Is RDC Risk Overblown?

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.

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.