Figure 1 – RDC’s Impact on Branch Traffic, December 2007We’re not prophesying the end of branch banking. Rather, we’re suggesting that some amount of branch infrastructure reengineering is a likely prerequisite to enjoying a respectable return on investment in mobile RDC. Many banks already are grappling with declining branch profitability. Fixing that problem will likely be costly and protracted. Branch closures may stop the hemorrhaging, but systemic redesign is needed. In this context, a successful consumer RDC launch would exacerbate the pain already being felt and hasten the need for the really big task of branch redesign. This makes FFIEC compliance looks easy by comparison. RDC (mobile or otherwise) is, after all, a customer self-service channel. Unlike other self-service channels that have largely added customer transactions (yet with great benefit), RDC eliminates trips to the branch by definition. Check transactions remain the #1 reason banks have tellers. Mobile/consumer RDC could change that in a big way. That may be the big reason for hesitation at some banks.
August 11, 2009 by 5 Comments
Now that the dust has settled on remote deposit capture, RDC, for commercial customers, a relatively small number of financial institutions are looking towards measured expansion of the technology to include wealth management, micro business and private banking clients. Some even contemplate making RDC available to a broad consumer base using suitably equipped mobile phones as the image capture device (a.k.a. Mobile RDC). Yet compared to the meteoric adoption of commercial RDC, this subsequent market expansion is moving at a snails pace. What’s the hold up? More specifically, beyond a handful of financial institution pilots, why have so few banks launched initiatives? The most commonly cited adoption barrier is risk. In particular, some argue, the risk of users depositing the same item more than once. In addition, the FFIEC guidance, Risk Management of Remote Deposit Capture, January 2009, admonishes financial institutions to undertake careful risk mitigation and controls when deploying RDC, including determining which customers are suitable for RDC, training them appropriately, and developing appropriate systems monitoring and reporting capability. Some financial institutions have concluded that attaining all these requirements amidst serving a customer base as potentially vast as the consumer or small business market is untenable – or at least more trouble than it might be worth. Given the state of things in financial services, who could fault a financial institution for being risk adverse? Yet, something tells me that risk is only part of the story – or worse, a convenient justification for inaction. The larger challenge for financial institutions contemplating adopting mobile RDC is what to do with all their branches. Over eighteen months ago, Celent surveyed over 150 commercial RDC deploying financial institutions and found that even then, in RDC’s formative years, a third of banks experienced a significant reduction in branch transaction volume as a direct result of RDC (Figure 1). Since that survey fielded, total RDC client adoption has more than doubled, displacing more branch traffic. A significant small business or consumer RDC initiative would have a more profound impact.
July 24, 2009 by Leave a Comment
Pitney Bowes and Jack Henry & Associates (JHA) have teamed up to offer remote deposit capture (RDC) to small businesses. JHA’s ProfitStars division is providing the solution. The relationship was announced in May. E-mail marketing has begun among Pitney Bowes installed base of postal meter customers. The bank-neutral solution branded Click Deposit provides bundled scanner fulfillment support and processing for a monthly fee starting at $39.95. The lowest cost option supports up to 150 checks per month. Businesses having higher check volumes would be invited to join at higher monthly rates – as high as $149.95 with several options in between. All plans require a 3-year commitment which includes leasing the Panini MyVisionX-30 scanner. The solution optionally provides an AR extract suitable for QuickBooks users. Click Deposit customers enter a merchant processing services agreement with JHA which is, of course, riddled with mention of Check-21 and ACH terms that perhaps one in ten thousand small businesses would understand. JHA underwrites each merchant and assumes the associated deposit risk. Funds availability is not specified in the agreement, only that funds may be delayed at JHA’s discretion. Merchants are liable for fraud, loss due to duplicate presentment, NSF and proper safeguarding of original items once scanned per the agreement. All reasonable terms in our opinion. In part, the agreement is lengthy because deposits are processed using both Check-21 and ACH rails. All deposits are aggregated at one or more presentment banks that clear items using image exchange. Individual DDAs at the multiple banks of first deposit are then credited using the ACH. Celent finds Click Deposit a solid service and a logical extension to Pitney Bowes existing solutions on terms that are currently competitive to what most banks are providing. The big difference between Click Deposit and individual bank solutions (beyond the incidental use of the ACH) is that Pitney Bowes is actually selling the product. It will, no doubt, enjoy this advantage for some time as most banks remain slow to introduce remote deposit capture to the small business segment. Longer-term, Celent expects competitive offers at lower monthly pricing utilizing less capable (and expensive) scanners aimed at small businesses with low check volumes. As the market matures, low total solution cost and access to efficient distribution channels will be of growing importance. In the absolute, Celent finds this a significant initiative. Pitney Bowes enjoys a large installed base and support infrastructure well-suited for Click Deposit. Banks that have not yet awakened from their slumber need to realize that the market is not standing still. Despite the troubling economy, a number of new, bank-neutral solutions are close aboard.
