By Bob Meara
Celent LLC
Editor's Note: This story was published by RemoteDepositCapture.com April 20, 2009; reprinted with permission. © 2009 RemoteDeposit Capture.com. All rights reserved.
Remote deposit capture (RDC) has taken financial institutions by storm. In just over three years since its debut, well over half of all U.S. banks have adopted solutions, along with a significant number of credit unions and retail brokerages. This extraordinary adoption earns RDC the distinction of being the most rapidly adopted technology in the history of the U.S. financial services industry.
Its many well-documented benefits for businesses and financial institutions make this rush to market seem almost reasonable. But this extraordinary adoption among financial institutions has thus far led to comparatively tepid client adoption.
Based on multiple research efforts, we can conclude that this lopsided picture is not the result of an exaggerated view of the market opportunity. The rationale for such historically temperate sales and marketing efforts among banks is defensible in many cases. But RDC is no longer a nascent market. The time has passed for financial institutions to get busy selling. They're not alone anymore.
RDC's early movers were the large cash management banks, and virtually all of the initial activity was within the treasury management organizations of deploying financial institutions. Many referred to RDC as "corporate capture" in those early days. Since then, institutions of all sizes embrace RDC as a viable product for small businesses and even microbusinesses - those having annual revenues less than USD $1 million.
A stark characteristic of the otherwise highly diverse small business segment is the absolute centrality of check payments. In a June 2007 survey of 325 small businesses across multiple vertical markets, Celent found checks represent more than 70 percent of receivables among an astonishing two-thirds of businesses (Figure 1). Unlike the vanishing usage of checks at point of sale, checks remain vital to health care providers, property management firms, and a host of service providers.
Although check payments represent the bulk of receivables among these firms, they don't necessarily take in checks in large numbers. In this same survey, Celent found the majority of small businesses receiving five or fewer checks per day, and the size of the business was a good predictor of average daily check volume (Figure 2).
And, with the exception of retail merchants (for example, dry cleaners), cash payments are a relative rarity among small businesses. The centrality of checks alongside the absence of cash makes RDC doubly attractive among small businesses. But it gets better.
These same businesses that receive check payments daily make relatively few trips to the branch to deposit them: two trips per week on average, with larger businesses depositing more often. This obvious disconnect can only be explained in terms of the inconvenience of recurring branch visits. This is why RDC is such a rich opportunity among small businesses.
To have a solution is one thing, but to use it to aggressively capture market share is another. Addressing the enormous small business RDC market is a vexing challenge. Deployers must deliver low cost, easily installed, and highly usable solutions to large numbers of businesses unwilling to pay the monthly fees that typify the middle market and large corporate segments.
Low solution costs must be accompanied by highly scalable and efficient deployment and support models. Not many financial institutions have these core competencies.
To some banks, this means they must acquire another solution for small business, much in the same way many banks did with Internet banking solutions. At least 30 percent of retail banks anticipate doing so, according to a Celent survey of financial institutions in June 2007. Once rare, such solutions are available from a growing number of software vendors.
Concurrently, leading check scanner manufacturers have recently launched lower cost scanners designed for small business applications. Moreover, third parties expert in efficient hardware deployment and support have emerged with RDC-focused solutions so banks don't have to be in the hardware business. The table is all set - when's dinner?
Beyond product and infrastructure, financial institutions will have to get comfortable with a very different business case to justify broad-based small business RDC deployment. One important aspect lies with scanner hardware cost recovery. Historically, many financial institutions either required RDC clients to purchase the scanner up front or bundled the scanner into the monthly service charge. Relatively few banks provide scanners at no cost to RDC clients (Figure 3). Many of these same clients, however, are receiving credit card terminals at no cost from their card processor.
The credit card business isn't what it used to be. Market growth has cooled, with stiff competition and challenging margins. ISOs appear more than eager for the opportunity to expand their product lines beyond card services.
| | |
| · Focused on products and services | · Broad array of products and services |
| · Highly incentivised to sell. Most are 100% commission | · Mostly salary - about 10% - 20% variable compensation on average |
| · Proactive, "feet on the street" sales model | · Reactive branch sales model |
| · Small business is a primary market for many ISOs | · Small business is often a secondary market |
| · Sales culture | · Service culture |
For ISOs, the opportunity is two-fold: cross-selling RDC to current merchants and expanding reach beyond card-heavy clients into entirely new markets within existing geographies. From a market development perspective, the scenario is close to ideal. Compared to financial institutions, ISOs appear to be in a good position to act on the opportunity (Table 1).
But, how is this going to work? ISOs will need to provide remote deposit capability that allows businesses the ability to maintain existing bank relationships. Ironically, that won't likely be done using the image-based processing that Check 21 envisioned.
That's because most banks aren't ready to receive image cash letter deposits, and those that are limit such arrangements to large volume clients because of the time-consuming file certification and management overhead involved.
Instead, ISOs are likely to utilize a third-party aggregator and a presentment financial institution, into which all the collective small business check deposits will be sent via image. Then, the presentment financial institution will settle with multiple banks of first deposit using ACH credits, while presenting items to paying banks via image exchange.
In so doing, banks of first deposit maintain deposit relationships, businesses enjoy the benefits of remote deposit, presentment banks earn fee revenue, and ISOs do what they do best - sell and service clients. It might actually work.
[To view a flow chart of this processing model, please visit www.remotedepositcapture.com/news/news.aspx?aid=22500.]
As attractive as RDC may be for ISOs, success won't be a slam dunk. ISOs don't know check payments like they know cards. Thorough training will be an imperative.
Additionally, the RDC value proposition is highly varied among market segments. Many ISOs enjoy specialization, and won't find their target market segments a good fit for RDC. Unlike merchant acquiring, RDC is not required for check acceptance. Some segments (restaurants, for example) will make lousy targets for RDC. ISOs will need to sort this out.
Secondly, the processing model presents significant return item risk to presentment financial institutions. To mitigate this risk, presentment banks will wait until all funds are good before originating the ACH credit to banks of first deposit.
Client funds availability will likely be delayed compared to bank direct RDC models. It's too early to tell if this will be a factor in selling.
But the biggest risk to the success of ISO RDC delivery is the business model itself. Today's bank direct RDC pricing leaves plenty of room for ISO profit.
But if free scanners and lower monthly maintenance fees become the norm, there may be insufficient profit opportunity left for an ISO in the middle. Will ISOs claim the RDC market as they have done with cards? It's simply too early to tell. Many banks regret what has occurred with merchant acquiring and won't let that happen again with RDC. But that won't stop ISOs from getting a foothold in this large and diverse market.
Some banks, those primarily seeking core deposit growth, welcome third-party involvement to take care of the hardware deployment and provisioning. So what can be predicted with certainty? Just this: It's going to be fun to watch.
Bob Meara is a Senior Analyst in Celent LLC's banking group. His research focuses on check processing with emphasis on branch capture, remote deposit capture and deposit automation, as well as check conversion, image exchange and image replacement document solutions. He can be reached at mailto:bmeara@celent.com.
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