I hate being wrong: A precise look at mRDC adoption in the US

Nobody likes being wrong. I’m no exception.

Sometimes it’s not so much being wrong as much as being inaccurate. Here’s an example of where my best-effort estimates have been a bit off.

Mobile RDC (mRDC) has been a fairly hot topic and a mobile banking capability that has gained rapid and widespread adoption among US banks. But how rapid and how widespread? I’ve taken a stab at answering these and other questions over the past few years. Relying on a combination of financial institution surveys and RFI responses from the leading vendors, Celent has published comprehensive annual reports on the evolving state of remote deposit capture, including mRDC.

Back to the question…

Since empirical methods would be tedious and time consuming, I created estimates of mRDC bank adoption annually based on vendor-reported client base and implementation backlogs. It turns out that two of my last three annual estimates weren’t all that accurate. How do I know?

Last month, FI Navigator and Celent announced a collaboration to publish the industry’s most comprehensive report detailing mobile banking offerings on the more than 6,000 U.S. financial institutions that offer mobile banking and more than 50 vendor providers.

The report, Mobile Banking Quantified – Comprehensive Benchmarks for US Vendors & Institutions, will be available for download in late April 2016. The research leverages FI Navigator’s mobile banking data and analytics module, along with Celent’s industry research methodologies, to provide vendor and institution performance standards from nearly three years of month-to-month historical data.

Look at how my historical annual estimates compare to the more accurate FI Navigator data since mid-2013.

mRDC History

Back in 2013, vendors were implementing as quickly as they could. In aggregate, vendors reported over 700 banks and credit unions were under contract, but not implemented. It turns out that implementations proceeded faster than I thought, as my year-end estimate was 40% low! I did better in 2014, but estimated 9% high in 2015.

I look forward to the extraordinary precision and depth of insight Celent’s relationship with FI Navigator will bring the industry. For more information on the report and additional offerings, please go to http://discover.celent.com/FIN-Mobile.

Is RDC Risk Overblown?

In retrospect, sure. Looking forward, I’m not so convinced. I had the pleasure of attending WAUSAU Financial System’s annual Customer Conference in Chicago last week. One of the sessions focused on surviving RDC audits. The prevailing consensus among banks in the session was: “RDC and ACH are very different animals. What are the regulators thinking? Why all the scrutiny on RDC?” Despite the regulatory scrutiny, remarkably few financial institutions have suffered loss uniquely attributed to RDC. In Celent’s October 2013 survey of US financial institutions, 95% of respondents indicated that losses associated with RDC were at or below established risk thresholds. But, history is not always a good predictor of what is to come. With the growth of mRDC popularity, it is incumbent upon banks to both be vigilant and to use the best tools available to manage what will certainly be increasing risks associated with RDC. After several years of relative tranquillity, fraudulent activity is on the rise. The changing state of things is apparent when we look at where losses have occurred. Once the near exclusive domain of commercial banking, RDC losses are quickly migrating to the retail bank – along with 20 million or so consumer users of mRDC. RDC Loss Mix Source: Celent surveys of US financial institutions, Oct 2012 and Oct 2013, n>200 And the loss mechanisms are changing too. From 2012 to 2013, the percentage of losses associated with check kiting and fraudulent or altered items declined, while losses associated with duplicate presentments increased. The most vexing challenge is how to manage items deposited at more than one financial institution. This unintended consequence of Check 21 legislation presents a systemic risk with no particularly good fix at the moment. As banks seek more automated and flexible RDC risk management approaches, Celent sees a replacement market emerging. Vendors are increasingly competing based on the efficacy of RDC risk management capabilities along with the ability to be the bank’s enterprise distributed capture platform, managing all deposit channels, from RDC to branch, ATM and lockbox. This is where the action needs to be if RDC is to deliver its full potential.