June 26, 2009 by Leave a Comment
“A Different Kind of Bank: Why you’ll Never Need a Branch Again” was the title of last evening’s USAA Webinar merchandizing its mobile banking initiative. USAA was the first bank that we’re aware of to deploy remote deposit capture to consumers in any meaningful scale. With three years under its belt, USAA now supports well over 150 thousand active users on its Deposit@Home product. For perspective, this is more than ten times the number of RDC clients of any other US bank. Now, it’s at it again – this time, enabling mobile banking users to deposit checks using suitably equipped mobile phones. Scoffers are quick to point out that USAA is an anomaly. Indeed it is. USAA Federal Savings Bank serves 5+ million members – all from a single branch in San Antonio. Well, not exactly. The bank happens to have a single branch in San Antonio. Obviously then, USAA cannot rely on its branch network as many banks do to serve its customer base. With assets of $35b (March 2009) and nearly triple the industry average deposit growth over the past three years, USAA appears to be doing just fine without an expensive branch infrastructure. Its transaction mix is rather unlike most banks. Already, USAA has over 1 million mobile banking users, and the service is barely eighteen months old. USAA’s ambition with its mobile banking and mobile deposit service is simple- to make it convenient for its members to bank with USAA whenever and however they wish. Hmmm, that sentiment sounds remarkably similar to that offered by a large number of what we might call traditional retail banks also investing in self-service delivery channels. Observing USAA’s initiative begs the question; will mobile remote deposit capture become broadly adopted by retail banks just as internet and mobile banking has? Mobile RDC is both a great concept and an operationally sound approach – at least the Mitek powered solution is. It represents a powerful way to migrate significant transaction volume from branches to a low-cost self-service channel. In our research, Celent found that nearly 90% of teller transactions involve checks, and a full third are simple check deposits. Why not empower consumers to deposit checks themselves at a fraction of the cost of teller transactions?
We think most banks will pass on the idea. Why? Because mobile RDC is disruptive. It may delight millions of consumers, but it also would challenge the status quo among retail operations organizations, forcing rapid change in ways few banks may be prepared to embrace. USAA doesn’t have this problem. Over a short period of time, USAA has transformed what was once a significant competitive disadvantage (no branches) into a compelling competitive advantage. Its membership and deposit growth proves it. Retail banks need to pay attention.
June 10, 2009 by Leave a Comment
NACHA and the ACH have been on a roll for most of the decade, posting impressive network transaction growth rates year after year. From 2000 through 2008, total ACH volume (network + off-network) has almost tripled from 6.9 billion to 18 billion transactions. But from our perspective, the Glory days are nearing an end. This can be seen in the recently released Q1 2009 network volume statistics, with total network volume up just 1.9% versus year ago. Prior to the invention of check conversion SECs (ARC, BOC, POP, RCK, TEL and WEB), the ACH was used almost exclusively for recurring transactions. Indeed, it was designed specifically for this purpose. Network volume was dominated by cash concentration activity and prepaid credits (direct deposit of pay checks) and debits (recurring bill payments). But after years of promotion, the growth engine slowed to an idle. Then came check conversion, beginning with POP introduced in 1999. The collective check conversion introductions have produced impressive results. Through 2008, check conversion activity accounted for 38% of total network volume (32% of total ACH volume), up from just 6% in 2002. Same-Day ACH: Whose Interests Would be Served?For the multiplicity of eCheck SECs, the vast majority of check conversion volume has come from ARC and WEB. ARC was adopted by a significant number of large billers and retail lockbox operators because, at the time, ARC offered compelling savings versus paper check clearing methods. WEB has been propelled by PayPal transaction activity, with significant growth over the past two years in particular. But, what lies ahead for check conversion? We see growth, but a far cry from the glory days gone by. In large measure, this is a direct result of the inexorable decline in consumer check writing. There are at least two additional factors. • Electronic bill pay will likely continue to grow at 5% to 7% annually for the next few years, but a good portion of that growth will cannibalize ARC volume as electronic initiated payments displace ARC conversions of mailed remittance. • Even though POP and BOC will see continued adoption by retailers, the resulting ACH volume will be unimpressive. This likely outcome is perhaps why NACHA and the network operators have begun merchandizing same-day ACH. We provided a position on that initiative in an earlier post,
May 18, 2009 by 2 Comments
