The big banks are wasting little time leveraging Check 21 and seeking to lock up small businesses with remote deposit capture solutions.
That's because they know what many credit unions may not realize, according to two experts: the deposit side of the commercial side is more profitable than the lending side.
"Anybody with a heartbeat knows check volume has declined," acknowledged Royce Brown, the president of NetDeposit, Inc. "But going forward checks are still going to have huge volume and you still have to deal with those checks and you still have to make money in dealing with those checks. The key is to make sure the checks that go electronic go to your electronic system."
For credit unions, the competitive news is difficult as many are only now sticking a toe into business services and even those that have built fairly sophisticated operations still can't bring the resources to bear that a Bank of America or Citibank can. Moreover, many credit unions have focused on the lending side of the commercial relationship, leaving the deposit relationship for later, in many cases due to a lack of data processing capabilities or a misunderstanding of the opportunity.
What Banks Know
According to Brown, banks know a little something many credit unions do not. He said that one thing that has surprised him is that the profits to be had on small business deposits are double those of small business lending. Indeed, during 2002 net revenue on deposits was $20 billion. For the same year, net revenue from commercial lending was $10 billion (see chart).
In 2004, there were approximately 450 remote locations, a number that has grown to 2,700 in 2005. By 2006 Net Deposit is projecting that number will hit 15,000.
Brown said small business presents opportunities, but financial institutions must target segments most likely to benefit from remote deposit capture. Among the types of business that process a lot of payments are property management firms (127,000 companies), rental services (124,673); accountants/tax preparation (201,406); doctors/dentists (703,959), automobile services (459,175), and auto dealers (167,068). All figures are from the U.S. Census Bureau.
He noted that some banks report that small businesses will show up in the branch three or four times per day to make deposits; remote deposit capture can knock that number down to zero, he noted.
"Small business is a slam dunk; it will be a success," predicted Brown. "The retail market is really not a focus for banks right now."
While many saw Check 21 as an operational issue, Brown said it is really a marketing opportunity. Among the banks that clearly agree with that projection is Bank of America. BofA has been piloting remote deposit capture solutions since 2002, initially seeking to develop it internally before opting to partner with NetDeposit. Its NetDeposit partnership has been piloted at the merchant level and has been rolled out after the platform was built during 2004 and the big bank invested in image exchange.
Already the bank is seeing big volumes. During September, for instance, it processed $3.7 billion in remotely captured deposits.
Bank of America's strategy around distributed capture includes experimentation within its branches right now in evaluating a retail remote deposit system. "We're also looking at some applications with merchants where we can integrate a check version of our remote deposit along with a check reader for small business where there isn't much space," explained Elizabeth M. Lee, VP in Bank of America's Global Treasury Services.
In addition, in 2006 BofA will be piloting 15 image-enabled ATMs to examine customer adoption.
For businesses, the opportunity to reduce trips to the branch is a primary convenience driver. Small businesses also want cut-off-time flexibility, to improve operations, to improve collection time and reduce desk float, to reduce returns, to remove geographical boundaries, and to simplify cash management.
For those retail customers and small businesses, the costs include the scanner, PC technology, Internet Access speed and service fees the bank/credit union may put in place. Risks include technology aptness, original handling, payment liability from the bank, cash reporting and the speed to handle large volume of checks.
The cost issue is one the bank continues to wrestle with as it seeks to provide less-expensive scanners to retail customers. Lee and Brown said scanners run from $750 to as much as $3,500, depending on volume.
Cost Just The First Issue
"We're working with scanner vendors to try to get an under-$500 scanner that's a little more robust," said Brown.
But Lee noted the cost is just one issue. For instance, once the scanner is deployed, what happens six months down the road if the scanner breaks? "You want to consider whether you are going to offer hot spot services, or lease or rent machines," said Lee. "Logistically, how are you going to manage that? If you sell it, you've got tax issues."
The concerns don't stop there in remote deposit capture. "You have to make this as bulletproof for the customer as you can," said Lee, noting there are a whole host of security issues that must be considered. In addition, businesses that have a high number of cash transactions and which must deposit that cash within the branch will not see any benefit in installing a deposit capture solution.
Examining Profitability Model
For the credit union or bank, the questions to be asked begin with the revenue opportunities first before examining the cost component, noted Lee. If a profitability model indicates there is a case for moving forward with remote deposit capture, the financial institution must examine whether there is opportunity to leverage the existing infrastructure, including can the customer support center handle the increase in calls.
"Can those employees answer scanner questions?" asked Lee. "Is the institution prepared to handle hardware issues? Will the technical skills of the customer create issues, and can issues be resolved quickly to prevent frustration?"
Another consideration BofA has weighed, said Lee, has to do with credit risk and the willingness to underwrite customers/members and what will be the criteria for doing so. A risk profile must be created in terms of the limits set for customers; agreements must be structured to cover risks, but also remain simple enough for the customer to understand. Finally, the credit union or bank must assure that originals are handled properly.
Lee said BofA has sought to make its deposit capture application as simple as setting up a computer ordered through Dell. From that point, the bank/credit union must provide online and automatic installation and upgrades, must provide online training modes, and must ensure its solution is easy to support.
BofA has worked carefully to package its deposit capture solution, providing web-sign up, a simple agreement with limited forms, bundled pricing to reduce up-front costs (including a 30-day try-and-buy and reduced scanner costs), bundles of hardware and software that can be mailed or picked up at the branch; stock at the branch that can be sold and delivered without delay; same-day customer setup; plug-and-play hardware and single-step software installation; Quick start flash, website and call-in number, a training mode (to practice), and careful support in the early days to prevent errors and ensure a good customer experience.
