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Electronification And Beyond; Remote capture is about more than just imaging checks.

By Maria Bruno-Britz, Bank Systems & Technology — May 1, 2006

When some technologies hit the scene, they take off like a shot. Other technologies build momentum slowly like a roller coaster, bursting into motion after their functionality reaches a peak. For remote deposit capture -- using devices to create digital images of checks -- the adoption curve has climbed steadily, but only now is banks' use of the technology about to explode. In fact, a report by Boston-based Aite Group forecasts that the number of U.S. banks offering remote deposit capture will grow by 1,000 percent by 2009.

Although the ability to create check images has been around for a number of years, it was not until Check 21 became law in October 2004 that the technology gained some momentum. Still, less than 100 banks offer remote deposit capture (RDC) today, according to Aite Group. However, that number will jump to more than 500 by 2008, the research company suggests.

"Like any new payment instrument, [RDC] is at low levels of penetration right now," relates Andrew Dresner, director, retail financial services, at New York-based Mercer Oliver Wyman. "But banks are seeing that their customers like it. Those banks that are being aggressive with the technology are seeing a strong uptake in customers adopting [RDC]." >>

Bankers certainly are upbeat about the technology. "The traction is definitely there," says Tony Gandolfo, a VP with The Bank of New York ($102.1 billion in assets) who heads the check and image-based deposits and disbursements product management group. "Last year, many of our customers were still assessing image deposit solutions, but during the first quarter of 2006, folks came out buying. This is becoming a mainstream product offering."

According to Debra Sciano, VP and senior product manager with Cleveland-based KeyBank ($93 billion in assets), RDC already has taken off. "There are a lot of instances where the product practically sells itself," she says. "It has proven itself in its value to customers almost immediately."

"Every bank seems to be going after [RDC] because of the immense value -- you're in your customers' back offices all the time and you can get more information from the deposits than you used to," relates Danny Peltz, EVP, wholesale Internet and treasury solutions, with San Francisco-based Wells Fargo ($482 billion in assets). "There's no reason not to do this."

And perhaps Peltz is right. Check 21 more or less opened the floodgates for financial institutions' efforts in the check imaging area. As BofNY's Gandolfo says, "Check 21 was the catalyst for adoption of remote deposit capture." Naturally, some banks were more eager to embrace it than others.

According to Danne Buchanan, CEO of Salt Lake City-based NetDeposit, a provider of remote capture and routing technology, in addition to the early adopters who "viewed remote deposit capture as a strategic weapon," there were those who adopted the technology from a defensive standpoint. They did not really believe in the product as something to increase market share, but as something to help them keep up with the Joneses, he asserts. "It's all in how you perceive the product," Buchanan remarks. "If you see it as something that can expand relationships, there is a huge opportunity. You'll have balances on your deposit sheet you didn't have before; you'll have new credit and investment opportunities. This is absolutely a product you can move into your customer base for stickiness and cross-selling. You're also streamlining your back office [by eliminating much of the paper processing]."

In spite of these obvious benefits, some have a more tempered view of RDC's revenue-generating potential. "Right now, the efficiency savings you get are offset by having to generate substitute checks," explains Craig Vaream, VP and senior product manager of domestic check deposits with New York-based JPMorgan Chase ($1.2 trillion in assets). "But our branches [and some of our clients] are using [check] scanners. So we thoroughly believe in this technology. The key to unlocking all the benefits of this technology will be when the industry adopts image exchange on a large-scale basis. Until then, the industry will not be at optimized efficiency."

Richard Winston, a senior executive with Accenture (Chicago), concurs. In fact, he says he thinks of RDC technology as somewhat of a revenue-neutral investment in some regards. "You're using it as a technology substitute for a lockbox," Winston opines. "It's a substitute technology and a convenience. You'll keep check volumes out of the bank's back office and reduce activity at branch teller stations. [RDC] is another enabler of getting checks out of the system."

Capturing Market Share

"If you're talking about a big bank that's rolling out [RDC] to its existing customers in its existing footprint, then saying it's revenue-neutral is an accurate statement," responds Mercer Oliver Wyman's Dresner. "You need a help desk, you need to deploy the equipment -- add all this up and it's revenue-neutral." However, there is money to be made, he stresses, if a bank goes after customers outside its footprint.

And that is just the course of action many banks are taking. According to Wells Fargo's Peltz, "When you talk about [RDC] as taking checks from one channel and moving them to another, then it's neutral. But in terms of my being able to create new market share, then it's definitely accretive to revenue. You're offering new services to existing customers and those outside your footprint."

Memphis-based First Tennessee Bank ($36.6 billion in total assets) was an early adopter of RDC. And it certainly is making money from the offering, claims SVP of treasury management services Taylor Vaughan. "We're making a profit because of monthly and per-item fees," he explains. "[RDC] is an important part of our strategy because we feel that we can sell our value proposition outside the market where we've already been successful. We have existing customers who are moving all their banking relationships to us. And we're also gaining relationships beyond our footprint." In fact, Vaughan says the growth rate for RDC adoption outside First Tennessee's footprint has been brisk.

Dave Youngerman, president of check capture technology provider Panini (Dayton, Ohio), goes as far as to say merger-and-acquisition activity among banks will decline because of RDC and its ability to create new client relationships. "Those banks that do this first will attain the asset growth they need and they won't have to grow through mergers," he explains.

