Mobile RDC vs. Branch Deposits: Which is More Risky?

The FFIEC Guidance on RDC Risk Management published in early 2009 was a watershed event that ushered in widespread concern over the risks inherent in remote deposit capture. The guidance was promulgated by regulators that had no operational experience with the technology. Banks did what they had to do – devote extraordinary effort to ensure regulatory compliance. Vendors too were busy enhancing the risk management capabilities of their solutions. Now, these capabilities give banks extraordinary abilities to manage check deposit risk. Over the same period, RDC evoved from the business-only product of its genesis to what is quickly becoming a mainstream consumer self-service deposit mechanism. Yet, the majority of U.S. Banks restrict usage because of risk concerns. In all of this, it’s important to realize that the belated FFIEC guidance did not result from egregious losses resulting from RDC abuse over the previous four years. Instead, the guidance was meant to be preventative. There remails little evidence of ongoing operational losses from RDC. In three consecutive annual surveys of RDC deploying financial institutions, nearly 90% reported having suffered no RDC losses. And, losses among the other 12% were not recurring events. Are the widespread risk concerns warranted? Those Darn Duplicates! For those who insist that RDC gathered deposits are inherently risky have Check 21 to blame. After all, it was Check 21 that created the legal footing such that original items wouldn’t be needed for clearing and settlement. Since Check 21 didn’t require BOFD’s to have original items either, RDC was born. And, what’s the inherent risk? Arguably, the only mechanism unique to RDC is loss resulting from duplicate presentment. All other loss scenarios can occur with or without RDC. Let’s assume such things will begin to happen with some regularity. Then what?     Managing Risks: Beyond defensible KYC procedures, what is available to help banks mitigate check deposit risk? Plenty! Most banks (or their item processing service providers) already have enterprise duplicate item detection capability. Those relatively few that don’t need to make an investment. COCC, a Connecticut outsourced processor, announced in June 2011 that it would provide duplicate presentment detection for all its item processing clients at no charge. More third party processors will likely follow. In March 2013, Early Warning Services announced a pilot of an enhanced version of its Deposit Chek Service that includes duplicate item detection among participating financial institutions. A sophisticated deposit review mechanism should also be in every bank’s toolbox. Modern systems are able to provide near real-time views of deposit activity across channels, place limits on deposits and flag unusual activity for speedy review by trained personnel. Many systems also can be set to flag items that have a mismatch between the item’s dollar amount and the depositors stated deposit amount along with routing and transit number validation and optional image based check fraud detection – all prior to posting. Contact your vendor if you need more information. RDC vs. Branch Deposits Invariably, banks reluctant to offer mobile RDC assert that deposits made at bank branches are less risky. Really? Only a small minority of FIs have teller image capture systems, so consider two scenarios: a non teller capture branch deposit compared to RDC using a modern deposit review system. You decide.
Branch Deposit Remote Deposit
Deposit review is conducted manually (if at all) by tellers in a distracted and hurried environment. Deposit review conducted by trained specialists in the back-office.
If item detail is captured at all at the branch, most include check amounts only. Tellers are focused on completing the transaction. Check codelines are captured and verified in real-time. Suspects are flagged immediately for review and possible hold.
Teller visibility is limited to a single deposit. Back-office personnel often have an enterprise wide view of account trends and activity.
Fraud systems don’t see the item until hours later, often not until day-2, depending on when image capture occurs. Optional real-time interface to fraud and positive pay systems. Multiple risk filters examine all items in real-time, flagging unusual activity or suspect items for operator review.
With typical branch deposits, transit items aren’t presented until late in the day. Transit items are presented for clearing and settlement throughout the day, accelerating payment and returns.
Funds availability is a function of policy and Reg CC – without regard to characteristics of individual depositors. Funds availability may be negotiated based on customer risk ratings as part of a unique deposit services agreement.
In Celent’s view, banks still on the mobile RDC sidelines fearing RDC risk are more susceptible to returned item loss through obsolete branch deposit taking workflow. A less risky, lower-cost approach invites image capture at each point of presentment alongside modern, image-based risk management approaches.

Should Banks Charge Fees for Mobile RDC?

