After the passage of Check 21, I bravely forecasted a rapid reduction of paper items due to the adoption of image item replacements (IRDs) and image clearing. When asked why, I fearlessly predicted rapid adoption of the technology by the big regional banks. Elimination of the large item processing shops, large staffs and greatly reduced float were the lure for the large regionals. This was a no-brainer, the advantages are so great for everyone.
Once again I am picking black feathers from between my teeth after feasting on a meal of bitter crow. Arrrgh, why is the adoption of new technology so painstakingly slow in the banking industry? If only Moore’s law applied to bank technology, paper checks would be converted at the merchant’s location, most if not all payments would be electronic and float would be a thing of the past. Cold molasses flows at warp speed compared to the pace of technology change in banking.
A few weeks ago, while driving to work, I heard an exciting radio advertisement for a local community bank. National Bank of Arizona was running a campaign offering remote deposit for its business customers. NBA is an Arizona-based community bank owned by Zions Bancorporation. Wow, here was a mid-size bank offering services generally available at the larger regional banks and only for the larger, high check volume customers. Check 21 has made it possible for mid-size banks to offer new business services to their customers. Good for the bank, good for their customers. Great, now I had my subject for the next GonzoBanker.
Let’s take a quick look at merchant remote deposit to understand what it is, how it works and who is providing the technology. Here is the process for both merchant and bank. The process begins upon receipt of checks in payment for services or products provided by the merchant.
The Merchant’s Role
Checks are endorsed then read by a small image/scanning device. The scanner processes each check by creating an image of each side, reading the MICR line to gather account number and routing/transit number. Check amount may be obtained by manual entry or by software decoding the CAR/LAR (courtesy and legal amount) written on the check.
Scanners can be as simple as a manually fed device the size of a Starbuck’s Venti cup of coffee or an automatically fed device as large as a bread box. Low volume scanning devices can process a few items a minute, and automated devices can process up to 50 or 60 items a minute. A number of hardware vendors provide such devices including:
Application software driving the scanner can be located at either the merchant’s site or via an Internet application. In either case, the information is gathered from the scanner and transmitted to the merchant’s bank. Scanned paper checks are retained by the merchant and can be destroyed after just 14 days. In reality, most merchants will keep the items for 60 to 90 days.
At this point the merchant has sent a proofed deposit to its bank and has created an image of each deposited check that can be used for later research. Responsibility has now transferred to the merchant’s bank.
The Bank’s Role
The bank has an image deposit from its customer. Using the image file, the credit can be applied to the merchant’s account and the items can be included in the normal payment process. In a fully imaged environment, the on-us items would be captured for immediate processing or later batch processing. These transit items would be combined with other transit items, and an image cash letter would be transmitted to an image clearing facility for payment. Unfortunately, many, if not most of the items are turned into an IRD and printed and inserted into the paper collection process. Yes, PRINTED, turned back into a paper item for processing. Ouch, can you believe the beauty of paper check elimination at the merchant that is then printed at the bank for processing. It has to be more efficient to simply send the paper to the bank. Oh well, it is a step in the right direction.
The Vendor’s Role
Net Deposit, BankServ and DepositChecks.com are three of the packaged remote deposit solutions available in the market. They combine the hardware and software for commercial/community banks to provide to their customers. DepositChecks.com also makes its product available directly to a merchant. Keep in mind these are first generation products and they will get better and better over time. It seems clear that the successful solution should do at least the following:
The Collection Process
When an image file is received by the bank, ideally it would be promptly processed, credited to the merchant, and appropriate float assigned depending on the item and method of collection. As long as a paper IRD is created, there is little benefit to either the bank or the merchant. In fact, it may be less efficient to the bank and likely a wash to the merchant.
Some banks are now able to create an ACH item from the image file and present it electronically for collection. For these items, bank efficiency and merchant float are improved. Ultimately the image files will be processed when received, on-us items posted in real time, foreign items either converted to ACH items or included in an image cash letter for collection through an image clearing house. At the current rate of adoption, it will likely be a few years before we see significant adoption by the industry.
C’mon bankers, vendors and software providers. Let’s get together and make this happen. It’s good for everyone. Banks can decrease their non-interest expense, vendors can generate additional revenue, and merchants can eliminate the daily bank deposit run and collect their money faster. Oh, and voila, if this works for the merchants, you can do the same thing at your branches and kill all of the checks at first point of receipt.
Why can’t we all be image-enabled faster?