By Patti Murphy
ProScribes Inc.
Editor's Note: Editor's note: This article was published by RemoteDepositCapture.com July 15, 2013; reprinted with permission. Copyright © 2013 RemoteDepositCapture.com. All rights reserved.
Selling merchants on remote deposit capture (RDC) would appear to be a slam dunk. The basic business case is similar to the pitch for credit and debit card acceptance: install electronic capture devices to eliminate labor- and paper-intensive processes and speed collections.
Plus, there's an army of feet on the street - independent sales organizations (ISOs) and merchant level salespeople (MLSs) who have sold millions of devices for merchant acceptance of credit and debit card payments, and even for mobile payments. RDC would seem a natural fit for this channel. But it hasn't worked out that way.
"The industry had great expectations," said Leo Tintinelli, Product Manager for Hardware and RDC Software at RDM Corp. "We all expected an evolution of Check 21 that was similar to that of credit cards." Yet after five years of meager sales RDM shut down the division it had selling RDC scanners to the ISO channel. Bob Meara, Senior Analyst at the consultancy Celent LLC, concurred. "I was optimistic a few years ago," he said. But the ISO channel hasn't taken off. According to Celent's research, as of June 2012, 90 percent of all RDC scanners in the market were put there by banks.
One reason ISOs haven't done much with RDC has to do with the nuances between wholesale (commercial) banking and payment services, and retail (consumer) banking and payments. "RDC is about reducing expenses associated with processing paper; it's a cost-saving activity," said Paul Martaus, an independent consultant to ISOs and banks. "The credit card business is about lending and processing transactions."
"ISOs are focused on working with retailers," and retailers deal primarily with consumers, Tintinelli added. With RDC, "ISOs have to shift their focus to B2B [business to business] payments. That's an entirely different sale," he said. And most ISOs don't have staff resources to go after the B2B market. Banks, on the other hand, have cash management officers who specialize in B2B products and services. Payment Alliance International, an ISO headquartered in Louisville, is an exception. PAI has built a book of business with RDC by altering the traditional ISO model: it signs banks as RDC marketing partners rather than dispatching MLSs to cold call prospects.
"We were finding that it was hit or miss with just feet on the street," said Donna Embry, PAI Senior Vice President. When an MLS would call on RDC prospects "they almost always called their banks," Embry said. That's because they were more accustomed to dealing with banks on matters related to check deposits, not with ISOs.
ISOs are an outgrowth of the rapid adoption of credit cards. "In the early years the banks were literally buried in stacks of duplicate paper receipts" from daily card transactions, said Brandes Elitch, Director of Partner Acquisitions at CrossCheck Inc., and a former banker. "Something had to happen, or the system would have shut down from capacity constraints."
That "something" was electronic transaction capture, "which spawned a whole support industry," Elitch said. ISOs were a necessary part of that support industry because they could sell anywhere; at the time branching laws restricted where banks could locate offices. It was a sweet deal for ISOs and MLSs, who tallied huge profits marking up per-transaction and terminal fees paid by merchants. But that business model has become outmoded as retailers' needs have changed. Meanwhile, ongoing litigation and government regulation related to card fees, and intensified competition, have compressed per-transaction and hardware fees collected by ISOs and their sales partners.
To be successful, an ISO must offer an array of merchant services, from multiple tender types to lucrative value-adds like shopper rewards programs. Working with financial institutions to reach RDC clients is one of several strategies PAI adopted for competing in this new environment. "We're capitalizing on the fact that banks are looking for ways to grow fee income without adding risk," Embry explained. PAI sells directly to businesses - for an ISO, a bank referral is golden, she noted. The ISO also handles boarding, training, processing, etc., and assumes transaction risks. The referring bank receives residuals from the transactions. Also, PAI can assure better availability than a client bank would get from an upstream correspondent, Embry said.
Financial institutions that use PAI's RDC offerings range from small community banks to midsize regionals, she added. Despite the successes of companies like PAI, most ISOs aren't drawn to selling RDC services. "There's just not enough profit in it for them," Martaus said. Besides, viable alternatives exist for checks tendered at the POS. ACH applications for converting checks to EFT, for example, predate and have more traction with merchants than image-enabled remote capture solutions, Tintinelli said. Last year merchants converted more than 454,000 checks to ACH payments clearing as POP transactions, a popular ACH format for POS debits. WEB transactions (check payments initiated online that clear as ACH payments) totaled almost 3 million in 2012, according to NACHA.
Given the evolution of RDC technologies, which make it easier than ever to deploy services such as check verification and guarantee, opportunities for increased margin and profit continue to grow. It will be interesting to see how many more ISOs become the exception.
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