink character recognition) rejects. The software uses ICR (intelligent character recognition) technology to take a second look at the MICR line at the bottom of checks that could not be recognized magnetically. AFS's Scott Image Associates unit, in Sanford, NC, has tested the software and reports that it automated as much as 80 percent of previously rejected items.

AFS customers are now using this software to handle checks and lists coming from online payment brokers, including CheckFree. "It's a little different workstream," notes Vetterick. "Since DREAM can automatically read the MICR line off the check, both the check and the list can be scanned on the same scanner at the same time, maintaining transactional integrity."

According to Vetterick, "it's 20 times more efficient" to handle both at the same time than to separate the paper paths and put them together later on.

Wausau Financial Systems, a payment automation systems provider in Mosinee, WI, has addressed the electronic payment check-and-list problem by adding full-page OCR (optical character recognition) to its ImageRPS remittance processing solution. The upgrade also addresses money orders, travelers checks and other items that usually demand manual keying.

"The recognition software enhancements provided with ImageRPS will transform how exception item data gets captured in a remittance environment," says Mike Tallitsch, Wausau's product manager for remittance processing. "From multi-page, check-and-list transactions to money orders from a convenience store or any other provider, [exception items are] now easily automated for significant labor savings."

Streamlining Conventional Payments

Of course, as so many bills are still paid by checks and remittances, technology providers are competing to drive down costs with improvements in automation equipment and software.

BancTec, Irving, TX, for one, recently introduced a higher-speed check/remittance transport. Priced starting at $230,000, the company's new high-volume E-Series transport is available with optional speeds of 1,200, 1,400 or 1,600 documents per minute and is intended for mid- to high-volume processing environments handling 100,000 or more transactions per day.

Meanwhile, BancTec's mid-tier E-Series transport, which processes 550, 800 or 1,150 documents per minute, will be supported by new software with standard grayscale support, improved image thresholding, optimized JPEG compression and an ability to capture up to eight image zones per side.

"We're focusing on taking image quality to the next level to improve read rates," says Dave Conklin, vice president of sales and marketing for BancTec's business partner solutions. "New image compression technologies such as DjVu and JPEG2000 will make color and grayscale imaging much more affordable. We're moving image compression to software to protect the buyer's long-term investment in this equipment."

High-volume check imaging demands significant storage investments, but better compression will make the most of storage while also delivering better images that yield higher accuracy rates and fewer manually processed exception items.

To support mixed paper-based and electronic payment environments, BancTec last year introduced its PayCourier solutions, which provide a common database for both types of transactions as well as Web-enabled lockbox capabilities for electronic payments. Web-based search and query tools provide access to images and data from anywhere so that customer service and customer self-service initiatives can be supported.

Mainstreaming Payment Automation

Remittance processing technology is more efficient than ever. Advances in computer processing power and recognition accuracy alone are dramatically improving accuracy and reducing manual processing costs (see "Better Recognition Drives State-of-the-Art Payment Processing," page 49). The technology is also more affordable, even for smaller institutions serving regional and local markets.

According to the T. Houston Technology Group, Alvin, TX, half of all banks in the United States now have in-house check imaging systems. Yet far fewer water companies, tax collection agencies, cable television companies and other smaller concerns have this technology.

"Community banks have got to start learning to sell the services they have mastered so well," says Tom Houston, principle of the eponymous bank consulting, marketing and training firm.

Banks are taking advantage of these opportunities, says Patrick Koster, marketing director of BankWare, a remittance systems and services firm in Birmingham, AL.

"Many community banks are beginning to reach out to [help local companies] process their payments," Koster says. "Over the next 18 months, you will see the big [billers and banks] trying to work out all the issues [involved in EBPP]; at the same time, local community banks will be putting remittance solutions into place."

While image-enabled remittance systems are more affordable for smaller banks (see "First Federal Automates to Support Growth," page 53), some institutions are making a bigger leap into the EBPP world, according to Houston.

