Last week, my colleague Steve “Cassandra” Williams reported some frightening things regarding the level of debt owed by American consumers. (see “Bankers and the Bloated Consumer,” GonzoBanker, Jan. 21, 2005). According to Steve, financial institutions had best consider the prospect of future economic difficulty. What better way to do that than to improve internal efficiencies and deploy technological improvements that strengthen the lending administration function? (OK—maybe bolster your ALLL and then buy some new technology?) To put it another way, isn’t it true that the only thing worse than a debtor in bankruptcy is a debtor in bankruptcy whose lender has neither a clear title nor current insurance on the collateral?
We’ve seen clients struggling to improve the efficiency of their loan administration processes—which new technologies to adopt, how to implement them, and how to best utilize them once the implementation decision has been made. (for more on loan ancilliary systems, read “Secondary Is Primary,” GonzoBanker, May 24, 2002) One loan administration technology that is both intriguing and dangerous is document imaging. This kind of imaging is a technology loved by those who have successfully installed it, and despised by those who have experienced a poor implementation.
Why adopt document imaging?
By “document imaging” we mean “file folder” imaging, where images of 8-1/2 x 11 documents are scanned and stored electronically, instead of in large filing cabinets. So what can document imaging do for you? Lots of things—if you do it well. First and most obvious are the benefits in the lending back office. As any chief credit officer will attest, it requires significant effort to maintain good credit and collateral files. However, much of this effort can be automated, and document imaging systems are a good way to move in that direction. It is not uncommon to see personnel reductions of 50 percent to 75 percent in terms of clerical filing resources, along with significant lender and support staff productivity improvements, when it is no longer necessary to deal with physical paper.
Second, what are the are benefits to lenders? Certainly, there will always be lenders who cannot function without their own personal copy of key files (e.g. “shadow files”). While shadow files will probably always exist, the only thing better than a lender having shadow files in his or her desk is for every lender to have access to every file from their computer—home or office—knowing that they can quickly access all of them. (Yes, we can establish the appropriate security, so that only the appropriate personnel can access the files they are authorized to see.)
Third, with document imaging a copy of all files can be stored in an off-site vault daily, in case the fireproof vault ever turns out to be not so fireproof.
Fourth, everyone will be looking at current information.
Fifth, document imaging can provide significant benefits when regulators or loan review personnel must access files. We have seen examinations where the examiners spent the entire exam in a conference room, looking at loans on-line. Not one single piece of paper was handled physically. (Why do you care? They go home sooner. Why do they care? They get to go home sooner.)
Finally, document imaging systems are cheaper than large, heavy, expensive, powered filing equipment. We know of banks who have spent enough on power filing equipment to pay for a quality document imaging system several times over. If you’re in need of more file storage, it would be a serious miscalculation to buy more power files without considering document imaging first—and if your credit administration function isn’t already in the basement, it may well be down there as soon as your architect explains what the maximum load-bearing limit of the typical upper-story floor is.
Document Imaging Best Practices
It should be possible to cost-justify a document imaging system based on documented efficiencies, primarily labor savings and usually in loan administration. We have done ROI calculations with very favorable characteristics (think in terms of months, not years, for a full return of your investment) for loan document imaging systems. Cost-justification is harder to do when there are lots of consumer files (mortgages, cars, etc.) because there’s little in the way of measurable labor savings from retrieving/re-filing.
Did you notice that I didn’t mention COLD imaging or check imaging? The functionality needed to image a loan credit file includes: many 8-1/2 x 11” documents, in color, with the ability to update each document while retaining the prior versions of images. These capabilities are quite different from the functionality needed to image hundreds of thousands of checks per month: no color, we never replace an image of a check with an updated image of the same check, and images are used only for historical and research purposes once statements have been rendered. And THAT technology is quite different from the technology needed to create images of stock paper reports, which are created daily, in page number sequence, with the same report names, and which have little or no graphic capabilities as is needed in a COLD system. Signature card imaging is different still: while it somewhat resembles document imaging, most modern check imaging systems also include signature verification/comparison functionality, along with sophisticated fraud detection features, that are unlike either document imaging, COLD storage, or check imaging technology.
There are some very nice imaging systems available, some of which can passably perform almost all of these different purposes, but most systems are strong in just one or two areas. Use the right tool for the right job—and do loan document imaging first, because it should have favorable payback characteristics and it will strengthen your loan administration procedures against the day when credit quality trumps all other considerations in bankers’ minds.