When Check 21 went into effect last fall, there was initially much concern that banks would use the new rule to process customer checks in real time, thus eliminating the float and causing a wave of bounced checks. It didn't happen, of course. But make no mistake, banks want it to happen and, more importantly, so do more and more of their corporate customers.
Merchant capture, corporate capture, remote-deposit capture-the technology goes by many names-but the concept is that banks put the techno-logy for check-image capture in the back office of their corporate clients, which can then send their checks to the bank for same-day processing and clearing of funds.
Thomas Houston, president of T. Houston Technology Group, which consults for community banks, says merchant capture is being called by some "the greatest innovation since the account number."
And Robert Hunt, a senior analyst in the retail and wholesale banking practice at TowerGroup, says "there are real competitive advantages for early movers" in adopting this technology.
The reason for the excitement is that merchant capture seems to be one of those technologies that can benefit both the corporate customer and the bank in significant ways.
On the corporate side, executives see a chance to reduce the float and make funds available faster. And for multi-state or national companies, it's a way to consolidate banking relationships that have sprung up solely due to the proximity of a certain bank to a certain office.
Instead of making multiple deposits at multiple financial institutions, all those deposits can be sent electronically to one bank-and be made available more quickly. "Merchant capture breaks down geographic walls," says Jeff Vetterick, vp of marketing at Advanced Financial Solutions, a Metavante company in Oklahoma City, which is currently rolling out merchant-capture technology.
And the geographic benefits extend to the banks as well. Using merchant- capture technology, a regional bank could offer check-clearing services to a corporate client's national network of offices, not just those that happen to be near a branch.
That's the thinking behind the decision of $7 billion asset Sterling Savings Bank in Spokane, WA, with 170 branches in four states, to implement the AFS product.
"We don't have a heavy branch concentration and so we need to make it convenient for companies to work with us," says Kade Peterson, an svp at Sterling. "It really allows us to expand our footprint to places where we don't have a branch."
Despite the potential, there are still limitations to real-time processing of checks that will take time to overcome. The most significant of these is that the Check 21 rule does not require a bank to accept an electronic version of a check; it requires it to accept a substitute check, or image-replacement document. Unless both banks involved agree to an electronic exchange, the company's bank will have to print out an IRD to present to the bank on which the check is drawn.
The economics of this means that banks, at this point, want to offer this merchant-capture technology to companies with a low volume of high value checks, not a small mom and pop with lots of $20 checks to cash.
"We're not targeting retailers," says Peterson, who expects to have its first beta customer live by the end of March. "We're targeting medium-sized companies depositing a few large dollar items that are important for them to get into the bank, such as wholesalers, manufacturers and distributors."
Hunt adds that "the key to merchant capture is to have banks agreeing to receive electronic checks as opposed to being presented with an IRD. Then we have STP, because [the check] never goes back to paper." While a few banks have put proprietary technologies in place, such as Bank of America and First Tennessee, now a bevy of vendors are competing to offer solutions, including AFS, Wausau, Unisys, NCR and Net Deposit, he says.
Houston says that the reason more banks have not already rolled out this technology-virtually everyone is in the beta phase at best-is that "vendors are still retooling bank-capture technologies into merchant capture, and they've only been at it since the rule change in October." He predicts that "while we're at the bottom of the adoption curve, it will turn up quickly because it just makes too much sense."
Still, beside the coordination between banks to accept electronic checks, there are other practical brakes on quick implementation of these technologies. Tops among these is the issue of fraud. Any time there is a new technology, observers say, the bad guys will look for cracks in the system.
But even non-intentional glitches that would put the banks on the financial hook must be guarded against. For instance, what if a check sent electronically is also inadvertently cashed at a local branch on the same day?
This type of concern is what prompted Sterling Savings to request that AFS incorporate some disabling technologies in its software to prevent checks from being accepted a second time.
With that soon to be in place, Peterson says the bank is looking forward to issuing credit approval to its first beta customers and installing the hardware and software on site to begin merchant capture. Training corporate employees, he expects, will take just 10 minutes.
Some corporations are so taken with the new technology that they're not waiting for their bank, says Vetterick, and are approaching AFS directly. "They want to put the technology in place themselves so they can then shop banks," he says.