"The key to pulling this off at a smaller bank is to pool resources with other like-minded institutions," Houston says. "The cost for implementing EBPP ranges from $350,000 to $750,000 - too expensive for most community banks. Because of the enormous start-up costs, most banks will turn to service bureaus for these services. Another alternative is creating a co-op of similar size banks to share expenses. It costs about $3 million to implement [EBPP] for 100 banks, but the cost per bank drops to about $30,000. In this range, most community banks can afford the technology."

Joseph Devlin (armadill@earthlink.com) is a freelance writer based in Half Moon Bay, CA.

Gauging EBPP

Most estimates show low penetration of electronic billing in both the business-to-business (B2B) and business-to-consumer (B2C) sectors. Zona Research, Redwood City, CA, offers the following positive notes.

• High-volume billers (more than 200,000 monthly bills) comprise 70 percent to 80 percent of the U.S. market.
• Perhaps one-quarter of all high-volume billers now offer some sort of electronic billing, and many of those that don't plan to do so in the next 24 months.
• On average, billers now receive about 12 percent to 18 percent of their payments electronically.
• Of approximately 30 billion recurring electronic billing transactions each year, slightly less than half are for business-to-business transactions, despite B2B's much greater market size and complexity.
• By a sizeable margin, current electronic billers prefer to keep in-house control of their bill processes rather than outsourcing to a third-party vendor.

Source: "Buy Now, Pay Now: Internet-Enabled Billing Comes of Age", Zona Research, March 2001. For more information, visit www.zonaresearch.com.

Better Recognition Drives State-Of-The-Art Payment Processing

With speeds and check recognition accuracy rates reaching new highs, the cost justification of payment automation technology no longer applies solely to high-volume lockbox applications.

A few years ago, automation could only be justified, as a rule-of-thumb, with at least 1,000 transactions per day. As the price, size and speed of transports have come down, that breakpoint has been dropping rapidly. Today, even entry-level systems can be justified. In some cases, it is possible to cost-justify automating a remittance processing application that involves only a few hundred transactions per day.

Today's payment automation technology is aimed at automating all sorting, reading and keying steps of remittance processing to increase operational efficiency. Automation can also eliminate the charge (usually $.03 to $.05 per check) for MICR encoding the amount on the check, and it provides a better audit trail with transactions being processed inline. Automatic endorsement of the customer account number on the back of the check facilitates quicker research. Increased overall throughput reduces "float" and "holdover" costs by shortening the time between the moment a payment is sent and the moment the funds are made available.

Many of the gains in efficiency that have been realized can be attributed to increased character recognition rates on checks. With today's extraordinary CPU horsepower, mammoth disk space and cheap memory, powerful context analysis and data validation routines can be brought to bear to improve check recognition accuracy. Software now employs multiple data points, check digits and other data validation tools that compare raw intelligent character recognition (ICR) results with specific, predefined expectations.

For example, ICR results can be verified by comparing them with the OCR (optical character recognition) results of a "pay this amount" field on a utility bill. Advanced cursive handwriting recognition engines (supplied as modules by vendors including Parascript, A2iA, Orbograph, Gentriqs and Ceresoft) can recognize the handwritten textual amount on a check in a process known as legal amount recognition (LAR). These results can be compared to the handwritten numeric amount on the same check through courtesy amount recognition (CAR). Some vendors push accuracy even higher by using multiple ICR engines before comparing CAR and LAR results.

ICR vendor Orbograph, Billerica, MA, reports that by using CAR alone, the company's technology can recognize 40 percent of personal checks at a 1 percent field error rate. With the addition of another CAR engine, and by consolidating results from both engines, the percentage of personal checks recognized at the same error rate rises to 49 percent. By adding a cursive ICR engine that interprets the legal amount and then interactively compares its answer with the CAR results, the percentage of checks recognized at the same error rate rises to 72 percent.

Finally, by comparing CAR and LAR results using complex "voting" algorithms and validating the answer against the OCR results of a machine-printed coupon, overall accuracy in remittance processing operations reaches 92 percent. And that's at a rate of one error in 10,000 amount fields read. At this level, it's hard not to choose to automate payment processing.

Arthur Gingrande (arthur@imergeconsult.com) is a partner of Imerge Consulting (www.imergeconsult.com).