The Best News About RDC in a Long While

I just finished two remote deposit capture (RDC) related reports last week – and yes, they took way too long to complete. The first was a comparison of vendor solutions and the second an analysis of the state of RDC with projections for the future. Having been immersed in RDC for a bit (OK months) I got to thinking. There’s some great news in the world of RDC! For example: • The vast majority of RDC deploying financial institutions still have not suffered any economic losses attributable to RDC. • Even though commercial RDC is a mature market, there remains a significant upside for participating banks in terms of selling additional clients. • Vendor solutions continue to improve at a rapid pace, particularly in terms of providing financial institutions tools to manage risk. • Mobile RDC is experiencing explosive growth behind terrific consumer awareness and strong concept scores. In a July 2013 Celent consumer survey, mRDC was the second most valued capability in mobile banking, exceeded only by account aggregation (seeing all one’s accounts in one place). • Banks are gradually relaxing mRDC eligibility criteria and deposit limits in response to consumer demand and favorable operational experience. And, I could go on. But the most encouraging news in my opinion is that compliance worries are mostly a thing of the past – in both retail and wholesale banking lines of business at most banks. For several years, compliance was “Job #1” for RDC product managers. Thankfully, those days are largely behind us. At last, delivering value and growing the business has returned to the RDC agenda, and it has done so in significant ways. In October 2013, Celent surveyed US banks and credit unions about RDC adoption, risk, attitudes and priorities. We’ve done so annually since 2010. On question asks respondents to rank the importance of RDC priorities. We ask the same question in the context of commercial RDC (treasury management departments) as well as small business RDC (small business or retail lines of business). 2012 was good news. 2013 even better news – after years of a compliance dominated agenda, client adoption solidly returned to the #1 spot. The figure below graphs the percent of respondents ranking each priority as “most important”. Note the year-to-year changes. SMB RDC priority 2013 Don’t get me wrong, compliance will remain an imperative in all areas of banking, but it should no longer dominate bank’s RDC project list. More than anything else, this will be a harbinger for good RDC things to come.

The Mobile RDC Cost-savings Myth

Mobile RDC (mRDC) is so hot right now. And, for good reason – the capability matters to consumers. In fact, consumers value it rather highly compared to other mobile banking functionality. In a June 2013 Celent survey of US internet active consumers, mRDC was the second most highly valued capability surveyed, with two-thirds of smartphone users ranking the capability “highly valuable” (6 or 7 on a 7-point scale). Among those surveyed, mRDC was more highly valued than person-to-person payments (54%) and the emerging capability to enroll a new bill payee using the phone’s camera (46%) which a handful of banks offer. Mobile Value Despite the obvious wisdom in adopting mRDC, there’s a growing chorus advancing the assertion of prodigious cost savings realized with every mRDC deposit. Some assertions are in the $4.00 per deposit range. The argument is based on estimates of average per-deposit transaction costs of $4.50 or greater for branch deposits and as little as $0.25 for mRDC. Vendors cite these numbers as if the business case were inviolate and cost savings immediate. I think this is hogwash for several reasons. 1. Cost savings through mRDC – or any self-service mechanism for that matter – is only realized when a commensurate operating cost reduction in the branch infrastructure is affected. Easier said than done. Most banks have long since thinned their teller ranks. More substantive cost reductions must come through process redesign, automation, physical redesign and organizational change. These are huge undertakings. Banks are grappling with the unsustainability of their branch networks. mRDC isn’t their silver bullet. It’s simply contributes to the erosion in foot-traffic already taking place. 2. Branch transaction cost estimates, even if precise, are usually fiction. Most banks I’ve interviewed concede their activity based costing models are rudimentary at best. More importantly, branches serve multiple, important functions beyond deposit processing and these are often not reflected in the transaction cost estimates. 3. mRDC cost savings are argued to be a result of displacing teller transactions with low-cost self-service deposits. Great idea, but what about the ATM channel most banks just invested in? How much cannibalization of image ATM deposits are assumed in the calculation? Not much I dare say. To the extent this occurs, it erodes the theoretical cost savings of mRDC. 4. And lastly, the total costs of mRDC are typically understated once licensing, maintenance, support, compliance and training are included. Where does this leave us? mRDC is a great innovation; a real win-win. But, unless your head of retail is willing to commit to $4.00 in cost reductions for every forecasted mRDC deposit (I haven’t met one yet), the cost savings claims may be more theoretical than real. Said another way, migrating transactions to self-service channels remains an important objective. Let’s not overstate the short term cost savings associated with doing so.

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.

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.

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.


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 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!

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

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.