Remote deposit capture (RDC) is becoming an increasingly popular solution for merchants and a potent value-added service for ISOs to offer. But the process of scanning checks to electronically deposit them into bank accounts is not without complexity. A recent RDC Roundtable Virtual Conference & Expo, presented by online financial services forum Bankerstuff.com, shed some light on the fundamentals of RDC.
According to Rob Hayden, Senior Expert at payments industry consulting firm McKinsey & Co., there are three types of RDC:
While corporate capture is the most mature RDC market, branch capture is becoming increasingly popular, and ATM capture is an emerging segment, Hayden said. He added that significant growth is occurring in all three markets.
In the keynote address, An Outlook for Remote Deposit Capture, co-presented by Hayden and David Stewart, also a Senior Expert at McKinsey, five trends were discussed that seem to favor the expansion of RDC in the marketplace.
These trends are economic slowdown, retreat from risk, more aggressive regulation, changing competitive landscape and the maturing electronic payments market. Following is a discussion of each one:
Economic slowdown: Stewart pointed out that a year ago global financial services firm Lehman Brothers collapsed on Sept. 15, 2008. Since then: the gross domestic product of the United States has declined for 4 consecutive quarters; unemployment has risen to a 20-year high of 9.7 percent; the credit markets have dried up; and personal income and consumer confidence have declined. As a result, consumers are spending less and spending less often, Stewart said.
Therefore, businesses are looking for strategies to reduce operating costs and optimize working capital.
Retreat from risk: Due to the struggling economy, "retreat from risk happened across all sectors in the payments value chain," Stewart said. So commercial banks have reduced the supply of credit available to businesses. This move has "strained the loyalties of some corporate customers," he added; those customers are likely to seek out businesses that offer products such as RDC to "help simplify the business case."
More aggressive regulation: With the payments industry facing new regulations in 2010, keeping business balance sheets in the black will increase in importance. "Products or technologies that facilitate deposit collections or improve the value propositions to customers will be that much more important in the very near future," Stewart said.
Changing competitive landscape: Major acquisitions have dominated the financial landscape, such as Wells Fargo Bank acquiring Wachovia Bank and PNC Financial Services Group Inc. acquiring National City Corp. In consequence, "the top four or five banks now control well over half of the cash management market in the U.S.," Stewart said.
For smaller banks that don't possess the scale of the large banks, functionality, service and innovation will increase in significance.
Maturing electronic payments market: Stewart recognizes that debit card usage is on the rise, and the use of checks is on the decline. Despite this, Stewart predicts the growth of RDC adoption will reach 20 percent in 2010. "Commercial customers want better ways to deal with [checks]," he said. They're going to find a provider of RDC to do it."
One conclusion drawn from the interactive roundtable is that careful planning is crucial to successful RDC deployments. In one discussion entitled Best Practices for RDC Customer Approval, Kathy Levin and Terri Sands, Managing Directors of Payments Information Circle LLC, documented the steps financial institutions (FIs) must take before RDC rollouts can occur.
According to Levin and Sands, the first step is to document the client approval process and submit it to the institution's senior management for consent. The actual process consists of vetting the client for its risk level in handling checks. That is accomplished by procuring an application from the potential client and, based on the information furnished by the applicant, generating a risk profile for that client.
Then, it's on to the FI's credit department to approve and set limits upon the RDC customer's check conversion activities. The final step in the approval process is to have the customer sign a legal agreement. "Then and only then can you really go to client set-up," said Levin.
As part of an RDC provider's underwriting, it is wise to create a "portrait" of an ideal RDC customer because, as Levin said, "All receivables are not created equal." An example of a good RDC prospect is a local merchant who has been a reliable customer for years; conversely, a problematic candidate does business in another state and contacts you about your RDC product by phone.
In the WACHA Roundtable Discussion, Mary Gilmeister, Accredited ACH Professional and President of the Wisconsin Automated Clearing House Association, offered insights into how to go about risk assessments. Her comments took the form of questions that RDC providers must ask, such as:
Personal experience informed Gilmeister's remarks. When one merchant in her sales territory experienced a break in, the thieves didn't steal cash; they stole checks, which raised the specter of identity theft, since checks contain sensitive customer data, such as names, addresses and bank routing numbers. Thus, it is vitally important to know whether merchants are storing checks on site for weeks or even months.
"The longer you have that check at the merchant, the better the chance the check gets stolen," Gilmeister said.
She also stressed that providers should investigate the physical security controls at the RDC customer, such as what security protocols have been implemented for the transmission of check images and what anti-virus software is installed on computers.
According to Gilmeister, keylogging (also called keystroke logging) has become a problem on RDC systems. Keylogging is the act of monitoring a user's actions at a computer keyboard to take note of (or log) the keys struck. This is usually done covertly with the installation either of malware within the computer system or of a hardware circuit attached between the keyboard and the computer.
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