A Dialogue on Commercial Deposit Automation

Transcription

1 Moderator Participants Jeanne Capachin Research Director Financial Insights Michael Grazer Vice President Union Bank of California Steven Schumer Vice President M&T Bank Chuck Welch Vice President UMB Financial Corp. Andy Wied Executive Vice President Frost Bank Denton Lee Group Vice President First Citizens Bank & Trust Co. A Dialogue on Commercial Deposit Automation Remote Deposit Capture One of the opportunities with the advent of Check 21 is the ability of banks to accept corporate deposits any place in the country, without investing in branches. With remote deposit, banks can now provide their corporate clients with hardware and software which allows those clients to scan their check deposits, transmit an electronic file of those check images to the bank, and then clear those items faster, either electronically or by creating paper substitute checks from the scanned images. Remote deposit capture is a bandwagon that banks of all sizes are jumping on, but very few banks have fully implemented their solutions yet. Although banks are moving quickly, there are lots of questions about this new product. For instance, banks are concerned about new types of risk this can introduce into the bank-client relationship and how to manage those risks. Banks are also thinking about what it means to provide hardware and software to their clients, and the responsibility the bank incurs to trouble shoot and maintain that equipment. Lastly, there's the chicken-and-egg question - does it make sense to offer remote deposit capture before my bank is ready to participate in image exchange? For many banks, the answer is yes, simply because time to market may be so critical for this product. Many banks see remote deposit capture as a must-have capability, regardless of the challenges they see. This is particularly true of those banks with a strong commercial account base which they want to grow. With this capability banks can offer a new, valuable service to their existing clients. Clients now no longer have to bear the burden of transporting check deposits to their bank, and there is the promise of better availability by eliminating transportation delays. Banks also must offer the service defensively. Without geographic barriers to entering new markets, banks from around the country can compete for check deposit business, and incumbents are making sure they can counter the offers of interloping banks by offering the same capabilities. It is about protecting market share, even if revenues and profit margins may not increase in the short term. A Supplement to American Banker Produced by Source Media s Custom Publishing Group

2 A Dialogue on Commercial Deposit Automation Why do you see Commercial Deposit Automation as such a hot opportunity? Chuck: I think one of the opportunities is the fact that it is going to eliminate geographic boundaries. Most of the banks here on the panel are regional banks and we peak in our regional market place. One way to gain entry into new markets is to go to retailers or other commercial-based deposits where you may have difficulty are regional banks and we have to protect 0 getting to with a branch. And therein 0 lies what we have out there right now and one of the big advantages. 0 really expand on it. 0 Michael: The other thing is that finally we are at a point where technology is at a peak and we can actually take this in and handle it. Customers are becoming more comfortable with a paperless environment, or they are comfortable with images. So I think we are at that point where 0 Chuck: Our challenge is going to be that we are not going to be fully image exchange-enabled. We are going to be enabled, but we are not going to be participating from day one. We will be taking image deposits and then printing substitute checks. So we are going to Michael Grazer, Vice President, Union Bank of California Customers are becoming more comfortable with a environment, or they are comfortable with images. So are at that point where this can work. It is very exciting I think the way we set up the platform to they come in is important. You can stil balancing of that deposit. That's a positiv Andy Wie customers and start taking their deposits because you can with this platform. If we have a retail deposit product, we have the ability to protect the retail business we currently have. Denton: It s one of the first win-win products for customers and banks that we ve seen in a long time. The customer can self-serve. They can extend their business day and they don t have to rush for some banking deadline. They can consolidate accounts. It will also eliminate work for the bank. Our largest teller time is spent handling larger business customer accounts. We're getting to a format that s easy for us to deal with in an image world. I think it will eventually be a commodity in our world. It also helps in those markets where you have a limited presence. You can take this can work. It is very exciting. Andy: Check 21 has been a big splash. You ve all heard customers use different words to refer to this type of technology, but they all get that something is going on. Now this doesn t happen very often, so I think that s partly why it s hot. The timing is right. Whenever we make an investment like this, there s a risk. So what has to happen at your bank and in the industry for this to be a successful bet? Andy: I think you have to be proactive with your customers, protect your market share and your customer. And, you have to be aggressive with it. All of us, as we said, actually inherit additional costs. We see what the benefit long term is going to be when we go into exchange and when we can send images straight into processing, there are going to be huge benefits. Getting to market now outweighs some of the additional expense. Steven: I think it is an investment. It s part of our relationship with that customer to retain that customer. It s almost a must have in our original market or we are going to be susceptible to losing customers. It probably won t be priced so that it s profitable right now, and that s going to be a tough thing. Michael: I think corporate capture is a kind of philosophy. It s putting it out there, and I think it s going to push more

