Capturing Deposits From Afar

Offering remote deposit capture puts banks in position to scoop up lots of new business customers, but it is not without risks.

The service basically pushes the task of check processing onto a bank’s small business or corporate customers. Using devices installed in their offices, businesses simply scan checks and send them electronically to the bank, eliminating time-consuming trips to the branch. They also can post checks later in the day for same-day credit and gain timesaving benefits from storing and retrieving electronic images.

Businesses are so enthusiastic about getting rid of their daily trips to the branch that bankers say remote deposit practically sells itself. The Boston-based financial technology research firm, Celent, predicted last year that $150 million to $200 million of commercial deposits would move within 12 months to banks offering remote capture. Now the firm is upping that number. “It will easily be 10 times that” by the first quarter of 2007, said Bob Meara, a Celent senior analyst.

But in the rush to get on board, banks should not be negligent of the pitfalls involved in letting customers essentially take over one of their most mission-critical operations. Much of the potential trouble boils down to the fact that the original check remains in the business customer’s office after it is scanned. “So many things can go wrong with the original check staying there,” says Paul Carrubba, a Jackson, Mississippi-based attorney at New Orleans-based Adams and Reese LLP.

After depositing a check image, a dishonest customer might also deposit the original check at a branchu00e2u20ac”at the same time or months later. Or a customer might create five images and send them to five different banks. Remote deposit capture also makes it easier for employees to divert funds to their own accounts without a business owner’s knowledge, Carrubba says. And if a business is not careful to lock original checks away, they are at risk of being stolen by outside parties intent on performing identity theft. A bank may also be held liable for passing along low-quality check images that are incorrectly read.

The best way to avoid customer transgressions is a tried and true method, bankers and experts say: know your customers. Portland, Oregon-based Umpqua Holdings Corp., parent company of Umpqua Bank, has been offering the service since midyear and says it conducts an evaluation of each client on its system. The review includes an examination of the company’s financial strength, a credit review, and for new customers, an additional series of questions, says John Baker, senior vice president of treasury management and product strategies at the $7.1 billion bank. About 30% to 40% of businesses on the system are new to the bank, he says.

John Charette, vice president of finance and vice president of business technology at $50 million Independence Bank in East Greenwich, Rhode Island, said his bank has rejected a couple of customers that did not meet its selection criteria. Typically, Independence, which has been offering remote deposit for more than a year, approaches potential customers. “If they approach us, we look even more carefully at them, especially if they’re out of state,” Charette says.

Some banks are reserving the right to review deposits before they are finalized, says Carrubba. They may review all deposits or just ones over a certain dollar amount. Other ways to reduce risk are to put limits on the number or dollar value of items deposited.

Regardless of a bank’s policy, customer agreements are “extremely important,” Carrubba says. “They may or may not decrease fraud risk, but they would decrease business risk by putting responsibility on the company,” he says.

Charette says his bank spent a lot on lawyers fees to develop its customer agreements, which has mitigated its risk. “You have to make sure that anything that’s the result of the customer gets put back on the customer,” he says.

There are also operational considerations. Charette says he discovered during a review of vendors that many systems let users run the same check through the image scanning equipment more than once. “That’s a pretty significant risk, especially if you’re giving next-day funds [availability],” he says.

Independence customized its product from VSoft Corp. of Atlanta to ensure it would reject any check that was imaged twice, Charette says. As an extra measure, the bank also has a mechanism in its own back office to check for duplicate items.

Umpqua’s system stamps the front of every check that passes through with bold letters pronouncing it has been electronically presented, a procedure known as “franking,” Baker says. Besides decreasing the likelihood of a check being fraudulently presented twice, it helps administrators know where they left off in case they get interrupted while scanning a pile of checks, he says.

Another threat to remote deposit has emerged in the form of patent litigation. Plano, Texas-based Data Treasury Corp. has filed lawsuits against a number of banks, including Bank of America Corp., Citigroup, Wachovia Corp., and Wells Fargo & Co. for infringing on its patent for capturing, storing, and processing electronic check images. It also has extracted settlements and/or licensing fees from other institutions, including J.P. Morgan Chase & Co. and Merrill Lynch & Co.

“The whole issue has cast a dark cloud on the industry and has noticeably slowed adoption,” writes Celent’s Meara in a July report. Some banks are responding by choosing vendors that already have settled with Data Treasury and thus are indemnifying financial institutions from any liability, Meara says. Carrubba notes, “A bank needs to make sure it has something in its agreement with its software provider that gives it protection against any claims on infringement.”

All of these uncertainties have contributed to National Bank of Indianapolis’ decision to hold off on remote check deposit for now, says Mike Riddle, first vice president and manager of the bank, which offers a number of other advanced cash management services, including an overseas sweep account. “There were just enough things to make me pause,” Riddle says. Picking up checks from customers via a courier is more in keeping with the bank’s market profile, he says. In addition, there is some trepidation about charging customers to perform work that the bank normally would. “We’re old-fashioned,” he says. “We still like paper checks.”

But other banks are pleased with the results of their efforts so far in remote deposit. The three-year-old, one-branch Independence Bank has 35 customers on its “Cool Deposit” product, most of which are new to the bank. Charette figures the bank has increased its core deposits in the range of $5.5 million to $6 million and quadrupled check volume as a result of remote capture. “This product eliminates geographic limitations,” Charette says.

A few months ago, Independence succeeded in eliminating all paper check processing. Even checks deposited at its sole branch, for example, are now converted into images. As a result, it is saving at least $5,000 a month, Charette says, a number that should increase as check volume rises. Previously, Independence paid its processor 25 cents to 28 cents per paper item. Now it has eliminated the processor and sends electronic items directly to the Federal Reserve, which charges five cents for each one. Plus, the bank is saving an additional $1,000 a month in courier fees, Charette says.

The bank’s customers are saving, too. Independence targets businesses that process a high volume of checks, and helps them finance the equipment, which runs about $15,000. After paying for the system, the average customer saves about $200 a month in labor costs, Charette says. “Something that took about an hour can be done in 15 minutes,” he says.

Umpqua’s customers have been pleasantly surprised at the improvements remote deposit has afforded in the back office, Baker says. For clients accustomed to photocopying checks and putting them in color-coded files, remote deposit offers an easy way to store and retrieve check images. “That’s arguably more of a benefit than saving a trip to the bank,” Baker says. “We didn’t realize that would be as big a selling point.”

Banks that have not yet embraced remote deposit need to do so quickly, while taking steps to reduce the risks, bankers and experts say. “It’s something you have to do,” Carrubba says. “You don’t have a choice. If you don’t, other banks will come after your customers.” Large banks, in particular, are going to try to convince nationwide businesses that they don’t need local bank accounts, he says.

Meara concurs that widespread adoption of remote deposit by corporate customers is certain. “So don’t overthink this,” he says. “Get to market and learn as you go.” He advises banks to investigate outsourced remote deposit solutions, so they can get started and generate cash flow for very little money down. If the market grows, a bank can then bring the operation in-house. “You get to have your cake and eat it, too,” he says.

Carrubba cautions that regulators have yet to address the risks associated with remote deposit, but institutions can be sure they eventually will come out with compliance guidelines. “Banks need to be thinking of what the regulators will require,” Carrubba says. “They need to be proactive and not wait for the regulators.”