The Bank of New York Mellon continues its leadership role in adopting automated technology

“ IBM Payments Director enables us to take physical processes that were supported by our legacy check system and bring them ‘above the line’ by making them services- oriented... This greatly strengthens our ability to adapt and meet new opportunities.” — Louis Arkenau, VP of Image Initiatives, The Bank of New York Mellon

Established in 2007 from the merger of Mellon Financial Corporation and The Bank of New York Company, Inc., The Bank of New York Mellon is a leading asset management and securities services company, uniquely focused to help clients manage and move their financial assets and succeed in the rapidly changing global marketplace. Headquartered in New York, The Bank of New York Mellon has more than $20 trillion in assets under custody or administration and more than $1 trillion under management.

Business Challenge
As one of the early adopters of check imaging, even before Check 21 spurred many banks into action, The Bank of New York Mellon resolved to adopt digital check clearing. It sought a solution that would fully leverage its existing check processing infrastructure, while enabling the operational flexibility the bank needed to adapt to a fast-changing market.

Solution
Using IBM Payments Director and middleware technology, The Bank of New York Mellon deployed a new SOA-based electronic check processing system by service-enabling existing assets, thus allowing the bank to easily extend the system to its banking partners and deploy new payment services rapidly

Business Benefits

• Up to 90 percent reduction in manual touch points in the check clearing process
• Greater than 50 percent reduction in time required to integrate new banks into the check clearing exchange network
• Reduction in processing errors and required remediation
• Improved flexibility to introduce new payment services via SOA
• Faster integration with acquired banks’ check clearing systems

Why it matters
Moving from the manual processing of paper checks to an automated, image-based process enabled The Bank of New York Mellon to streamline its operations, while at the same time providing a source of new value-added payments services, bringing a new level of operational excellence. The fact that the solution was deployed within SOA enables the bank to develop and bring these new services—like check clearing in ACH and least-cost routing services—to market more rapidly and profitably.

Key Components
Software

• IBM Check Processing Control System
• IBM Payments Director
• IBM WebSphere Message Broker
• IBM WebSphere MQ
• IBM DB2
• IBM CICS

Servers

• IBM System z

Services

• IBM Sales and Distribution

Timeframe

• Design and Implementation: 9 months

With technology permeating nearly every aspect of commercial life, the traditional check clearing process—in which customers receive their original, physical checks along with their banking statement—held on for a surprisingly long time. By now, however, many consumers are beginning to notice that instead of a stack of checks, they’re receiving a smaller and more orderly deck of printed images that they can also view online. Accustomed to a steady flow of conveniences such as online banking, these customers see check imaging as the latest in a long string of innovations enabled by technology. But in reality, it reflects the confluence of a complex series of driving forces, important decisions on the part of banks and evolution in the technology itself.

Paper trail
Historically, for a receiving bank to clear a check, it would have to physically transport the paper check to the issuer’s bank. Before this can happen, though, the receiving bank needed to run the check—along with thousands of others every day—through mechanical sorters, which group the checks into bundles based on issuing bank. Using a courier, each of these bundles would then be sent to the appropriate bank along with a “cash letter,” which lists the amounts and instructions for transmittal to other banks. While less than efficient, physical check processing remained in place for two reasons: first, because it worked, and second, because replacing it would be costly and complex. It took the 9/11 terrorist attacks—which shut down air transport and kept billions of dollars worth of checks from clearing—to show that physical check processing represented a potential Achilles’ heel to the entire economy, and that a catalyst for change was required.

