Why Small Business RDC Matters

Why Small Business RDC Matters

Celent recently completed the analysis of some small business research among a random sampling of 500+ small business owners with annual revenues up to $2.5 million. The universe of U.S. SMBs excluding those making less than $50k/year is roughly 25 million.

smb-distribution

The research underscored the centrality of check payments among small businesses – like it or not. For example, 90% of responding SMBs accepted checks compared to 70% accepting cash, 33% credit cards, 31% debit and 28% PayPal (with large variations depending on type of business). And when asked “If you could be paid the same way each time by every customer –how would you choose to be paid?” Check (38%) and cash (33%) were the two favorites. This will change over time, of course, but for the mid-term, checks will remain commonplace among SMBs.

All these checks are producing a good deal of branch activity. In the same survey, businesses were asked how often they made check deposits and how many checks were in each deposit. The results were logical – the larger the SMB, the larger the average check deposit and the more frequently they deposited. smb-deposit-frequency About two-thirds of all SMBs in the sample had less than five checks per deposit, making them suitable candidates for low-cost remote deposit capture (RDC) solutions. smb-checks-per-deposit Why is small business RDC important? At least two reasons. Approximately 20 million small businesses are accepting checks on a regular basis and depositing them at local branches and ATMs. RDC represents an obvious convenience for these businesses. The second reason is the favorable impact RDC can have on branch traffic and the resulting cost to serve these customers. Using the surveyed deposit frequency shown above, the collective activity amounts to 3.6 billion bank deposits annually. Assuming these deposits were distributed equally among the nation’s 119,000 bank and credit union branches, each branch could see 30,400 fewer deposits annually if SMBs were enrolled in RDC en masse. That averages 117 branch deposits per day, or roughly a single teller per branch based on a teller efficiency of 18 transactions per hour. Larger banks that serve the majority of small businesses would enjoy the bulk of the savings. Financial institutions would do well to leverage RDC’s popularity by offering desktop and mobile RDC freely to small volume depositors, and aggressively selling more capable solutions to the third of SMBs with more substantial check deposit volumes. This needs to happen alongside realistic RDC risk assessments and a corresponding broadening of eligibility requirements and raising of deposit limits. Otherwise, RDC will remain a niche product that under delivers customer needs as well as product revenues.

Why Wholesale Lockbox Belongs in the Headlines

Why Wholesale Lockbox Belongs in the Headlines
The American Banker published an unlikely article this morning. In its article written by Jackie Stuart, Maryland Bank to Use Wausau Lockbox Service, the article waxed eloquent about the benefits Sandy Spring Bank will realize with its outsourced wholesale lockbox solution. Really – wholesale lockbox making headlines? A 50 year-old product? I was encouraged to see the article for two reasons. Wholesale lockbox (WLBX) is traditionally associated with the largest banks. Sandy Spring Bank is a $3.7 billion asset financial institution. Not long ago, wholesale lockbox would be a rarity among banks of that size. Image workflow and check truncation changed all that. Now, a number of solution providers offer flexibly outsourced solutions making a wholesale lockbox product offering viable for small banks. Observing this opportunity, all leading remittance processing software platform vendors now offer outsourcing services. After all these years, the market opportunity for wholesale lockbox services remains significant. While the majority of large corporations already use bank WLBX services, WLBX adoption falls markedly with the size of business – particularly among businesses with annual revenues below US$250 million. wlbx-oppty Processing efficiencies from image workflows and hub and spoke processing models enable lower price points than a short while ago. Moreover, since extraction and image capture can be geographically separated from lockbox processing, competition among outsource processors knows no geographic bounds either. This is good news for banks and fits well with the idea of WLBX adoption moving down market. With checks likely to dominate business-to-business payments for the medium term and WLBX is here to stay.