The Opportunity and Controversy Beyond Simple Check Recognition

There is more to checks than courtesy (numeric) and legal (written) amounts. Whether it's the payer's name and address, the payee, the date of the check or even the signature, they all could be captured and recognized as part of normal processing. Recognition vendors, billers and banks would love to make use of this information, but some of these "check mining" applications are fraught with privacy concerns.

Just what is possible with the latest technology? CheckPlus 2.0 recognition software from Parascript, Niwot, CO, can detect the presence of a signature and sort check images by date. "[This cuts] costs by sorting out checks that banks might later reject," says John Unoski, general manager of Total Recognition Products for Parascript. "It also improves customer service by allowing speedy retrieval of payment data when responding to inquiries."

Checkreader software, from ICR developer A2iA, New York, can identify the payer and match it with the person invoiced. Olivier Baret, vice president of research and development at A2iA, points out that, "By recognizing the payer's name and address and comparing it with the information on the invoice, the technology can detect payment errors. [It also] allows the company to send the check back to the customer with [lower] returned check costs."

ICR has been applied to forgery detection by Ceresoft, Silver Spring, MD. The company supplied its technology to Capitol Security Systems, Chicago, a firm that markets an advanced, automated teller offering check-cashing services to bank customers.

In the interests of speeding processing, ICR systems that feature courtesy amount recognition (CAR) and legal amount recognition (LAR) comparison will sometimes bypass the LAR process if the CAR confidence level is sufficiently high. Unfortunately, this approach in an ATM application would allow a forged courtesy amount to pass through undetected. Ceresoft's technology is trained to take a different approach.

"LAR results are processed and reported independently of CAR results," explains Bob Foley, Ceresoft's sales and marketing director. "If the handwritten legal amount fails to match up with a high-confidence numeric courtesy amount, our system will detect it instantly."

ICR could also be used to harvest marketable information, such as which long distance or mobile phone company payers use, which grocery store they buy from or even which doctors they visit, but privacy concerns are at issue. Remittance automation and recognition vendors say such uses are too sensitive to deploy.

"Checks hold information that could be invaluable to a lot of people, but [for now] check processors are the only ones who ever see it," says John Black, director of product strategy at BancTec, Irving, TX. "If the industry could overcome privacy concerns, that information could be used to cut down on fraud, to help small businesses track their expenses or to help customers keep track of their payees."

Arthur Gingrande (arthur@imergeconsult.com) is a partner of Imerge Consulting (www.imergeconsult.com).

First Federal Automates To Support Growth

First Federal Savings Bank, Twin Falls, Idaho, is typical of the smaller institutions now adopting check automation technology. In January, the seven-branch bank implemented new technology to improve efficiency and keep pace with growth. The institution now services 13,000 checking accounts, up from just 4,700 in 1996.

"We are growing and sending more and more checks," explains Mary Fort, First Federal's assistant vice president. "When we were small, the paper system worked just fine, but we drop statements eight times a month. Last fall, it got to the point where each time [we sent statements], we were taking at least 10 hours just putting the checks in order. We had three shifts, and if we hadn't automated, we would have simply run out of time."

After deploying check automation software from Mitek Systems, San Diego, all checks are now run through a single transport with three workstations, and the software compares checks to deposit slips and credits. The software recognizes and compares numeric courtesy amounts and handwritten legal amounts. If there is agreement, it passes on the debit without human intervention. If there is a disagreement, the check shows up at a workstation. Operators see whole check images (backs, too, as necessary) as well as boxes that show the software's interpretation of the amount fields.

"Our staff can magnify the image to decide on the correct amount, and as soon as the correction is entered, the new figure becomes part of the system," says Fort, adding that 81 percent of transit checks are now read automatically.

Under First Federal's old manual system, two proof operators worked at checking and encoding until 11 each night. "Now they are done by 8:30," says Fort. "It would be earlier, but some of our branches are open late."

The alternative to automating was adding staff and cost, but that would be just a temporary Band-Aid. "We now have the capacity to grow to 20,000 checking accounts," Fort says.

Gordon E.J. Hoke (ghoke@imergeconsult.com) is a principal of Imerge Consulting (www.imergeconsult.com) and a contributing editor of Transform Magazine.