Last week, the Chicago Tribune broke a story that PNC was considering charging fees for its mobile remote deposit capture (RDC). The story prompted this action even though I have previously commented on the topic. Should banks charge for mRDC, especially when data suggests many consumers would be willing to pay? Heck no! Why leave money on the table? At least three reasons.
  1. First, the train has already left the station. Hundreds of US financial institutions now offer mRDC and that number will likely double in the next year. RDC is quickly becoming a staple mobile banking capability and all but two financial institutions offer it free of charge. To my knowledge, only First Tennessee and US Bank have fees associated with mRDC.
  2. The revenue opportunity is uninteresting. Most mRDC users deposit just a few checks per year. The math varies by bank because of varying degrees of small business usage among other things. But, if the annual average per registered user is ~20 checks per year (optimistic to say the least), a $.50/check fee would net just $10/year per customer.
  3. As Bank of America can attest, the risk associated with introducing new fees in today’s hyper sensitive environment clearly outweighs the likely revenue gain.
Banks would do well to invest in ways to attract and retain valuable customers instead of ways to increase fee income. In retrospect, banks have done it to themselves (again) by missing the revenue opportunity early on. But, two years into market maturity is no time to start. But there is a larger, more interesting question the Chicago Tribune article invites. Should banks charge for services that save it money? The article asserts PNC saves $3.88 per transaction because mRDC deposits cost less to process than do teller transactions. True enough (perhaps) – theoretically. But banks won’t realize any net savings through RDC until branch channel costs are reduced as transactions migrate to self-service channels. In this regard, most US banks have a long ways to go. More importantly in my opinion, is that positioned properly, bank products should have little to do with the cost to serve. Instead, products and services should be priced based on demonstrable perceived value, not cost-to-serve. There are countless examples of successful products that enjoy comparably elevated product margins. Here are a few:   – Starbucks Hazelnut Macchiato   – Crest Pro-Health whitening toothpaste   – Folgers Decaffeinated coffee   – Tropicana Orange Juice with Calcium   – Virtually every “option package” ever sold with an automobile In each of these cases, products were positioned based on a unique value proposition that had precious little to do with the products cost of goods. Let it be so in retail banking also.

Reflections on the Remote Deposit Capture Summit 2012

I had the pleasure of attending the Remote Deposit Capture Summit 2012 in Orlando last week. As in prevous years, the Remote Deposit Capture Summit 2012 was a helpful networking event for those who derive their livelihood from RDC. And as in previous years, the number of new faces were few. To my eyes, there was a singular source of excitement at the Summit this year, and it was again all about mobile. Discussions with a number of financial institutions prior to and during the event suggests that mobile RDC is a source of both excitement and aggravation. The excitement is a function of the large and growing appetite among consumers and businesses for the capability. Stories abound about how enrolments and subsequent deposits happen within minutes of making apps available on the Apple iStore. Such stories are simply…amazing! The aggravation reflects a growing realization that we may have collectively over promised and under delivered mobile RDC’s efficacy to consumers. Said simply, the advertising makes mobile RDC appear faster and easier than it typically is. The unfortunate result is that an alarming percentage of deposit attempts fail. Worse, many banks don’t have clear visibility to these dissatisfying interactions and feel powerless to address the problem. In several cases, banks explained that prior to a deposit being accepted, they can’t track the activity back to individual users. Don’t misunderstand my comments as being down on mobile RDC. I’m a big fan. What the RDC Summit drove home for me is that significant improvements need to be made in the user experience. Two things appear central to doing so. 1. Improved integration into mobile banking platforms. Particularly in the area of analytics to help financial institutions better understand the customer experience and address poor experiences with targeted customer outreach. How many banks provide real-time help to depositing customers who are having difficulty? Not many. 2. Improved image analytics. Image analytics engines have come a long way over the past few years, but the extreme variability of mobile image capture has proven to challenge even the best of them. The space, once the sole purview of Mitek Systems is now a hotbed of competition from AllMyPapers, Top Image Systems and others. Trends in product development point to real-time user feedback designed to reduce the variability in the raw images. The end result, will hopefully be reduced image rejects, reduced back-office exception processing and improved customer satisfaction. It can’t come soon enough.

