Community banks should consider in-house check printing as a way to increase fee income, enhance customer service, provide a unique product and strengthen brand identity.

In-house printing can also be a valuable tool for differentiating your institution from larger banks.

Differentiation

has always been great in theory, but tougher in execution. Banks basically more similar than dissimilar. Can community banks differentiate themselves from larger banks based on price? This often is a futile if not self-destructive practice, although not always. What about differentiation through service excellence? Certainly, but few are not trying to do this. Clearly the challenge in differentiation through service is providing services your competitors cannot or will not provide. How about differentiation of products? Are there products community banks can offer that larger banks don't have and won't offer? Absolutely. Differentiation through price, service and product is attainable by community banks if they leverage their size advantage.

Community banks, by virtue of their size, have a distinct advantage over their large bank competition. As Johnathan D. Holtaway states in the National Banking Report: "There is no question size counts, but it is equally obvious that excessive size can dampen creativity and create inefficiencies to the extent that some very large companies become competitive dinosaurs. Also becoming increasingly evident are some of the advantages of specialization over a more conglomerate approach to the delivery of financial services."

Differentiation from large banks can be achieved when community banks leverage their size advantage to develop niche products and services. Community banks need to become "financial boutiques," acutely sensitive to the particular needs of their defined customer base. In-house check printing can be a powerful branding tool for marketing a community bank's defined niche.

Since the demand for checks will continue to be strong in the foreseeable future, community banks will continue to need a supplier of checks for their checking customers. Most banks today contract with an off-site vendor for check printing. A small, but growing number of banks are choosing to print customer checks in-house. While both options are viable, in-house check printing has unique advantages community banks should not ignore.

Marketing advantages

The current technology that allows banks to produce top-quality magnetic-ink-character- recognition (MICR) encoded checks was developed in 1994 by Professional Check Systems as a method for banks to increase fee income and enhance service without passing on higher fees to customers. Significant advancements in technology have occurred since the introduction of in-house check printing, allowing banks to produce customer checks, loan coupon books, receipts, cashier's checks and tickets.

Professional Check Systems (part of Harland Financial Solutions) and ACOM Solutions are two large manufacturers of in-house check printing equipment. Both systems include a laser printer with MICR toner, cutter, binding system, software and supplies. Both systems are compact and can easily be operated by anyone who can run basic computer programs and a laser printer, and many banks operate their systems using existing personnel.

In-house check printing enables community banks to offer customers a highly visible service with many marketing advantages. These include:

* Custom check designs. In-house check printing makes it financially possible for small banks to offer custom check styles. In the past to offer custom styles through a third-party vendor, banks typically had to guarantee 4,000 to 8,000 orders per custom-style each year. With in-house checks, banks offer as many custom designs as they wish. By developing a "corporate check" and offering it as the lowest price check-style, the bank sends thousands of bank branding ads throughout their communities. Other designs can be developed featuring team mascots, local landmarks and local organizations.

* Customer service advantages.

* Quicker delivery. Checks printed in-house can travel from order to delivery in a matter of minutes. Imagine the satisfaction and surprise when customers completely out of checks are told to sit down and have a cup of coffee, their new checks can be made for them while they wait! The customer receives incredible service, and the bank actually saves money on postage. Same-day service may not be possible for banks with multiple locations, but a 48-hour turnaround is common.

* Added security. Branch pickup of check orders will increase customer security and branch traffic and is a component in increasing customer service through in-house check printing. Important account information is never sent through the mail. Since check orders are easily recognizable, they are subject to theft. Customers will appreciate the added security branch pickup of check orders provides; bankers will appreciate the additional opportunities to cross-sell other bank products and service. Banks still have the option to mail orders to customers who cannot pick up their orders. Postage costs can be added to the check costs so there is no additional cost to the bank.

* Unlimited customization. With third-party vendors, logos, fonts, bylines and monograms are limited and costly. With in-house check printing, any logo or monogram can be scanned and easily added to a customer's check. Eight standard fonts are available, instead of the usual four to six. Bylines are completely customizable and can be two lines. The second line can be used for two or three signature checks. Not only are banks able to provide greater service through these added features, they control the price. With costs at virtually zero for these features, any markup is nearly 100 percent profit. Or they can be added as additional services to customers.

