Why Smaller Banks Should offer Image Cash Letter Deposit Services

Why Smaller Banks Should offer Image Cash Letter Deposit Services
Farmers & Merchants Bank, a $2 billion-asset bank based in Long Beach, Calif., is launching an image cash letter service. The accompanying press release caught the eye of American Banker resulting in a story today on the topic, Big Check Volumes Aren’t Just for Big Banks, a Small Bank Says, written by John Adams. I was grateful to see an important (albeit not terribly exciting) topic get coverage in American Banker. This blog post serves to add some additional insight to Adam’s article, specifically, why the opportunity for image cash letter (ICL) deposit services is so large. In a previous post, I commented on why wholesale lockbox belongs in the headlines even though it has been around as a staple treasury management offering for five decades. The post emphasized that fter 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 and ICL Deposit Services are Complimentary

WLBX and ICL Deposit Services are Complimentary

The above chart shows the number of businesses by annual revenue that utilize bank WLBX services, or not. Why wouldn’t a good size company, say one with $250 million in annual revenue not use a bank for WLBX services? Because, for whatever reason, they choose to do the work internally. A significant number of these companies have their own remittance processing systems. Some are dated, but most are image equipped and are equipped to send x9.37 compliant files to a bank (or could be made to be). Lots of businesses in other words. All are ICL deposit candidates. Offering an ICL deposit capability used to be a hassle. In the early days of image exchange, there were many variations on the x9 standard going around, and accepting an image file from someone’s in-house system was easier said than done. Well, it probably still is, but not nearly as much so. Now, a bevy of solution providers offer this capability. Some offer outsourced item processing services also, making the task even easier for smaller and midsize banks. But most banks have been focused on offering RDC solutions bundled with desktop scanners, even though tens of thousands of businesses don’t want to buy RDC – they already have scanners. As a result, a minority of U.S. banks offer ICL deposit services. And, the smaller the bank, the less likely ICL services are offered. icl-deposit Hungry for fee revenue? Opportunity knocks!

Do Recent Announcements Bode Well for Same-Day ACH? Color me unconvinced.

Do Recent Announcements Bode Well for Same-Day ACH? Color me unconvinced.

Earlier this month Aptys Solutions announced the availability of same-day ACH support on its PayLogics platform primarily used by midsize banks. On about the same timing, Fiserv made known the availability later this year of a separately licensed module to its PEP+ product used by most large US banks. The enhancement is currently being pilot tested at Citigroup. So, it looks like in short order, the technical hurdles of same-day ACH adoption may be lowered for many US banks. Does that mean swift adoption of the service will follow? Color me unconvinced.

The Achilles heel of the new service is fundamental. A significant number of financial institutions must opt-in to the service before originating depository financial institutions (ODFIs) will have anything meaningful to offer to their customers. The service stands in sharp contrast to what has been one of the hallmarks of the ACH, namely “universal” accessibility among financial institutions. In Celent’s view, the opt-in nature of the new service combined with higher ODFI pricing has resulted in protracted adoption. Available payments platform upgrades won’t change this.

One might cite the rapid industry adoption of image exchange infrastructure over the past several years to argue that the opt-in approach is sound and should work again in the case of ACH. There are at least two reasons why this won’t be the case.

  1. Image exchange presented a compelling business case based on cost reduction from the start. Not so for the FedACH SameDay service, which carries a premium for ODFIs versus the next-day legacy service. Moreover, post Check 21, the Federal Reserve immediately began deconstruction of its physical check processing footprint. This created a significant and growing cost increase for financial institutions that persisted in paper check clearing, strengthening the business case for image exchange. There is no similar dynamic at work in the ACH.
  2. Image exchange–adopting banks didn’t have to sell the service to clients to benefit from adoption. Instead, image exchange began as a payment system innovation that later, once a critical mass of participation occurred, was offered to clients as image cash letter (ICL) deposits and accelerated funds availability. In the case of FedACH SameDay Service, without something to sell, there is little benefit to ODFIs beyond its use to settle on-us transactions (at a higher cost).

So, what can we expect? A number of large, early-adopter banks invested heavily in image exchange infrastructures, but significant industry adoption took several years. As more banks connected to the various image exchange networks, the business case for subsequent adoption improved. The same dynamic will be at work for same-day ACH. Early-adopting banks won’t have much to sell clients, because so few RDFIs will be available. Client adoption will fuel RDFI adoption, and vice versa.

What would be compelling, perhaps, is a broadly available same-day alternative accompanied by a NACHA rules change—particularly if both debits and credits were included. That would give banks something to sell, both for existing ACH customers, for expedited consumer payments (in return for a meaningful fee) and as part of the growing interest in mobile P2P payments.

Innovation in Unlikely Places

Innovation in Unlikely Places
BAI Payments Connect event this past week in Phoenix wasn’t exactly a hotbed of innovation in my opinion. Not surprising perhaps, when so much collective industry activity needs to be spent on compliance these days. In fact, one mid-tier bank asserted publically that 30% of its IT budget in 2010 addresses compliance directives. A sad reality in my opinion. But, innovation wasn’t absent at the event. It did show up in some unlikely places, however. Here are two innovations I observed. A common element in both is that they have to do with paper. When all the action is on the imaging and electronic side of payments, these two innovations deserve recognition for the value they provide to those having to deal with residual paper. Block & Company: helping RDC clients protect checks post-imaging. Most everyone is familiar with the FFIEC Guidance on RDC Risk Management. This too little too late guidance has spawned extraordinary industry-wide effort with the objective of reducing RDC risk mechanisms. Page 4 of the document addresses operational risk at customer locations. In particular, financial institutions are challenged to ensure customers properly safeguard original items once scanned and deposited. This is a tough one, because customers will do what they do, with little ability for financial institutions to impose procedural changes upon them. Block & Company invented a device to address the risk associated with multiple presentment and inadvertent disclosure of sensitive information from original items. The RDCheckTrack by NKL®, Paper Check Storage Device provides a secure way for RDC customers to temporarily store deposited items prior to destruction. The device provides storage capacity of about 2,400 checks held between three internal bins. A laptop-style cable lock keeps the unit in place, and an outside timer tracks the client prescribed time period for holding checks and prompts when destroying is required. Not exactly game changing, but a very practical benefit to financial institutions and customers alike. In my opinion, these ought to be offered to all new and existing commercial RDC clients.
A Solution to Original Item Storage for Commercial RDC

A Solution to Original Item Storage for Commercial RDC

Everyone hates IRDs, but Liberty Processing & Services Innovation, LLC (LPSI) is focused on taking away as much of the pain and cost of IRD production and clearing as possible. Earlier this week, LPSI announced the launch of services to more efficiently print and distribute substitute checks for financial institutions. LPSI has joined forces with United Parcel Service (UPS) and a top tier bank to bring aggregator services, convenient settlement, advanced logistics and timely delivery to financial institutions nationwide. LPSI offers same day, and deferred services to endpoints in all states for both forward presentment, as well as returned items. The innovation here is a logistical one – teaming up with a transportation logistics pro – UPS, with operations in Louisville, Kentucky, a stone’s throw away from the UPS air transportation hub. Celent understands that LPSI pricing and lead times will challenge the Federal Reserves FedImage Services. Perhaps with its logistics superiority, LPSI is well positioned to be the last man standing as IRD volumes continue their decline.