Two years later, Congress passed the Check Clearing for the 21st Century Act, better known as “Check 21,” which enables banks receiving paper checks to create and process digital versions of them—thus eliminating the need for further physical transport and handling of physical checks. By dramatically altering the regulatory landscape, Check 21 fully opened the digital door for banks, but another important incentive for banks to change their processes was already at work. With more and more consumers paying via credit and debit cards and more banks offering online bill payment, the volume of checks processed by banks has been declining, causing the unit processing cost per check to rise proportionally. Even before this confluence of events, however, The Bank of New York Mellon (www.bnymellon.com) saw that the future of banking required automation, and so beginning in 1994 it began the process of converting its traditional check clearing process into an automated process that utilized images of checks, not the physical checks. The bank chose IBM, on whose Check Processing Control System (CPCS) the bank had long relied for its traditional check clearing process, to help them convert to check imaging.

Electronic check processing solutions are comprised of components that address each phase of the check clearing process. One component needs to address the actual capture and storage of the check image. Another needs to enable the so-called “day-one” processes that take place after image capture within the bank’s back office operations. Yet another needs to support the bank’s subsequent “day-two” processes, which address exception items, such as illegible checks and overdrafts. While The Bank of New York Mellon’s decision to use the IBM Payments Director solution would have a major role in shaping its future electronic processing capabilities, its choice of a broader architecture strategy—that is, how and where to deploy it within its existing infrastructure—would prove equally significant.

Dynamism demands flexibility
The bank’s existing IBM CPCS solution had, for a long time, delivered exceptional reliability and performance running within IBM CICS® on an IBM System z® server. However, the process changes inherent in electronic check clearing dictated a new set of IT requirements centered on flexibility, since the need to support change was essential. As The Bank of New York Mellon formed new correspondent banking relationships, for instance, the new system needed the flexibility to rapidly, seamlessly and cost effectively integrate them into the process flow. Another source of dynamism was the demand for new services in the payments area, such as check clearing in Automated Clearing House (ACH) and least-cost routing services offered to banks, which provides new revenue streams and enhances the bank’s ability to differentiate through value-added services. To effectively capitalize on these opportunities, the bank would need the ability to adapt or repurpose key elements of the solution without the major development and integration requirements that make such changes costly and time-consuming. For these reasons, it was essential that the bank follow a different approach than traditional mainframe deployments. It saw SOA as the answer.

Because many processes within IBM Payments Director are built around SOA, the bank was able to deploy the solution in a way that effectively turns key check-clearing functions into services that are invoked in the course of the process flow. One such component is IBM Payments Director Gateway, which serves as the front end of the system and the means by which transaction information and messages are directed to and from the core CPCS solution on the System z (where they are stored in an IBM DB2® database). Among these messages are “electronic cash letters,” which previously had been delivered in paper form. IBM WebSphere® MQ provides the core messaging functionality within this SOA framework. To further strengthen the solution’s SOA properties the bank is also deploying IBM WebSphere Message Broker as an enterprise service bus that will connect the solution’s key components and provide an environment for future SOA integration.

Louis Arkenau, VP of Image Initiatives, sees IBM Payments Director’s support for SOA as providing the bank with a new level of flexibility to optimize its key processes. “IBM Payments Director enables us to take physical processes that were supported by our legacy check system and bring them ‘above the line’ by making them services-oriented and disconnecting them from legacy hardware and legacy mainframe processes,” says Arkenau. “This greatly strengthens our ability to adapt and meet new opportunities.”

Straight through error correction
The most immediate benefit of the new system is its dramatic impact on the efficiency of the bank’s check clearing operation. Under the previous system, a check could be touched by human hands many times over the course of the entire process, with each touch point representing a chance to mishandle the check. In such a case, the check would need to be returned through a laborious, time-consuming process. Since the Bank had long been imaging checks, the Payments Director solution allows for “truncated” checks which are incorporated into an automated workflow that cuts the number of touch points by up to 90 percent, bringing the bank closer to the much sought-after goal of straight-through processing.

Going forward, Arkenau believes that the flexibility enabled by IBM Payments Director will also strengthen the bank’s ability to address its most pressing challenges, including the operational demands of rapid growth, the need to efficiently integrate newly acquired banks and the need to seize fast-moving opportunities.

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