Making the Case for Remote Deposit Capture

As businesses clamor for check capture services, more banks are jumping on the remote deposit bandwagon. Some early — and rapid — adopters are already into their second generation of product offerings.

| SYNOPSIS | After a breakthrough year in 2005, remote deposit capture (RDC) is gaining traction. Corporate customers want it as a means to expedite funds availability. Some financial institutions see remote deposit as a defensive move. In addition to incremental fee income, the benefit of RDC has become the connection it creates between the bank and corporate customer — even opening the door for consolidating business relationships. Early movers are already taking the next step and reaching out to bigger and smaller business clients alike, with more features and segmented services.

Some say there’s a “gold rush” underway and others a “land grab.” Call it what you will but banks large and small are readily making a business case for remote deposit capture (RDC). Those that haven’t yet implemented are in an uncharacteristic hurry, and many of those that have are readying a second-generation product plan.





Before 2005, only a handful of banks had launched RDC. Now, all of the top 20 banks either offer or are developing the service, according to RemoteDepositCapture.com, a Web site that gathers and analyzes information about RDC. Its appeal? Businesses gain earlier access to deposited funds by scanning check images at their own work sites.

Bolstered by widespread interest from corporate clients and the advent of supportive regulation (in the form of the Check Clearing for the 21st Century Act), banks have taken to RDC much more quickly than check image exchange, which requires more inter-bank cooperation and upfront expenditure. Early adopters include Charlotte-based Bank of America Corp., Bank of New York Co., New York-based J.P. Morgan Chase & Co., KeyCorp of Cleveland, U.S. Bancorp of Minneapolis, Memphis-based First Horizon National Corp. , Wachovia Corp. of Charlotte and San Francisco-based Wells Fargo & Co.

“We’re in a situation where there’s a gold rush,” says Aaron McPherson, research director for Framingham, Mass.-based Financial Insights.

Many banks see RDC as a necessary defensive move to protect their client base against rivals who can offer what their corporate customers are making clear that they want. They also believe that giving their customers the ability to deposit their checks at their own stores and offices will strengthen the relationships, and will encourage some business customers to even consolidate various banking accounts with a single provider. Boston-based research firm Celent LLC has predicted that as much as $150 million in commercial deposits will have migrated to banks offering RDC services between mid-2005 and mid-2006.

As new as remote deposit is, some experts say that it’s already entering its second generation. Banks that were early out of the gate in offering the product are starting to segment their offerings to appeal to smaller and larger business clients, and also adding premium features. (See sidebar, “Market Leaders Introduce Bells, Whistles” on pg. 27.)

For more on RDC, see “Remote Capture: A Way to Draw the Corporate Customer Closer,” in the March/April 2005 issue of Banking Strategies at .

More Than ‘Remotely’ Popular

Prior to 2005, only a few early movers such as First Horizon and U.S. Bancorp had experimented with RDC. But the introduction of Check 21 in October 2004 — which gave legal status to the substitute checks necessary to most imaging endeavors — broke the market wide open. As of late 2005, about 28 U.S. banks were offering an RDC service of some kind, says Alenka Grealish, manager of the banking group with Celent. She predicts more mid-tier and community banks will join in this year as prices on equipment fall and service bureaus begin to offer RDC products.

According to Robert Hunt, senior analyst for Needham, Mass.-based TowerGroup, Inc., the banks that have taken a strong, early lead are Wells Fargo, Bank of America and First Horizon, institutions that have established cash management divisions.

Taylor Vaughn, senior vice president for treasury management services at First Horizon, says many of the banks that are just beginning to “come off the sidelines” were inspired by the success of these early movers. Institutions are also recognizing that they stand to lose potential revenue, operating efficiencies and customers if they don’t mount a comparable offering.

John Hancq, senior vice president for cash management at Vineland, N.J.-based Sun Bancorp, Inc. which launched its remote deposit offering in October 2005, agrees that “competitive issues factored into the timing.” The $3.2 billion asset-sized bank must “compete with banks that are so much bigger,” Hancq says.

“It’s a real land grab,” says Danne Buchanan, CEO of NetDeposit of Salt Lake City, Utah, which has worked with more than 25 banks on RDC. “The business customers really want this. So it’s a pretty easy sell.” As of early March, NetDeposit reported its bank customers had about 4,000 corporate customer locations up and running and were adding more than 100 locations every week.

“The pull from corporate customers has gone faster than we ever expected and has spread among small and large businesses alike,” reports Suzette Massie, president of the consulting division in charge of global payments for Dallas-based Carreker Corp., which has worked with more than 20 banks on RDC.

To the business customer, RDC offers the ability to delay deposit cut-off times and have access to more funds sooner, since businesses can do deposits at their own sites. Not having to trek to the bank to make deposits was definitely a key incentive for Salt Lake City, Utah-based Scott Machinery. The company, which sells John Deere construction equipment, has been using RDC to deposit its checks at KeyBank (a subsidiary of KeyCorp) since December 2005, according to receptionist Amber Goodfellow. Goodfellow is responsible for RDC at the company. The local business receives “almost all of its payments via check,” according to Goodfellow. She says the location she works from can take in as many as 50 checks worth $300,000 in a day.

Although Scott Machinery has eight locations and 120 employees, “going to the bank once a day was a problem because we’re so busy all the time,” Goodfellow says. Inputting the checks at the main Salt Lake City store takes five minutes a day, Goodfellow adds, and the money is ready to access immediately. Scott Machinery’s experience was so positive at its headquarters store that it recently added remote deposit at its Idaho Falls and Cedar City stores.