Most everyone knows that the Federal Reserve announced recently that it would launch a same-day ACH settlement option to be available in the second quarter of 2010. The service enhancement would be offered optionally, would require opt-in, and would carry ostensibly higher pricing to the originating bank (ODFI) to compensate the RDFI for the accelerated debiting of funds – although the pricing plan was not announced. The accelerated clearing option would be available only for select debit transactions, eChecks, but would not be offered for ACH credit transactions – at least not initially. Some debate surrounds the specific mechanisms surrounding same-day settlement of what for years was a future dated transaction. The Federal Reserve unveiled its plan which some argue unduly favors ODFIs. Meanwhile, a number of industry executives advocate an alternative appearing to offer a stronger value proposition to receiving FIs. The latter proposal, known as the “NACHA concept”, would destroy a longstanding ACH system attribute; float neutrality. The result would look remarkably like today’s check clearing system. The Federal Reserve’s proposed initiative appears adequately researched to us, and meets the stated objective just fine. Why the controversy? A larger question is this: Whose interest is same-day ACH supposed to be serving here? What hitherto unmet need is being met with either of these initiatives that cannot be met with an existing, alternative payment method? Celent finds the motivation for same-day ACH suspect. The often stated driver for same-day ACH is the growing network risk of direct sends occurring among several large banks, bypassing the network and thus “robbing” network operators of coveted transaction volume and its’ resulting revenue. A network based same-day option, some argue, would thus blunt the impact of such out-of-network activity by making ACH network based services more competitive. Not likely. Those same financial institutions have been clearing checks using direct exchange for years because doing so was less costly than using clearinghouses. Similar dynamics are at work with image exchange, and they will likely remain at work with ACH. A more viable argument for same-day ACH is to help the ACH network remain competitive with image exchange. Ironic isn’t it that after a decade of trumpeting the virtues of check conversion (faster returns among them) we are witnessing such a dramatic evolution of the ACH to improve its competitive position versus check clearing mechanisms? Ironic too is that the last ten years of ACH evolution, specifically check conversion, while bolstering ACH network volume, has also increased return rates and costs associated with the added complexity the changes created. Same-day ACH will likely only make matters worse by adding additional complexity. I suspect that when the dust settles a year from now, we’ll see relatively little same-day ACH volume. That is, unless we collectively think beyond competing payment systems and their institutionalized self-interests and deliver real value to consumers. Using same-day ACH for expedited payments would be one such approach.
April 29, 2009 by Leave a Comment
On 28 April, NCR announced its integration of Mitek Systems’ ImageNet Mobile Deposit to its’ APTRA Passport imaging platform. The NCR decision follows integrations already completed by J&B Software and RDM Corporation. This was a smart move on NCR’s part in our opinion. Others are sure to follow. Mitek announced its ImagNet Mobile Deposit platform in January 2008 and followed with announcements of Blackberry support in September 2008 and Apple iPhone compatibility in October. To be sure, Mitek is pushing the envelope with remote deposit in an environment where the industry is barely adept at small business RDC using specialized check scanners and “consumer capture” is largely offered among credit unions alone. But all this is changing. In our opinion, mobile remote deposit is destined to succeed for two reasons: convenience and device ubiquity. Apple shipped 2.3m iPhones in 2007 and 13.7m in 2008. RIM boasts about 25 million BlackBerry subscribers through February 2009. The world is quickly going mobile, and mobile banking is riding the wave. Bank of America alone boasts well over a million mobile banking users (June 2008). Apart from risk concerns, why wouldn’t mobile RDC be an obvious feature for select mobile banking users? We’re not alone in expecting mobile remote deposit to catch on. In research derived from a Fiserv-sponsored online survey of roughly 300 customers in October 2008, one third of respondents see a need to offer mobile deposit capture services to their business customers. The majority of respondents indicated that businesses that sell products and services at the buyer’s location (such as home appliance repair businesses and food and beverage distributors with trucks in the field) are their primary target market for mobile deposit capture. We agree. Banks would do well to launch mobile RDC first to business clients while there may still be fee income to be had. But banks clearly aren’t rushing into mobile RDC as they had with RDC’s original incarnation. Caution is understandable, but scoffing is short sighted. Celent’s position is that viability of mobile check deposits rests on four requirements: 1. Client usability – the application must be fast, simple to use and provide reasonably consistent performance despite widely varying lighting conditions, steadiness of hands and check stock characteristics. Obviously, mobile deposits introduce greater variability in image characteristics than images captured on specialized scanners. 2. Operational viability – even the most enriching user experience would be for naught if mobile deposits wreak havoc in the back offices of deploying financial institutions. 3. Security – image and data transmissions would need to be secure. Any security vulnerabilities would prove disastrous. 4. Broad device support – part of the value proposition for mobile deposits rests on not having to invest in image capture devices. To provide some direct experience in using ImageNet Mobile Deposit, Celent requested a test account from Mitek and experimented using the authors AT&T Tilt device. Installing and learning the simple application took no longer than 15 minutes. Sample deposits were performed using a mix of personal and business checks after lining out the check codeline for security. Overall user experience was favorable – even for this novice camera phone user. And, the image analytics appear to have been up to the task. With intentional carelessness toward lighting, contrast and steadiness of hand, resulting check images appeared Check 21 ready. Mobile RDC is clearly a nascent market, and banks have lots on their hands these days. But sitting on the mobile RDC sidelines may leave banks wishing they hadn’t.
