Mobile RDC: What’s the hold up?

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.

Pitney Bowes’ RDC Initiative – when will banks engage?

Pitney Bowes’ RDC Initiative – when will banks engage?
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.

USAA’s Mobile Remote Deposit Capture Initiative

USAA’s Mobile Remote Deposit Capture Initiative
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?

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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.

NCR’s Mobile Deposit Move

NCR’s Mobile Deposit Move
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.
Checks captured on the author's device with intentional carelessness

Checks captured on the author's device with intentional carelessness

Will ISOs claim the RDC market as they have done with credit cards?

Will ISOs claim the RDC market as they have done with credit cards?
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. picture122 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!

FFIEC RDC Guidance

FFIEC RDC Guidance
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.