By Patti Murphy
ProScribes Inc.
Despite decades of electronic innovations and numerous card-based alternatives, U.S. consumers and businesses still like to write checks. Sure, we are writing fewer checks, and most of them are converted to electronic (image) files somewhere along the collection stream. But checks and demand deposit accounts (DDAs) are so entrenched in the American consciousness and economy that eliminating them isn't a viable option.
The result is a hybrid approach to merchant payment services, with the ISO channel focusing primarily on credit and debit card acceptance and complementary offerings such as cash advances or gift and loyalty programs. Check services, on the other hand, are for banks to sell, because checks and the DDAs on which they are drawn are too critical to the overall banking relationship for banks to neglect - so the common wisdom goes.
That's why so many banks are offering mobile remote check deposit (RDC). "The banks haven't given up on this like they did with cards," said John Gainer, Executive Vice President at Digital Check Corp., a leading manufacturer of check scanners.
"Even though the number of checks being written is decreasing, they aren't going away," said Donna Embry, Senior Vice President at Payment Alliance International of Louisville, Ky. Even if the paper check at some point disappears, the DDA is here to stay, she added.
Indeed, the DDA relationship is far too important for banks to disregard, said John Leekley, founder and Chief Executive Officer of RemoteDepositCapture.com. It's the lifeblood of banking relationships. "Everything moves through the DDA," Leekley said. Check, debit card and automated clearing house (ACH) payments all post to DDAs. Even the net settlement amounts for card payments are posted (as ACH credits) to card-accepting businesses' DDAs.
Then there is the data checks provide, Leekley noted. Information such as names and addresses, bank accounts, business relationships, as well as information about spending patterns can be gleaned from checks, which is beneficial to banks and business customers, he said.
And numbers demonstrate the check's tenacity. When the Federal Reserve last surveyed the market, in 2009, there were about 23 billion checks written, or 7.1 percent fewer than in 2006. That same year, the Federal Reserve Bank of Boston surveyed consumers on preferred payment methods. It found the average consumer made 64.5 payments per month; 8.2 payments were by check.
According to a 2010 report from the Bank Administration Institute and Hitachi Consulting, consumers use checks to pay for 30 percent of occasional bills and 5 percent of in-store purchases. But these numbers pale compared with check usage among businesses. Aite Group LLC indicated 70 percent of business payments are made by check. Ron Shevlin, Senior Analyst at Aite and co-author of a recent report on corporate disbursements, said "a sizable chunk" of business checks are disbursements to consumers.
Further evidencing the value of checks and checking accounts, a group of public and private experts devised a model for an entirely digital check, or electronic payment order (EPO) that could someday replace the paper component of the DDA.
Digital Checks as Electronic Payment Orders, published by the Federal Reserve Bank of Chicago in 2009, describes a scenario in which checks are completely digital - no paper whatsoever involved. This could be achieved by leveraging the near ubiquity of smart mobile devices and the electronic check clearing infrastructure the Check Clearing for the 21st Century Act helped to bring about. It would "provide a convenient, low-cost payment option for both consumers and businesses, based on a payment method that they have found useful for many years," the authors wrote.
The potential savings to banks are significant. For example, EPOs would be indistinguishable from other imaged checks, and it costs less to produce an image using a mobile device than it does to use a full-scale scanner. Widespread adoption of EPOs also could temper strategies for growing deposits that depend on branches, the authors noted.
When the Chicago Fed began circulating its digital check tome, consumer adoption of mobile banking and payments was just beginning in earnest. That year, Tower Group Inc. was predicting the number of mobile banking users in the United States would reach 10 million.
In a 2012 report titled Consumers and Mobile Financial Services, the Fed noted results of a survey indicating 87 percent of Americans had mobile phones, 21 percent of respondents had used mobile banking applications in the previous 12 months, and 11 percent expected to be using mobile devices for banking within the next year.
Even the "underbanked" are taking to mobile financial services; among those polled by the Fed, 29 percent had used mobile banking applications, and 17 percent had made mobile payments. (Just 12 percent of "banked" Americans with mobile phones reported they had made mobile payments, the Fed said.)
