Business clients that receive thousands of checks per month typically can't get automated bulk check processing services from a small bank. And if the services matter to those clients, the small banks lose their business to larger rivals.

But Farmers & Merchants Bank, a $4.7 billion-asset bank based in Long Beach, Calif., is launching an image cash letter service. In doing so, the bank is demonstrating an emerging option for smaller banks to deepen relationships with business clients, speed processing and take greater control over the quality of check images that are prepared for deposit.

"The businesses that we are working with are demanding the type of technology that enables much faster processing, and we want to free them up and not worry about banking, but the day-to-day activities of their businesses," says Ken Nagel, CIO of Farmers & Merchants Bank, which has a 21-branch network and provides commercial and small-business banking products.

Image cash letter services are similar in concept to remote deposit capture but applied to a much higher number of checks that are received in a short period of time. The service receives paper or scanned checks and creates images of those checks that are ready to be deposited at the bank. The software application is based on x9.37-the American National Standards Institute( protocol for the exchange of data that guides the configuration of check images for deposit.

F&M is using the image cash letter service to target companies that receive more than 2,000 checks per month. The bank, which also offers remote deposit capture for small-volume and lockbox services, hopes to pitch the service for its ability to provide faster access to funds and lower processing costs than other third-party options.

The bank also gains control over the quality of the images for risk and error mitigation.

"We can process the data quicker, and it speeds up the deposit process," Nagel says.

F&M has a growing number of business clients that are expanding their own client bases fast enough to outsource check processing, Nagel says. Charities and medical offices in particular are receiving increasing volumes of checks.

"The small capture devices are not going to work, so we're getting an increased demand for the [x.9.37] file," Nagel says.

Image cash letter services are a common product for larger banks, since smaller banks don't typically have a large number of business clients that receive thousands of monthly checks.

"A good percentage of the large banks do this, with slightly less in mid-tier segments and few small banks," says Bob Meara, a senior analyst at Celent.

To offer the service, Farmers & Merchants Bank partnered with FIS and deployed their Deposit Director solution. The customer accesses a secure portal and attaches their x9.37 file. Deposit Director then consolidates the files, runs security, limits and diagnostics on the file, and then transmits to the bank for processing throughout the day. It was implemented in less than 60 days. Other major providers of image cash letter technology for banks include Wausau and core providers such as Jack Henry & Associates (JKHY) and Fiserv (FISV). Meara says that while small banks have not offered the service traditionally, they could benefit from doing so.

"[If] you're not deploying the tech that you customers are using [for image cash letters], it's not evident that you would be able to receive files without error, or the data may not be up to snuff," he says. "You don't control the capture process."

As non-banks increasingly get into the payments market, there's an additional opportunity to provide image cash letter services, Meara says.

"Small businesses may be left with [remote deposit] capabilities, but no obvious way to deposit the checks. So this may be a way to snag part of the market," he says.