When Thomas Jefferson negotiated the Louisiana Purchase in 1803, acquiring 800,000 square miles of the western half of the Mississippi River Basin for $15 million (less than 3 cents an acre), critics and advocates clashed over the strategic advantages and wealth this addition could bring to the United States. Jefferson understood the benefits of doubling the new country's size and defended the purchase passionately.
The venture involved risk: The territory's future was unknown. However, rejecting such a good deal seemed unwise. For ISOs and merchant level salespeople (MLSs), remote deposit capture (RDC) could be their Louisiana Purchase.
RDC's potential is vast; the terrain is a mystery in many respects; but the financial rewards RDC could bring might surpass the highest industry expectations.
RDC is a new generation of check imaging and conversion that has piqued the interest of industry leaders. Many large financial institutions (FIs) have implemented RDC, and it has gained wider acceptance since 9/11 and the advent of Check 21. However, there is an untapped market for many ISOs and MLSs to explore. Check 21, short for the Check Clearing for the 21st Century Act implemented in October 2004, allows banks to clear checks using images (reproductions) of them rather than the original items, eliminating the need to physically transport paper checks.
According to Bob Ficarra, Vice President of Sales for Optio Solutions LLC, a division of CrossCheck Inc., only larger companies received POS terminals when they were introduced 30 years ago. The terminals reduced fraud and saved money, but the banks still shied away from providing them to smaller merchants because the risk was not deemed worth the reward.
"ISOs are cowboys, OK?" Ficarra said.
"The small and mid-sized merchants wanted the equipment as well, but how does a banker go out and sell to that merchant and do it cost-effectively? Bam! The ISO industry was born.
"FIs are not going out to the mass market with RDC. They're not comfortable taking the liability, so the small merchant is just sitting there. I've been hearing checks are dead all my career, but they're not going anywhere."
Ficarra feels now is the perfect time for ISOs and MLSs to tap into a market that has 20 times more dollar volume than credit cards and do what they do best: make merchants want the equipment and then provide it to them at a reasonable price.
"ISOs are going to take the risk on the fraud problem, and they can make a huge amount of money from the B2B [business-to-business] side, so this is the ideal ISO product," he said. "Remote deposit capture is the Barry Bonds of the check processing industry. It's check conversion on steroids."
The RDC solution enables users to scan checks and transmit the scanned images or automated clearing house (ACH) data to a bank for posting and clearing. RDC is a fully integrated, Web-based electronic payment processing system that uses a check scanner to convert paper checks into electronic transmissions. To accomplish this, five items are needed:
RDC encodes checks - in lieu of key entry - using courtesy amount and legal amount recognition (CAR/LAR) technology that automatically reads the printed amount and legal or handwritten amount from a check and displays the results to the user.
It then creates an X9.37 file, or ICL, which is the electronic file specification developed to support Check 21. It is the industry standard for electronic check exchange.
The ICL files - complete with check image and magnetic ink character recognition (MICR) numbers from the bottom of a check - are either electronically uploaded to a merchant's FI for deposit or used to print image replacement documents (IRDs), which are also known as substitute checks.
With IRD, the physical check is converted to a machine-readable paper substitute. The IRD contains a front and back image of the original check and is MICR encoded. IRDs must also bear a legend stating, "This is a legal copy of your check. You may use it the same way you would use the original check."
RDC enables FIs to take advantage of Check 21 by capturing checks at their earliest point of presentment and transferring them electronically to a check clearing house, the Federal Reserve, or a paying bank. Many RDC product suites today serve as both check conversion and back office conversion (BOC) tools and are equipped with risk management and identity assurance software.
Once check images are captured, ACH files (for eligible items) and/or image-based deposits are prepared. The RDC system then transmits deposits to an FI via file transfer protocol over the Internet as 128-bit encrypted files.
With RDC, checks clear within 24 to 48 hours, compared to five to seven business days with traditional check deposits. Nonsufficient funds (NSF) checks can be presented for payment up to three times, allowing merchants to collect up to 50 percent more of NSF checks. Merchants know immediately if there is an error with a deposited check, thereby increasing the chance to collect money promptly.
Also, merchants are not restricted to geographical boundaries since any FI in the United States can centralize all accounts with RDC. In addition to processing personal and B2B checks with the same ease as ACH transactions, remote deposit solutions can process traveler's checks, money orders, insurance payments, and payroll and government checks. Check capture uses the same software for branch and remote deposits.
Recent changes in ACH rules make it possible for banks and businesses to convert checks to ACH for faster clearing and settlement. With remote deposit capture, merchants can:
RDC allows ISOs to:
There is a camp in the payments industry that would have ISOs and MLSs believe checks are dead, or at least dying a slow death. But according to the 2007 Federal Reserve Payments Study, which was based on findings from the 2007 Electronic Payments Study conducted by Dove Consulting, the numbers do not support concluding that the end of checks is near.
Noncash payment transactions in the United States in 2006 totaled 93.3 billion, with a value of $75.8 trillion. There were 62.7 billion electronic payments versus 30.6 billion checks paid. Checks accounted for 33 percent of noncash payments. Electronic payments - including signature, PIN-debit and credit card, ACH (including BOC and electronic funds transfer), and electronic benefits transfer - accounted for $34.1 trillion.
However, though check volumes decreased 18 percent between 2003 and 2006, the amount of money paid via checks increased from $39.3 trillion to $41.7 trillion during the same time. Most corporate and B2B payments are still paper based and, according to the Fed, "although check volume is clearly on the decline, it will also likely have a long tail and need to be supported for many years to come."