April 24, 2009 by Leave a Comment
I was one of many attending Diebold’s Integrated Services Day held on April 15 at its’ headquarters in Canton, Ohio. After 150 years of business primarily as a hardware manufacturer, Diebold last week announced that its business model is shifting away from products toward integrated services. Over the next five years, Diebold will strive to have 75 percent of its business coming from the servicing side of the business, up from roughly 50% in the current year. While not entirely unique among ATM manufacturers, Celent finds this move significant on two levels. For Diebold, the move is a smart one, with hardware sales growth increasingly challenged across the globe. NCR and Wincor Nixdorf are seeing similar dynamics. The larger attraction lies in a new business model for ATM deploying financial institutions. In today’s capital starved environment, Diebold’s move replaces significant capital expenditures with more easily obtained ongoing operating funds. Its move comes when envelope free ATMs are being deployed by a growing number of banks. Deposit automation ATMs are becoming more attractive as banks truncate checks at points of first presentment across the enterprise. In that environment, traditional envelope deposit taking ATMs – particularly remote ones – incur disproportionate servicing costs. Diebold’s move strengthens its position versus independent service operators that have comparatively little experience with the new machines. Collectively, Diebold, NCR and Wincor Nixdorf are making it easier for financial institutions to replace aging “cash dispenser” ATMs with more capable self-service devices.
April 3, 2009 by Leave a Comment
Remote deposit capture (RDC) has taken financial institutions by storm. In just over three years since its debut, more than half of all US banks have adopted solutions, along with a significant number of credit unions and retail brokerages. But this extraordinary adoption among financial institutions has thus far led to comparatively tepid client adoption. Based on multiple research efforts, we can conclude that this lopsided picture is not the result of an exaggerated view of the market opportunity. The rationale for such historically temperate sales and marketing efforts among banks is defensible in many cases. But RDC is no longer a nascent market. The time has passed for financial institutions to take a more aggressive stance. RDC: The Perfect ISO Opportunity? The credit card business isn’t what it used to be. Market growth has cooled, with stiff competition and challenging margins. Independent sales organizations (ISOs) appear more than eager for the opportunity to expand their product lines beyond card services. For ISOs, the opportunity is two-fold: cross-selling RDC to current merchants and expanding reach beyond card-heavy clients into entirely new markets within existing geographies. From a market development perspective, the scenario is close to ideal. Compared to financial institutions, ISOs appear to be in a good position to act on the opportunity. But, how is this going to work? ISOs will need to provide remote deposit capability that allows businesses the ability to maintain existing bank relationships. Ironically, that won’t likely be done using the image based processing that Check 21 envisioned. That’s because most banks aren’t ready to receive image cash letter (ICL) deposits, and those that are limit such arrangements to large volume clients because of the time-consuming file certification and management overhead involved. Instead, ISOs are likely to utilize a third party aggregator and a presentment financial institution, into which all the collective small business check deposits will be sent via image. Then, the presentment financial institution will settle with multiple banks of first deposit using ACH credits, while presenting items to paying banks via image exchange (Figure 1). In so doing, banks of first deposit maintain deposit relationships, businesses enjoy the benefits of remote deposit, presentment banks earn fee revenue, and ISOs do what they do best – sell and service clients. It might actually work. Not All Roses As attractive as RDC may be for ISOs, success won’t be a slam dunk. ISOs don’t know check payments like they know cards. Thorough training will be an imperative. Additionally, the RDC value proposition is highly varied among market segments. Many ISOs enjoy specialization, and won’t find their target market segments a good fit for RDC. Unlike merchant acquiring, RDC is not required for check acceptance. Some segments (restaurants, for example) will make lousy targets for RDC. ISOs will need to sort this out. Secondly, the processing model presents significant return item risk to presentment financial institutions. To mitigate this risk, presentment banks will wait until all funds are good before originating the ACH credit to banks of first deposit. Client funds availability will likely be delayed compared to bank direct RDC models. It’s too early to tell if this will be a factor in selling. But, the biggest risk to the success of ISO RDC delivery is the business model itself. Today’s bank direct RDC pricing leaves plenty of room for ISO profit. But, if free scanners and lower monthly maintenance fees become the norm, there may be insufficient profit opportunity left for an ISO in the middle. Will ISOs claim the RDC market as they have done with cards? It’s simply too early to tell. Many banks regret what has occurred with merchant acquiring and won’t let that happen again with RDC. But that won’t stop ISOs from getting a foothold in this large and diverse market. Some banks, those primarily seeking core deposit growth, welcome third party involvement to take care of the hardware deployment and provisioning. So what can be predicted with certainty? Just this: it’s going to be fun to watch!
