Walking the Merchant Capture Walk

GonzoBankers, Happy 2006! It’s been a busy year already at GonzoBanker and our Cornerstone mothership. Lotsa talk and new buzzwords in the air these days. New strategic plans are in full Execute mode, and the scramble has generated palpable energy among banks, vendors and consultants alike.

One of the topics spawning water cooler witticisms at banks nationwide is Merchant Capture. You know the drill – merchants scan their customers’ checks, electronically deliver a deposit file to the bank, and never have to fill out a deposit slip, go to the branch or use a courier again. Banks save time and money. Commercial customers save time and money. Everyone’s thrilled. Bankers, just send your cash management sales reps out there to start filling in the purchase orders. In theory, that’s 100% Right.

But then Reality has to rear its tenacious little head. The truth is, there are not yet enough hard core success stories to prove the cost justification logic correct in all but the most obvious situations. Merchant capture will be a home run for the Targets and Gaps of the world, but what about the six-store liquor chain? Too early to tell. Vendors will tell you that they have sold dozens of merchant capture packages to their commercial banks, but when you dig deeper, you clearly hear that actual implementations by small business end users are seriously few and far between; I hear many stories of “pilot programs” and beta testers. (Vendors, I know there are exceptions out there. Hold your emails for the more blasphemous points I’ll make later in this article.)

I have talked with several vendors who admit that most bank merchant capture programs are in alpha or beta. That’s no criticism. We’re talking about some pretty new technology and a brand new way of delivering services to small business customers. But newness alone doesn’t explain all of the relative lack of real, in-production merchant capture sites out there. No, I spoke with several cash management sales reps at mid-size banks and they report that they have encountered noticeable push-back in their sales efforts.

Let me run through the various ways that banks are advised by their vendors to help small business owners cost justify a merchant capture project – and the obstacles my cash management friends are finding along the way:

The business owner will realize drastically reduced transportation/courier costs. The story goes that with merchant capture the business does not have to drive the deposit items to the bank or pay a courier to do so. What did my cash management sales reps tell me?

• Most importantly, mid-size banks have to be realistic on their prospects. The transportation cost reduction argument is a slam dunk for the furniture store chain with 50 locations. However, for every 50-store franchise a mid-size bank courts, there will be 20 or 30 sub-five location businesses, and the small guys really aren’t burdened by much of a transportation cost. Most of these businesses do not use couriers, and the time to and from the bank tends to be insubstantial.
• If it’s not hard courier costs being reduced, the logic goes that the business will save time (and some money) in just traveling to and from the bank to drop off deposits. You’re going to think I’m kidding, but sales reps told me that some small business employees just like going to the branch. They don’t see the reduced number of branch visits as a selling point; in fact, now you’re messing with their screw-off time. Now we’re in the realm of the clerk who sees a branch visit as a mini-vacation – eating free cookies and drinking free coffee, BSing at the commercial window, having an extra smoke in the afternoon, listening to Howard Stern while taking the long way back to the office, etc.

Automating the deposit process will make a small business back office more efficient. If a small business can scan its checks and use CAR/LAR software to read the check amounts, this argument holds water. It sure beats an error-prone adding machine tape.

• While many vendors will boast 80%+ recognition rates, the truth is that rates of 40% – 60% recognition are more likely in the real world of hand-scrawled checks – especially for the machines and software that smaller business owners can afford. (Again – hold your emails, vendors. This came straight from some aggressive cash management sales reps who are growing increasingly gun shy when deciding whether or not they can sell CAR/LAR without blushing.)
• Without some pretty impressive recognition rates, the small business has to manually enter check amounts into its software. This can cause the deposit proofing process at the business to arguably take longer with merchant capture.

The business will realize better funds availability and lower per item charges from the bank. With items arriving at the bank earlier and in a better format to be cleared more quickly (and cheaply), there is definitely potential for the bank to realize better float and lower item costs – regardless of whether it processes items or not.

• It should go without saying, but this argument is only compelling to the business owner if the bank passes on its savings to the business. Are you offering your merchant capture prospects better availability than branch customers? Are you backing off on your per item charges for clients that go merchant capture? Why not charge merchant capture clients $.20 per deposit and $.04 per item versus $.25 and $.05, respectively, for the branch lovers. And remember, you’re also competing against check-to-ACH conversion technology that’s cheap and gaining momentum.

Far too many banks are either deciding not to pass along the savings at all or pass along only a crumb. If you’re looking at merchant capture as a long term relationship builder, hogging all the savings for the bank is decidedly short-sighted.

Remote capture will allow business to work with fewer banks and maintain fewer accounts. With merchant capture making the physical location of a bank almost irrelevant, the small business no longer has to work with (sometimes) many different banks that have branches close to the various business locations. Also, the need for some sweep accounts goes away with merchant capture.

• Again, this is a great point for the regional convenience store chain, not a big deal for the numerous small businesses that only deal with one bank in the first place.
• Also, keep in mind that many a savvy business owner maintains multiple banking relationships for reasons other than simple geography. Some prefer to diversify and nurture multiple banking relationships just to keep their bankers honest and to maximize options for the future.

A couple other points that my cash management reps said we should all consider:

• Don’t underestimate the push-back you will receive regarding the cost of entry – software, hardware, maintenance, etc. It’s easy to be a Big Shot and call the cost of a $600 scanner (a very low-end price) a non-issue, and it is a non-issue if you’re discussing Wal-Mart or 7-11. But for mom-and-pop shops and even lower mid-tier businesses that the vast majority of GonzoBankers will be targeting, the cost of entry certainly can be a barrier to your merchant capture program. That’s assuming we’re discussing an analyzed business customer. If your prospect is a free business checking customer receiving dozens of free items per month, that cost of entry looks even steeper.
• Prepare yourself for the business owner’s groan that will accompany the mere thought of yet another vendor relationship (or several more relationships!) to manage. Merchant capture means that the business owner has a whole new set of Things That Can Go Wrong to manage – faulty hardware, buggy software and related installation problems (though browser-based alternatives are quickly gaining speed), etc. That means more maintenance and service agreements to read, sign, manage and bitch about. Streamline this process and take as much of the onus on yourself if you want to soothe the business owner.
• Make your first call to the bookkeeper/accounting clerk of the company, but follow up with the owner. Irrational or not, some clerks will see merchant capture as threatening to their own job and try to kill your deal before it ever gets to the business owner. A quick follow-up call to the owner can prevent this from happening to you.
• On a minor but mildly interesting note, one of the bankers I interviewed said that he gives away a “Paid” check cancellation stamp and a simple, cheap file with a lock in which merchants can store their scanned checks for a short period of time. He said he was amazed at how many times he was asked by prospects, “What the hell do I do with my checks that I’m no longer sending for deposit?!”

Is merchant capture going to explode and change the payments landscape forever? I think the answer is a bold, Earth-shattering, “Uh, of course, Beavis!” It’s just not going to be as fast or as easy a sell as the vendors would have mid-size banks believe. Use the Reality Check above to make sure a merchant capture sales strategy is viable and realistic for your small business customer base, and remember that the healthiest perspective on merchant capture is that of a long term customer acquisition and retention strategy versus a short term revenue bump.

Special note to “Lost in Vegas”: Take the Over and the Steelers to cover.
-smh