Previously, without an appropriate payment acceptance product, ISOs and MLSs were locked out of B2B check payment opportunities. RDC provides them the opportunity to package an additional form of check acceptance with card solutions. And checks are expected to remain an important part of small business transactions. Industry analysts predict a 20 percent increase in RDC for FIs by the end of 2008.
"Checks represent more than 75 percent of total receivables for over two-thirds of small businesses," said Bob Meara, Senior Analyst with Celent LLC, an FI research and advisory firm.
"A terrific opportunity for RDC exists among the 20 million businesses with annual revenues of less than $1 million. New, low-cost scanners coupled with thin client [Web-based] applications will open up a whole new market."
Jerry Federico, National Sales Director for Enterprise Payments at ProfitStars Inc., a Jack Henry and Associates Inc. company, feels FIs are not the most aggressive marketers and have neither the resources, the motivation nor the skill sets to take that product to the street.
"The ISOs are the trusted advisors to millions of small businesses because they offer superior reporting capabilities and services," he said. "There is a perception that all RDC products are the same, but this is not so.
"Many subtle differences exist between product suites, and this is where the ISOs really need to do their homework and decide which solutions are best suited to a particular small business."
"Remote deposit offers three things salespeople love to hear," said Michael Pratt, Chief Marketing Officer for Panini North America Inc. "There is built-in market demand for this product; it instantly reduces transportation, operational and labor costs; and with over 24 million businesses in the U.S. and only 400,000 RDC units deployed, it's an ISO's ideal dream state."
Pratt's biggest concern is that solutions are not being offered and deployed fast enough to businesses that want them.
"So that's the real opportunity here for any sales organizations," he said.
Danne Buchanan, Chief Executive Officer of NetDeposit Inc., believes many banks haven't aggressively marketed RDC to small and mid-sized businesses. He also noted that banks offering RDC products require merchants to open up new - or move existing - relationships, which is a lot of work for small business owners.
"One of the biggest opportunities for an ISO over a bank is that an ISO doesn't require merchants to change their bank relationship, which is very meaningful in terms of selling a product," Buchanan said. "I expect ISOs and MLSs to get pretty aggressive in the marketplace over the next year once they get their feet wet and learn the market."
RDC products and services are evolving and improving rapidly to maintain consumer confidence and meet security standards that are critical for successful end-to-end transactions.
There are different sets of security standards and regulations in terms of the physical capture and deposit of checks as electronic images. "There's a whole bunch of rules behind electronic check payments," Ficarra said.
Check payments are governed by the Uniform Commercial Code (UCC), Articles 3 and 4a, a uniform set of laws adopted state-by-state that regulate electronic check imaging. Electronic payments like ACH, credit, debit and electronic benefits transfer are federally mandated under Part 205, Regulation E of the Electronic Funds Transfer (EFT) Act of 1978.
The most important difference between the UCC and Regulation E is in the time a consumer has to contest a transaction: 45 days under UCC and 60 days under Regulation E. Allowing time for posting and statement issues, under Regulation E, consumers could have up to 80 days to contest transactions. And federal law trumps state law, so when a check is converted for ACH processing, it is no longer a check, but an EFT transaction.
Therefore, if a company authorizes and converts a check to an ACH item, it owns that risk for 80 days.
However, it can reduce the risk to 45 days if it simply scans the check and clears it through the Federal Reserve's electronic check clearing services. Most checks today clear just as fast, if not faster, than ACH items. And the risk is smaller because check images are scanned front and back.
Many companies today offer RDC products that take advantage of both sets of rules.
After merchants swipe checks through readers, processors can decide whether to clear them as Regulation E items or as electronic checks.
"[RDC] is still a newer product in the technology curve, but it's certainly gotten a lot of traction quickly," said Steve Buchberger, Senior Vice President, Solutions Management for Wausau Financial Systems.
"We're just now seeing more interest from FIs in the small business market.
The solutions have matured in capabilities as well as ease of deployment with Web-based solutions, which I think is critical for an ISO market."
Buchberger doesn't think RDC will eliminate ACH transactions, even though an increasing number of banks receive images electronically. "In the early days of Check 21, few banks could receive checks electronically and needed an IRD," he noted. "Now, banks are updating their technology to send images end-to-end."
Paperless image exchange drives down costs, and the most comprehensive RDC systems today offer both image exchange and ACH capability, he added.
"RDC is quite a bit easier to implement than branch capture," Pratt said. "Early thick line [PC-based] versions made implementation more difficult. Now everything is thin client, and we found consistently through the industry that image quality has not emerged as a significant issue.
"The other concern was fraud. Interestingly enough, to the best of my knowledge, not a single case of fraud has been associated with RDC." NACHA - The Electronic Payments Association's BOC entry code allows retailers to take checks and either scan and deposit them electronically as an image or read the MICR line and truncate it into an ACH transaction.
And new RDC products are equipped with higher speed cameras for image capture and can read the MICR line both mechanically and optically to capture more accurate images.
Industry experts envision RDC eventually becoming a stand-alone payment application. "What we've done with our Check360 RDC solution is put a lot of front-end risk management features into our product like duplicate detection, which prevents checks being run through more than once or at other locations," Buchanan said.
"Where we are headed is to create one comprehensive payment solution for merchants instead of multiple solutions," he added.
"We strive for consistency across all payment mechanisms, and I think that's where the industry is headed over the next three to five years."
Ficarra believes the RDC opportunity is going to produce the next crop of ISO and MLS millionaires.
"They can become the gateway for RDC and punch a hole into the fabric of the small and mid-sized business owners, provide the appropriate value added services, and create new revenue streams in a niche market with massive profit potential - and a dearth of sales representatives," he said.
"So, where do I sign up?"
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