The Rise of Remote Deposit: Back to the Future!

Brentwood, TN (4/25/05)--

In case you haven't noticed, it's 2008. It must be. You see, 2008 is when the pundits predicted banks would start accepting check deposits remotely using imaging technology. So, since it's happening now, I can only assume we have slipped through a wormhole in the time-space continuum and fast-forwarded ourselves into the future. Or maybe, just maybe, the experts were wrong.

Either way, the ability to accept a deposit remotely is here and is quickly becoming the preferred method of submitting checks to the bank. Think about it. Getting checks from businesses to the bank is a royal pain in the courier. Logistics and geography force many companies to make their physical deposits as early as 1:00 PM. Either an employee takes the deposit to the bank or a courier comes by to pick it up. Both methods cost the business time and money. So when business owners discover that they can scan their checks at the office, submit them electronically, and extend their deposit deadlines to the close of business, how long do you think it takes them to sign up? The only real question is with which financial institution will they sign up? Here's a clue: if you are not offering a remote deposit service, it won't be yours.

OK, early on, everybody thought Check 21 would first be about getting backend systems to swap electronic image files. All of the host and item processing systems would have to be upgraded to accept the X9.37 file format that contains both check images and MICR data. Once this happened, banks could then begin truncating checks in the back office, then, a few years later, at the teller line, the ATM, and eventually, the merchant.

That was the prediction, but where are we now? Chances are your host system or item processor still isn't ready to accept and process X9.37 image files. So, you sit back and wait, right? And while you're waiting, super-regional banks are aggressively marketing remote deposit services to your business customers. But don't worry. They won't go after all your customers, just your best ones, those that represent a significant portion of your core deposits and bottom-line profit. Here's the reality: check truncation at the merchant site is happening first. It's a land grab for deposits, pure and simple. The first bank to put a scanner at the business site wins.

Those banks already offering a remote deposit service are finding that they are not only able to protect their existing corporate accounts but they're bringing in new accounts as well. That is to say, businesses that were formerly beyond the geographical reach of the branch can now remotely scan and electronically deposit any item with a MICR line. Moreover, these businesses will pay service fees to do so. (After all, with very simple math, you can show them exactly how much money and time they will save over traditional deposit drop-off or courier pick-up services.) So not only are these banks protecting their base of customers, they are increasing non-interest fee income and acquiring new deposits, those “low-cost” deposits that dramatically improve net-interest margins when loaned out.

Sound too good to be true? There has to be a catch, right? Of course there's a catch. You have to convince the naysayers, many of whom are in the operations area of your financial institution. These are the folks who want to postpone change indefinitely and will scapegoat the unknown to do so. They will say, “We have to wait until our backend systems can accept X9.37 files,” or “This is too risky, how will we prevent fraud?”

First, until your backend systems are upgraded, you will likely accept deposits remotely and create paper substitute checks for your on-us items processing. It's not difficult or expensive, relative to the opportunity. As for your transit check items, you can begin forward-presenting them electronically right away. You don't have to wait on your host system for that. Also, new pricing for image-exchange services is very competitive, providing the tipping point needed for many financial institutions to cost-justify electronic forward-presentment.

Second, as with any payments service, you will put in the appropriate controls and agreements to prevent fraud and mitigate your institution's liability. Done properly, accepting deposits remotely will not prove significantly more risky than accepting traditional physical deposits. The key is to identify risks, implement commercially reasonable controls (e.g., verification reviews and secure submission channels), and monitor carefully.

Of course, you can always play it safe and postpone offering a remote deposit service. You know, let other financial institutions figure it out first. Then again, in the interim, you risk losing your best business accounts and the deposits those accounts represent. This risk is much bigger than any you will encounter offering a remote deposit service.

As an independent community bank, you may think offering remote deposit is beyond your capabilities. You may think it's too risky or that it's too early to be offering a “bleeding edge” product. But you owe it to your customers and shareholders to review the facts about remote deposit and the opportunity costs of delaying a decision. If a service can bring in core deposits, increase fee income, and protect your most important account relationships from competitive encroachment, that service merits careful consideration.

The advent of remote deposit is the defining trend of 2005. It is upending traditional branch strategy and redefining markets locally, regionally, and even nationally. So wake up. You're not in a wormhole. Remote deposit is here and now. And it's back to the future for us all!

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