Celent Banking Blog – 2011 in Review

Happy new year! I thought it would be fun to recap 2011 by calling out the top 10 posts on our blog from 2011. The following list is based on total number of unique visits to each of these posts. Some of these are bang on as far as topic interest goes others may be surprising. Happy reading!
  1. ZashPay User Impressions
  2. U.S. Bank Deposit Point: Doing Right Things Right
  3. Tablet Wars: Online/Mobile Banking Will Never be The Same
  4. New ATM Rules on the Block
  5. Will Tablets Change Banking?
  6. Bank IT Spending and Trends: What Does 2011 Look Like?
  7. Celent Model Bank Awards 2011
  8. Is PFM The Future of Online Banking?
  9. U.S. Bank Deposit Point II: Will Pay-for-Deposit Last?
  10. Chase Website – Down Again

Mobile RDC and the Quest for Retail Banking Revenue

We’ve all witnessed how difficult it has become for retail banking to dig itself out of its retrospectively misplaced devotion to free checking. The recent brouhaha over several banks’ attempt to recover lost debit card interchange through monthly fees gives testimony to just how challenging this new climate has become. After a decade of training consumers to expect retail banking services for free, banks are challenged with positioning products and services in a way that provides value to customers while effectively monetizing the bank’s capabilities. Said another way, banks did it to themselves – and they’re doing it again. In this context, I’m a bit perplexed at how quick banks are to leave money on the table. One particularly egregious example in my opinion is mobile RDC. Here we have a product that: • Resonates with consumers and businesses alike for its convenience and usefulness • Is offered by a small fraction of U.S. financial institutions at present, providing early-mover advantage in a largely undifferentiated mobile banking environment. • Is easily bundled with other services that appeal to highly attractive market segments. So early-mover banks must be enjoying revenue from mobile RDC, right? Of the one hundred plus financial institutions currently offering mobile RDC, I only know of several that are charging for consumer usage. This is in sharp contrast with P2P payments, for example, where the significant majority of institutions using solutions (ZashPay et. al.) for mobile P2P payments charge for the service. Some institutions may be proceeding under the belief that consumers simply wouldn’t be willing to pay a small fee in order to avoid a trip to the local (or non-local) branch. Heck, one can barely start an automobile for less than a buck with today’s fuel prices. But, Fiserv research conducted in 2010 suggests that a percentage of consumers would indeed willingly pay at least two bits per deposited check. Admittedly, this does not constitute a thorough analysis of mobile RDC price elasticity, but it does suggest banks may be missing an opportunity.


Let’s look at two banks that are charging for Mobile RDC; First Tennessee and U.S. Bank. First Tennessee First Tennessee offers a full-featured mobile banking platform supporting Android, Blackberry and iOS equipped phones. First Tennessee Mobile Banking offers account transfers, bill pay (Mobile Bill Pay), ATM locator and Mobile Deposit. First Tennessee also offers SMS Text Banking and Mobile Web Browser with more limited capability. First Tennessee bundles Mobile Deposit into its Premier Checking product at no additional cost and Premier Checking customers are automatically eligible for Mobile Deposit. Premier Checking is free for those maintaining a $5,000 minimum balance. Otherwise it costs $9.00 per month. Brokerage customers are also eligible for Mobile Deposit at no additional cost. For other customers, First Tennessee is disclosing a $.99 per check fee, but is temporarily waiving that fee. Eligibility requirements for non Premier Checking or MAP customers aren’t disclosed on its web site. Instead, only eligible customers will see the Mobile Deposit option on their mobile banking app. Simple enough; if you see it, you can use it. U.S. Bank U.S. Bank Mobile Banking is a full-featured mobile banking app for Android, Blackberry and iOS equipped smart phones and is also available via browser (Mobile Web) with more limited capability. The applications offer bill pay, ATM locator, P2P payments (Pay A Person), transfers, real time alerts and mobile RDC (DepositPoint) on Android and iOS phones. To be eligible for DepositPoint, one must be a U.S. Bank Internet Banking customer with direct ownership in a U.S. Bank Checking or Savings account and have no more than two returned deposited items in the past 3 months. There is a $0.50 fee per deposited check. Both banks are positioning mobile RDC as a value added feature. U.S. Bank charges all users, while First Tennessee overtly bundles its application with premium accounts. Both are valid options that balance risk and reward. Most other banks are simply leaving money on the table.