March 18, 2009 by Leave a Comment
Lest there be any thought about cash going away, use of cash in the US continues to increase despite the rapid growth in the use of electronic payments. The Federal Reserve reports the dollar amount of currency in circulation has grown 88% in the past 10 years to US$770 billion in 2007 and US$889 billion in late 2008. Meanwhile, the amount of cash ordered and deposited through Federal Reserve Banks has increased 75%, to over 27 billion banknotes annually. This trend may seem reasonable in light of the US economic and population growth over the period. For perspective, per capita cash in circulation grew from US$183 in 1985 to US$2,537 in 2005 based on US Bureau of Census population estimates, or at a rate of 6% CAGR – well above the 4.2% inflation over the period. Cash usage is growing – absolutely. Meanwhile, cash usage at traditional point of sale locations has been remarkably steady alongside the dramatic growth in debit card usage. As a percentage of POS mix, cash declined from 39% in 1999 to 29% in 2008 according to recurring research by Hitachi Consulting. The data suggests debit card growth has primarily come at the expense of check usage at point of sale which has dropped from 18% to 8% over the period. There appear to be two dynamics at work. The first is our stubborn affinity for cash payments. Immigration trends as well as grey market economic activity also contribute to the sustaining popularity of cash payments for obvious reasons. Another factor has been the worsening economic conditions of late. 2008 has seen a return to an 8% CAGR of cash in circulation. The fourth quarter alone witnessed a 5.4% growth corresponding to US$45 billion in additional cash in circulation. This suggests the worsening recession impacted holiday spending, reversing the long-term trend favoring credit and debit card usage at point-of-sale. On top of that, there is clear evidence of cash hoarding as seen by the significant rise in the number of high value notes in circulation. Celent expects cash in circulation to peak in the next two years. So in addition to investments in alternative payment mechanisms, Celent encourages banks to revisit their cash logistics management systems. In many banks, there may be significant opportunity for cost savings. On the product side, a growing number of banks are being rewarded for their support of remote cash capture solutions. Remote cash capture will be the topic of a forthcoming Celent report.
March 4, 2009 by Leave a Comment
The Federal Financial Institutions Examination Council, FFIEC, issued its long-awaited guidance on remote deposit capture risk management in January 2009. In our view, the guidance provides prudent measures for financial institutions to consider as they seek to fully-leverage RDC for deposit growth and customer convenience. Importantly, the guidance contained no surprises, and did not impose fundamental limitations on what banks could do with RDC. We welcome this outcome. That said, we found two aspects of the guidance disappointing. The guidance introduces remote deposit capture as a “deposit transaction delivery system” not simply a “new service”. We couldn’t agree more. But the guidance equates all forms of distributed image capture, branch capture, teller capture, ATM capture and merchant/client capture as RDC. While all forms of distributed capture share a common technology, the risks associated with each vary considerably. The focus belongs on distributed capture taking place by untrained ordinary non-bank employees. Financial institutions have been managing check image capture for well over a decade with good success. Guidance for those operations likely weren’t sought or needed. The other troubling aspect of the guidance in our opinion is that it failed to recognize the many operational benefits of distributed capture. Arguably, the work process improvements enabled by modern image workflows can reduce risk, not elevate it. For example, instead of relying on tellers as a first defense against check fraud (e.g., 100% manual inspection) and antiquated day-2 rules-based fraud systems, RDC enables a highly automated and efficient set of deposit review and risk management tools that can be applied in near real time. Suspect items can be routed (via image) to trained operators for review well before posting. With the sensible guidance issued, banks can now breathe a sigh of relief, and get busy leveraging this immensely popular technology instead of being paralyzed by highly over stated perceived risks.