Several banks and prepaid debit card companies that cater to underbanked and unbanked consumers have mobile apps that allow consumers to cash checks with a camera-equipped mobile device and have the funds deposited directly to prepaid cards. "This changes the world," said Drew Edwards, Founder and CEO of Chexar Networks Inc. "It levels the playing field with respect to availability and access to the entire banking system."
Chexar built and operates Spyke, The Good Funds Network, specifically for cashing checks to prepaid cards. "With prepaid cards, consumers can do everything they would do with a checking account, except for the trip to the check casher," Edwards said. Spyke aims to provide an alternative to traditional check cashing for what Edwards described as 40 million U.S. workers whose employers do not provide direct deposit of payroll and people with other common types of checks. (For more information, see "When mobile meets RDC," The Green Sheet, July 23, 2012, issue 12:07:02.)
Chexar's data suggests checks written to consumers (by other consumers, businesses and government agencies) total $5.7 trillion a year and that in 2011, consumers paid more than $40 billion in fees to convert checks into good funds. "This is a bigger market opportunity than credit and debit," Edwards said.
Chexar uses RDC to support Spyke, as well as sophisticated data extraction and analysis tools for data mining and risk analysis. Spyke can interact with all manner of delivery channels (ATMs, bank branches, kiosks and mobile banking solutions). Chexar provides back-end support, such as analyzing, guaranteeing and clearing mobile check deposits.
Several other companies specializing in prepaid and RDC have homed in on this new business opportunity. Chexar appears to be unique in its use of image capture, storage and analysis tools to guarantee funds availability on mobile check deposits to consumers' prepaid cards. It is not unique, however, in leveraging the utility of check information. (See the sidebar accompanying this article, "Riding checks into the future.")
Leekley said service offerings like Spyke illustrate the value of check information beyond dollars and cents. "Automating check data and simplifying the application of data related to the payments is where the industry is headed," he said.
Leekley said RDC - in particular mobile check deposit applications - is well suited to merchants. Jeffrey Mack agrees. Mack is President and CEO of Cachet Financial Solutions, a Minneapolis-based firm specializing in RDC solutions. In July 2012, Cachet rolled out the Select Business Tablet to enable merchants to manage their businesses from the road. It supports remote check deposits and sophisticated management tools, such as the ability to track and supervise employees' deposit activities.
But RDC hasn't garnered significant interest from ISOs. "It is very difficult to get [ISOs] excited about RDC," said Jerry Frederico, National Sales Product Manager at ProfitStars, a subsidiary of technology giant Jack Henry & Associates. "There just isn't enough revenue in it to match up to what they can make on a Visa or MasterCard" merchant.
There needs to be something more, such as additional business tools, to dress up RDC. Payroll services are one option. "A combination that makes enough of a difference to move the needle," Frederico said.
O.B. Rawls, Senior Vice President for TASQ Technology Inc., First Data Corp.'s equipment sales unit, concurred. "It's a different kind of product," Rawls said of RDC. "It's a three- or four-visit sale, and there's less money in it for them." Rawls said that after failing to ignite interest for mobile RDC with ISOs, TASQ began marketing to financial institutions, with great success. "Banks do a better job of selling this because it's in their best interests to keep customers out of their branches," Rawls said. This is no small consideration. The consultancy Celent LLC recently surveyed small to midsize businesses and found that 90 percent accept check payments and that more than seven out of 10 frequent their banks between one and three times a week to deposit checks. Celent Senior Analyst Bob Meara said his analysis suggests 20 million small businesses in the United States accept about 3.6 billion check payments each year.
Digital Check Corp. tried to find ISO partners to resell its scanners, with little success, according to Gainer. Merchants, on the other hand, seem to like the concept of remote check deposits, he added.
"We're seeing retailers implementing remote deposit in the back office," Gainer said, for example, for items taken in at the POS or as bill payments. In many instances, these businesses are being identified by branch personnel. "The banks are zeroing in on this," Gainer said. "Merchants are being reached in part based on the frequency of trips they make to a branch."
And then there are the television ads that mega-banks like JPMorgan Chase & Co. and Citibank N.A. began running this year touting mobile check deposit. "It's cool now," Rawls said.
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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