Wanted: A few Good Fraudsters

OK, just kidding. But, there is an interesting irony related to RDC that I’d like to highlight. Risk concerns loom large among the majority of U.S. financial institutions that haven’t yet made RDC available to consumers and mobile banking users. Other banks are throttling small business RDC initiatives, in part, because of risk concerns. Clearly, risk isn’t the only reason banks aren’t rushing to radically improve the convenience and operational efficiency of deposit processing, but it may be the primary reason. So is the concern justified? I think so, but I also think it is hugely overstated. Here’s why. In two consecutive surveys of U.S. financial institutions (September 2011, n=218), fully 90% of surveyed institutions have suffered no monetary loss at the hands of RDC. The small minority that did suffer loss mostly had a single incident – after offering RDC for 4 or 5 years in some cases. Could 90% of credit card issuers make such a claim?

90% of US FIs have suffered no losses through RDC

90% of US FIs have suffered no losses through RDC

And, the prevailing loss mechanism is straightforward; duplicate presentment. Financial institutions could be on the receiving end of a duplicate item whether they offer RDC or not. This has prompted most financial institutions to install enterprise wide duplicate detection capability. The most interesting scenario involves a fraudster depositing via RDC at one or more institutions and later depositing via the ATM or teller at a second or subsequent institution. Matters are made worse if there is a meaningful delay between the first and subsequent deposits because many banks only look for duplicate items over a narrow time period. Losses have been so low that banks appear unwilling to invest in additional fraud reduction mechanisms. If actual RDC related losses have been higher, then banks could more easily justify the business case to stem losses. One approach would be to extend duplicate detection across institutions. The Federal Reserve, SVPCO, Viewpointe and Early Warning Services (EWS) among others would be in a position to provide these services. With all the commotion about RDC risk, you’d think there would be several industry-wide solutions available by now. Not so. Last month, Mitek announced an initiative, MitekONE that is said to be available in 2012. MitekONE’s mechanism was developed to improve the ability of banks and partners to detect attempted duplicate deposits of checks, both within banks and across institutions. Mitek will be offering this capability through a strategic relationship with EWS. Here we have an innovative response to a pervasive systemic risk. But, absent a few good fraudsters, I wonder if banks will invest.

Mitek’s on a Roll!

It wasn’t long ago, detractors of mobile remote deposit capture (RDC) offered three objections: • It won’t work • No one would use it • It’s too risky The first two objections have been thoroughly refuted through the positive experience enjoyed by the relatively few financial institutions thus far willing to challenge the status quo. The third objection is destined to be refuted as more financial institutions implement automated risk management tools increasingly available from a cadre of vendors. But, alas, check volumes are on the decline. Most deployers of mobile and consumer desktop RDC see just 20% to 30% of registered users depositing in any given month. Thus, consumer RDC’s value isn’t in its ability to process a prodigious volume of checks (they can’t) but in offering extraordinary convenience and value to consumers. But, what’s the next big thing? How is Mitek going to continue to add value beyond mobile RDC. Mitek offered a glimpse of a broader and more interesting strategy of leveraging its ability to accurately and reliably extract information off captured images. Today, Mitek announced a new product called Mitek Mobile Balance Transfer. This application would allow a bank’s customers to use their smartphones to take pictures of competing banks’ credit card offers. Users could then submit the images of these offers as a data file to their current bank, which may offer the customer a lower rate or better credit card features in an effort to have the customer keep their credit card with them (or, if the credit card is held with a competing bank, transfer the credit card balance). Unlike mobile RDC, the image isn’t used to produce a negotiable payment instrument; it is used to transform what has historically been a tedious and time consuming process for consumers and an expensive promotional vehicle for financial institutions. Celent expects Mobile Balance Transfer to be but one of a number of intensely useful applications that enable financial institutions to delight their mobile customer base.