Delivering Solutions, Not Products

There's no doubt RDC technology will have a vast impact on the financial services industry and banks' commercial customers. "There are a few banks out there that view remote deposit capture as a 'disruptive technology,'" comments Mercer Oliver Wyman's Dresner. "Now you can put the equipment in any size company, and some bank can come to the market and become the category killer in certain regions. [RDC] levels the playing field for banks of all sizes because geography doesn't matter any more."

But some day, banks that offer check scanning services to businesses will be a dime a dozen, if current industry numbers are any indication, Dresner continues. "In the short run, [offering RDC] does differentiate you from your competitors," he relates. "So if you're in the market early enough, you have a better chance to cement relationships. But two years from now, when everyone offers it, the bundling of services will differentiate you going forward."

Therefore, financial institutions need to provide something more if they wish to remain competitive, not only in the check processing space, but even in the cash management area as well, insiders say.

"Banks better understand how to differentiate themselves," warns KeyBank's Sciano. "You have to have a specific strategy where you bring your clients a solution -- not just individual products. You're not just going to deliver a remote capture product, but better accounts receivable services, for example. Focusing on the solution side is appealing to clients because it shows them we understand what they do."

It is this holistic approach that will win the favor of commercial customers, agrees BofNY's Gandolfo. "The Bank of New York's image deposit solutions aren't just point-specific offerings," he says. "We look at it from the standpoint of the overall relationship. Remote check isn't an individual, stand-alone service -- it's part of a suite of services."

Gandolfo says banks should use image deposit as a complement to clients' existing infrastructures. "We can process image cash letters [and] do remote check deposit, and we can provide all the value-added technology tools to make it a complete end-to-end electronic solution."

The Value of Information

But moving to such a model will take careful consideration, according to NetDeposit's Buchanan. "Banks need to think of what the value-added services are in terms of information and products to not only keep corporate clients but delight them," he says. "They have to think beyond remote capture to the information pieces to make their offering more compelling than the other guy coming in."

It is the information component that BofNY's Gandolfo thinks will appeal to corporate clients. "There's enormous value here from an information-capture standpoint," he says, noting that RDC can be more than just a convenience that speeds the check-clearing process for businesses. "Customers can input ancillary data associated with an imaged check, or they can scan coupons with the check to capture remittance data like a lockbox. That data can be exported and integrated into customer processing systems and accessed on an enterprisewide basis in near real time."

While experts agree that remote deposit capture is a win-win all around, banks must be aware of some issue when offering the service to clients. First and foremost is the fact that banks now are placing a very important financial instrument in the hands of another entity -- the control isn't there anymore.

"Banks are very good at handling paper items," explains Accenture's Winston. "If you put that into the hands of business clients, what happens?" he asks. "There's a lot of risk around the handling of checks, and you're putting that kind of processing into the hands of less-sophisticated corporations. That said, if you're dealing with a company with full treasury management capabilities, they would probably be less susceptible to such problems than a smaller company."

That is why banks are careful about the kinds of clients to whom they offer RDC. "Remote deposit capture is very risky -- even riskier than cash handling and ACH processing," comments First Tennessee's Vaughan. "If someone deposits cash in the bank, it's now in the bank's hands. With remote deposit, after the company scans an item, that customer still has it -- the change in control doesn't happen. So we don't want to offer remote capture to just anybody. We just offer it to companies that would be just as embarrassed about getting their names in the paper as us."

Good Things Come in Small Businesses

While such caution is prudent, that's not to say that RDC is not for small businesses, too. Banks certainly see opportunity in that market for RDC.

"This is a very active segment for us," says JPMC's Vaream of small businesses. "The benefits on the small-business side differ slightly from those for larger businesses, but they are still significant." Mainly, he suggests, the advantages of RDC for small organizations are derived from the elimination of time-consuming manual processes, including making photocopies of checks and having someone from the front office (sometimes the only administrative person on staff) travel to the local bank branch to drop off the checks every day.

"The real opportunity [for RDC] for the insurgents [banks that want to expand their footprint] is with small and midsize businesses," Mercer Oliver Wyman's Dresner concurs. "There's more opportunity in processing checks when you bundle reporting services with the remote capture product to service the needs of small and midsize businesses."

Some banks are going even a step further, focusing on certain segments of small-business customers, such as restaurants or hotels. Dresner says he is aware of at least one bank that is targeting RDC at personal money managers and another that is catering to homeowners associations. In fact, Dresner adds, the banks involved in this industry-specific targeting tend to be small themselves. "Many of the remote deposit pioneers haven't been the biggest banks with the massive footprints because those already have branches everywhere."

However, remarks First Tennessee's Vaughan, "Even people located across from a branch are using our remote capture product." Which goes to show there is something to be said for the efficiencies of RDC, no matter the size of the bank or the corporate customer.

"The revenue generation lies in how much a bank can attract new customers," relates Panini's Youngerman. "[RDC] also becomes a benefit for corporations ... that may have relationships with many banks in different regions. If a bank can attract the headquarters of a company to do business with them exclusively, that's a plus for the bank. And the corporate treasurer, instead of having six bank statements to consolidate at the end of the month, only has one. [RDC] goes beyond increasing the availability of funds -- it allows companies to consolidate their bank relationships."