10 Reasons Check Volumes will Hasten their Decline in the US

10 Reasons Check Volumes will Hasten their Decline in the US
It’s certainly no news flash that US check volumes have been declining. Depending on whom you talk to 5% to 7% annual rates of decline (checks written) over the past few years seems likely. Another Federal Reserve check study is in the works this year to add precision since it has been since 2007 since the last data point. That Federal Reserve sponsored study concluded there were approximately 33 billion checks written in the US in 2006, down from nearly 38 billion in 2003. But what will the future hold? The tendency is to assume past performance is a good predictor of future results. In other words, many expect this rate of decline to continue. Here are ten reasons to suggest that won’t be the case. 1. CashEdge (www.cashedge.com) Perhaps best know for its online account opening capabilities, CashEdge has launched P2P payment products Popmoney and a suite of small business payment products. 2. Boku (www.boku.com) Boku is a relatively new player in the mobile payment arena. Its focus is on the payment of virtual goods and offers flexible pricing models tailored to micro payments. 3. FreshBooks (www.freshbooks.com) Boasting over 800,000 users, Freshbooks is a web based IBPP solution targeted to small businesses. It makes online invoice creation, presentment, tracking and reconciliation incredibly easy. Not surprisingly, payments aren’t by check. PayPal is a favorite option. 4. PaySimple (www.paysimple.com) is an alternative web based utility for small business bill presentment and payment. The application is payment system agnostic, supporting electronic check (ACH), direct debit and credit cards. 5. iPay Technologies (www.ipaytechnologies.com) is an online bill payment solution provider targeting community financial institutions. Its efforts are bringing check payment cannibalizing services to 3,700 community banks and offers solutions for both consumers and small businesses. 6. IP Commerce (www.ipcommerce.com) provides a “managed commerce services platform”. Its aim is to provide a platform for rapid development of commerce enabled applications. Said simply, IP Commerce is accelerating the development and deployment of electronic payment alternatives. 7. Mopay (www.mopay.com) is the Mobile Messaging and Payment unit of MindMatics AG. Unlike Boku, Mopay is a B2B enabler, with coverage in over 60 countries. 8. Square (www.squareup.com) Hype aside, Square’s aim is to increase the incidence of credit card acceptance by marrying an extremely easy acquiring process with tiny card readers that plug into the audio jack of any iPad, iPhone or Android device. Square’s micro business target market is known for its reliance on cash and check payments. 9. Vendorin (www.vendorin.com) is a trading partner network built to facilitate the easy opt-in for electronic payments. It vastly simplifies the challenge of migrating from paper to electronic B2B remittances. 10. PayPal (www.paypal.com) is the household name in our list. Once primarily associated with eBay, PayPal is quickly becoming a force in B2B payments. Its PayPal Mobile iPhone P2P application enjoyed more than 1 million downloads in its first three weeks. And, this is by no means the end of the list. Said simply, viable alternatives to check and cash payments are multiplying – at an astonishing rate. There has been activity in the B2B financial supply chain space for some time. Now, there are more options there than ever before, and it is becoming easier for smaller businesses to enroll than with earlier incarnations. Mobile payments, particularly P2P, are hot now with banks by the hundreds implementing solutions to adorn mobile banking platforms with P2P payments capability. I wouldn’t be surprised to learn of check volume declines of the order of 10% to 20% per year over the next few years given the accelerating activity among alternative. This would be roughly three times the historic rate of decline.

The End of Checks in the US?

The End of Checks in the US?
In December, the UK Payments Council announced a 2018 target date for closing all cheque clearing operations in the UK. With some alarm, a few clients have asked Celent if the Council’s actions might signal similar forthcoming action in the US. And, if so, what are the implications? This post makes several observations. The UK Payments Council correctly notes that “cheque use is in long-term, terminal decline”. Having peaked in 1990, check volume has declined some 40% over the past five years. Thus, the Council’s decision amounts to taking a proactive stance toward hastening the decline in checque usage – a decline already in its 20th year. It aims to seek voluntary actions among financial institutions to provide modern (electronic) payment alternatives and to educate both consumers and businesses in the process. And, the Council’s decision isn’t definitive. 2018 is a simply target date, with thorough analysis ahead before anyone “pulls the plug”. So, what about the US? First, a little perspective. Check usage is in decline throughout all developed economies, with differences in the start and rate of decline. The figure below compares annual check dollar value (versus GDP) alongside the percent electronification of non-cash payments across multiple countries. Over the time period analyzed, the US and Canada had the highest relative check dollar volume. The US is well behind the UK – at least a decade – in overall usage and rates of decline. So, if the UK Payments Council initiative is to be replicated in the US, a target sunset date of 2028 might be a comparable starting point. Don’t hold your breath in other words! check-decline1 In addition to being a full decade behind the UK, the situation in the US is different along multiple dimensions. Here are a few: o The UK is a much smaller payment system with comparably few banks. It is fundamentally easier to get 12 UK clearing banks to agree than 8,000+ US banks and a roughly equivalent number of credit unions. o The UK already had a highly concentrated processing infrastructure in its’ Intelligent Payment Systems Limited (IPSL) entity. Not so in the US. While operational consolidation is well underway, there is a comparatively long way to go. Such consolidation is an inevitable economic result of the unit volume decline. o The UK had no Check 21 equivalent. It uses a rough equivalent of Electronic Check Presentment (ECP) called Interbank Data Exchange, or IBDE. The IBDE was set up by the 12 UK clearing banks in 1996 as a system to electronically exchange cheques and clearing balances, but the original items still travel physically from collecting to paying banks. Thus, the pain of declining check volume is likely greater in the UK since physical processing remains a requirement. Checks are dying a natural death in the US. Financial institutions would do well to invest in long-term care for checks through image infrastructure, widespread distributed capture and electronic statements. It’s too early to be shopping for headstones just yet. More information about the UK Payments Council can be found at: http://www.paymentscouncil.org.uk/