The Bank of New York Melloncontinues its leadership role inadopting automated technology

Innovation that matters

Overview

■ 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 lever-

age its existing check process-

ing 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.

■ Key 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 intro-

duce new payment services

via SOA

“ IBM PaymentsDirector enables us totake physical processesthat were supported byour legacy checksystem and bring them‘above the line’ bymaking them services-oriented... This greatlystrengthens our abilityto adapt and meet newopportunities.”— Louis Arkenau, VP of Image

Initiatives, The Bank of NewYork 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 rapidlychanging 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.

Reshaping the banking back-office with end-to-end electronic check clearing

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 evo-

lution in the technology itself.

Paper trail

Historically, for a receiving bank to clear a check, it would have to physically trans-

port 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 sec-

ond, 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 cre-

ate and process digital versions of them—thus eliminating the need for further

physical transport and handling of physical checks. By dramatically altering the reg-

ulatory 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.

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

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, seam-

lessly 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 oppor-

tunities, 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.

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.

Solution 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

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 effi-

ciency 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 auto-

mated 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 chal-

lenges, including the operational demands of rapid growth, the need to efficiently

integrate newly acquired banks and the need to seize fast-moving opportunities.

For more information

Contact your IBM sales representative or IBM Business Partner.

Visit us at:

ibm.com/innovation

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