Remote deposit capture introduces new, ongoing fees but many business customers have determined the benefits outweigh the fees, according to Vaughn of First Horizon. He says his business customers say that the benefits of remote deposit are well worth the monthly maintenance fee of $25 to $250 per location and a per-item fee that can range from a couple of pennies to a few cents, based on the volume of deposits.

During a BAI seminar on RDC in March, John Leekley, founder and CEO of RemoteDepositCapture.com, estimated that a corporation with an average daily check volume of 1,000 items would gain $240,000 annually from accelerated availability of funds under RDC. The full annual gain would be $300,000 with reduced transportation expense, reduced processing fees, efficiency gains and other benefits, Leekley said.

It’s the bank’s responsibility to make certain that the process is as secure as possible for it and for its RDC customers. That means selecting business customers that are less likely to commit fraud or try to duplicate their deposits. The customers also need to be trained to minimize their risk. One focus in the training is the safeguarding and destroying of the checks after they’ve been deposited and a period of time has passed.

The way to manage this risk is to know your customers, according to Paul Citarella, executive vice president for sales and marketing for Alogent Corp., an Atlanta, Ga.-based company that offers remote capture software. Banks need to know their business customers and the businesses they are in and set limits for RDC accordingly. One way in which a bank can mitigate the risk from potential fraud is to assign each of its remote deposit customers a risk based on their business and their previous relationship with the bank that allows them a maximum deposit value and number of checks based on the assigned risk.

The guidelines First Horizon uses to qualify customers for the bank’s ACH services are the same guidelines applied to remote capture customers, Vaughn says. Check volume and credit scores are particularly instructive as to whether RDC is a good fit for the customer, according to Vaughn.

A ‘Stickier’ Relationship

RDC can mean growth to a bank. U.S. Bancorp has had more than 150 corporate clients sign up for the service since the bank first introduced it in the fall of 2004, says Kristine Oberg, vice president and product development manager for treasury management services. By early December 2005, the bank had already processed 1 million remote deposits and that transaction volume is increasing by more than 20% a month every month, according to Oberg.

As “with any new product,” Oberg says, “there’s an investment on the front end,” although she declines to comment on how much the bank has spent thus far. However, she adds, “the return on investment is pretty quick,” largely because the software and systems integration were not extensive and U.S. Bank’s vendor-partners — RDM Corp. of Waterloo, Ont. and Solutran, Inc. of Minneapolis — helped things along.

And in spite of this growth, leaders like U.S. Bank have only scratched the surface of the remote deposit opportunity, experts say. There’s a potential market of more than 12 billion items, between consumer-to-business and business-to-business payments, that could be remote deposited, according to David L. Peterson, executive vice president for Goldleaf Technologies, a Brentwood, Tenn.-based company that offers remote deposit software and services.

Hancq of Sun says that remote deposit capture would appeal to his corporate clients because it saves businesses from employee travel back and forth to the bank. Employee productivity should benefit and it would reduce any potential legal issues from an employee being injured while en route to pick up the deposits. As of early March, Sun had 40 RDC customers, and Hancq says the bank is adding two or three clients a week to the service.

Remote deposit also gives banks an inside track with their customers, by putting a “teller window” of sorts in their business locations. “Whoever gets their scanner on the desk of that corporate customer has the best chance of owning that customer,” Peterson said at a recent NACHA-sponsored teleseminar. Maggie Scarborough, research manager for Financial Insights, says RDC enables banks to build a stronger bond with customers. “It makes for a stickier relationship,” she says.

Because of the need to quickly get payments deposited and into the business’ earning stream, businesses have needed to choose banks based on their proximity. RDC eliminates that consideration as a relationship driver. Without the need for a nearby brick-and-mortar location to make deposits, businesses are free to consolidate multiple bank relationships with one institution. It gives banks an opportunity to “penetrate a market where they don’t have a foothold,” says Massie of Carreker.

Remote deposit, for example, has already given First Horizon a foothold in 38 states, even though it operates branches in only four states, according to Vaughn. At Sun, Hancq says RDC has begun to expand the bank’s reach beyond its home base of New Jersey, and well into neighboring Pennsylvania and Delaware.

Since American Chartered Bank began offering remote deposit to clients in the second quarter of 2005, there has been acceptance from companies “both large and small, some with a few checks a day, others with hundreds of checks per day,” reports Kent Scharringhausen, senior vice president of treasury management services. Some are within walking distance of the Schaumburg, Ill., bank, and “we have also installed on the east and west coasts for clients with a national footprint,” Scharringhausen says.

One factor that has promoted greater use of RDC by a wider range of customers is lower prices for the equipment. TowerGroup’s Hunt recalls that when he first saw remote deposit-capable scanners showcased at BAI’s Retail Delivery Conference & Expo in 1998, they cost about $6,000. Now, the price has dropped to less than $1,000, he says.

About three-quarters of the 138 RDC clients that KeyCorp had in mid-February were middle market businesses, such as insurance or title companies, according to Debra L. Sciano, vice president for the Cleveland, Ohio-based bank. But small businesses represent a healthy 15% of Key’s RDC base. And, Sciano says, the bank is starting to see more of its remote deposit business coming from large corporations (2% of RDC customers) and the public sector (2%), as well as high net-worth clients coming from its private banking unit (another 2%).

This expansion of the market — both in the breadth of businesses that use remote deposit and banks that offer it — heralds how quickly “the business is moving forward,” says Leekley of RemoteDepositCapture.com. And as that expansion continues, Leekley points out, banks would be wise to stake their claim in the market based on what makes their RDC service special. “In the cash management industry, every product gets commoditized,” he says. “Banks need to work hard to develop a solution that differentiates them.”

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