* Quickly and professionally produced loan coupons. The lending department can increase customer service by using the in-house check printing system to produce loan coupons. These can be presented to the customer within days of the loan closing for a cost of around 65 cents.

* Free checking programs. Lower check costs can ease the deployment of new checking products such as senior checking or "relationship" checking. Such products often offer free checks when a certain relationship with the bank is maintained.

Income potential

The fee income potential for banks implementing in-house check printing varies by size of bank, volume of check orders and strategic goals for the bank. On average, it will cost banks $5.50 to produce an orderer wallet checks and $7 to produce an order of duplicates. Banks with higher volumes will also have to figure in additional labor costs; banks with lower volumes will generally be able to utilize existing employees during slow times.

Initial investment of check-printing equipment can run between $12,000 and $75,000, depending on volume needed and features desired. A $250 million bank, processing 10,000 check orders per year with a modest markup of $5 per order would net $50,000. Additional fees for specialty cuts and bylines plus the reduction of costs for providing "free" or "club" checks, loan coupons and internal tickets and receipts can double the cost benefit. The actual cost benefit is controlled by the bank and based on its strategy.

The customer service strategy

Banks that have implemented in-house check printing systems to increase customer service have often priced their checks to break even, passing the savings on to their customers. Logos and other custom features are also often offered at no cost. The low prices and the quick delivery strengthen relationships with their existing customers and attract new accounts to the bank. A $171 million financial institution in Florida reports, "Increased fee income was definitely not the main issue ... as long as this breaks even, we are way ahead."

The increased fee-income strategy

Bank that have implemented in-house printing to increase fee income are still able to price their product competitively and meet or exceed their revenue goals. In addition to income from markup on checks, in-house check printing positively impacts the bottom line by reducing costs for "free" checks, loan coupon books, receipts and teller tickets. The president of a $200 million financial institution reports, "Our payback was much quicker than the financial analysis had indicated." Banks can realize additional income by providing check printing for other financial institutions. This works well for banks that share ownership or for banks that provide other services to smaller banks.

A niche for your bank

Finding a market niche that differentiates banks from their competition and increasing fee income in a financial world of narrowing margins continues to be challenging for community banks. Studies show that checks continue to be the overwhelming choice for consumer payments for the majority of Americans. Use of checks remains strongest in the Midwest and in rural areas. Banks will continue to need a check printing source for its customers for the foreseeable future. Third-party check printers continue to provide a simple and widely accepted option for bank check-printing needs. All these companies have diversified and offer other financial products. Channel conflict exists as some third-party vendors offer discount checks directly to the customer and compete with the same banks they partner with. As check use continues to diminish, lower industry volumes and lower bank volumes may result in even fewer choices from third-party vendors and higher prices for bank customers.

In-house check printing is a financial product that can help community banks develop a banking niche through increased customer service, reduced customer costs and increased brand awareness. It also offers increased revenue through expanded fee income and greater chances for cross-selling through increased lobby traffic. In-house check printing, though far from a traditional bank operation, is a compelling option for community banks.

To Read the Full Version of This or Other School of Bank Marketing Papers ...

This article was excerpted from Tamara Bredeson's paper entitled, "Investigating the Benefits of In-House Check Printing for Community Banks," that was prepared for the ABA School of Bank Marketing and Management (SOBMM). This paper is one of a selected number of SOBMM papers that, as a benefit to members of the ABA Marketing Network, are available to members free of charge. Members who want to download a copy of this or other selected papers can go to the Marketing Network website, aba.com/marketing network.

In addition, other SOBMM papers are available in printed form for a fee. Go the Marketing Network website to see a list of available papers and their product numbers. The charge for each printed paper is $49 for ABA member banks and $79 for nonmember banks. To order, telephone ABA by calling (800) BANKERS and ask for the paper by title and product number.

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Tamara Bredeson, CFMP, is the marketing and sales director at Border State Bank, Baudette, Minn. She is a 2004 graduate of the ABA School of Bank Marketing and Management.