Mobile RDC: Easier Said than Done

Making occasional check deposits using one’s cell phone camera is a great idea. Mobile RDC is a strong concept for its convenience, cost effectiveness and ubiquity. It’s a win-win for financial institutions and customers alike. Yet two things are causing FIs to move with extreme caution: risk and compliance. A recent Chase announcement suggests that mobile RDC may be easier said than done. Last week, Chase announced a relationship with Mitek Systems to provide mobile RDC capabilities to the bank across a variety of smart phone platforms. But, Chase had previously launched its service behind significant national television advertising buys. It’s a fun ad. The post-launch move to Mitek invites questions. Why? Why now? Chase first made its Quick Deposit service available to customers in July through an update to its app for Apple Inc.’s iPhone mobile banking platform. In November it rolled out the service to customers who use Google Inc. Android smart phones. Neither initiative utilized Mitek’s Image Prove technology. With a significant base of registered users, why change platforms now? Our guess is that the image analytics engine supporting the application wasn’t up to the task. This likely caused usability problems such as those experienced by Celent’s own Bart Narter (see Bart’s blog here). There’s nothing worse than getting all fired up from a good TV ad only to be disappointed with the app later on. OK, there are worse things. Producing consistently high quality images with low exception rates under conditions of widely variable lighting, contrast, camera angle, signal strength and steadiness of hand is not trivial. In Celent’s opinion, the key to achieving good performance with mobile RDC lies with skillful use of imaging technology. Maybe that’s why nearly all vendors of mobile RDC solutions employ Mitek’s stuff (with its resulting impact on product cost). Mitek’s Mobile Deposit addresses the high variability of mobile image capture with a real time sever-side image analytics approach it calls IMage- PROVE. The basic idea is to use image analytics to automatically and satisfactorily mitigate unwanted image variability so as to render the originally captured (e.g., “raw” image) usable for automated processing. In Celent’s view, this process (regardless of solution used) is key to Mobile RDC’s viability. Without it, both user experience and operational results would likely be unsatisfactory. The figure below shows the processing of such “raw” mobile images. Processing Raw Check Images In August 2010, Mitek was granted a patent on its use of IMage PROVE technology in a mobile RDC environment. The patent covers the process of capturing a color image of a financial document using a mobile device and then transmitting the image to a server where the image can be processed further. The patent also covers the steps of detecting the financial document in the image, converting the image and correcting the orientation and size of the image. Some vendors and banks have tried to make due with image analytics systems designed for traditional check scanning approaches. Doing so might save some money, but will likely result in an eroded user experience and dissatisfied users. Compared to the cost of branch deposits, mobile RDC is a bargain. Our advice to banks: don’t be cheap, you might regret it later on. Our view: this move is good for Chase and ultimately good for the industry. A number of other large banks are close to launch. We hope all goes well.

Mobile RDC: Getting to Yes

Following on a February 2009 announcement with MFoundary, Mitek announced in December it had formed a strategic partnership with ClairMail to integrate its Mobile Deposit capability with ClairMail’s mobile banking platform. In so doing, the companies are making it faster and easier for US FIs with existing mobile banking solutions to offer mobile deposit (a.k.a. Mobile RDC). Celent applauds this effort. A preemptive move, pre-integration with mobile banking platforms corresponding to a significant percentage of mobile banking solutions only makes sense. But doing so won’t erase adoption barriers. Celent conducted research in August 2009 among 174 US financial institutions – just prior to USAA’s announcement of its Deposit@Mobile product. In the survey conducted primarily among product managers and senior executives in RDC deploying financial institutions, Celent found that risk and/or compliance concerns are holding banks bank by nearly a 2:1 margin versus any other adoption barrier. All the pre-integration in the world won’t address the lingering systemic risk paranoia around RDC. Barriers to Mobile RDC Aren't About Technology But risk can be justified in the face of adequate reward. That’s part of the current problem with mobile RDC. The #2 adoption barrier according to Celent research is low perceived demand for mobile RDC. When banks see adequate demand for the service, the perceived risk associated with solution delivery will be more easily assumed. So what’s behind the low perceived demand? Banks mention in interviews that consumers aren’t exactly melting the phone lines with requests for mobile RDC. Of course not – no one knows about mobile RDC yet! Too many banks confuse demand for a product or service with concept strength. Concept strength measures the viability of a product or service based on its ability to meet unmet consumer needs. Demand is a function of many variables including concept strength, awareness and pricing. In Celent’s research, mobile RDC appears to be an exceedingly strong concept among consumers; a “killer app” in fact. Demand will come rapidly, once more banks offer the service – generating awareness in the process. Anticipating strong future demand for mobile RDC, wise banks will be preparing.

Mobile RDC: What’s the hold up?

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.

Figure 1 – RDC’s Impact on Branch Traffic, December 2007

Source: Celent FI survey, December 2007, n=157

Source: Celent FI survey, December 2007, n=157

We’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.