3 paperless I think we. financial institutions to get behind image exchange and adapt to it quicker because you have this. How are each of you positioning ACH conversion vs. check truncation? Do you offer both products? Do you see them as complimentary? Where do you see the future? Steven: We see them as different basically because of the rules surrounding ACH conversion. We, on purpose, segregate the two. And we are leaning specifically towards Check 21 (check truncation). Chuck: You are probably going to see remote capture where the big niche is retailers. It s going to be your drug stores, your Wal-Mart s, your Walgreen s, those types of companies making good, clean image capture process. One of the reasons is there are a lot of problems with ACH conversion at point of sale because customers didn't understand why they were getting a check back. The other issue is if they hand the check back, they weren t imaging it. And so if there was a return item, they didn t have a source document and that created a lot of problems. rebalance deposits as l have control over the e. d, Executive Vice President, Frost Bank Probably what you are hearing us say is we are going to do all of them. Sometimes they may be complimentary. More often than not, they will be competing products. You have to find out which one is going to benefit your customer the best. Michael: We are having a line that is for remote check capture and we are having another line for ACH. But we are also partnering. I m partnering with my ACH partner because we do see the worlds will come very close. We are building requirements and working with NCR and other products to bring that decisioning to it. Denton: I think it s going to be the battle over the next two to three years as to what is the medium, ACH or check truncation. Currently, we are focusing our remote capture technology totally on the check. Our commercial customers will be capturing these items so we are heading down the path of using check technology, be that image exchange at the end or IRDs temporarily. I think the value proposition for us is we already have ACH. I don t have to make a big investment there. The big investment we have to make is in check technology. That s a different world that we had prior to Check 21. So that s where we are focusing our investment. Steven: One of the challenges with ACH is that you can only convert consumerbased checks. There is a big push to convert corporate checks as well. When that happens, that s actually going to benefit us long term. Short term, we are still going to have discussions on which product fits which niche. Andy: I think it varies pretty heavily from business customers because most banks have not caught up to dealing with the checks in the electronic world. I bet you we could look at most bank statements today and the checks that are converted through POP or ARC are still in the descriptive section of the statement, not in the check section of the statement. For commercial customers, it s going to be very important that the check can be displayed and dealt with as a check. Let s talk about the impact on operations. What are some of the challenges that you expect to see and how do you expect to address them? Andy: I think the way we set up the platform to rebalance deposits as they come in is important. You can still have control over the balancing of that deposit. That s a positive. It s going to be a little more We see the benefit exchange and when there are going to be some of the additiona challenging than the conventional check environment. Just as with any new product you are going to have challenges, but you just have to get creative with it. Denton: We actually made the decision as to the vendor approach that we took based on the concern over operational issues. All the back-end functions that you have to deal with are a lot more important than the front-end. We saw a lot of vendor approaches to it. Everyone was focusing on the front-end. But the back end is where it s all about because if you have to rebalance that transaction, you better have the workflow to bring those images in and understand how to deal with them. We didn t want three different workflows. That would be the advantage for us of marrying up this front-end with the NCR

4 ImageMark system on the back-end. All three platforms can actually come in through the same process. So to us, that was the driving force. There are just so many operational issues because we ve got non-operational people for the first time actually handling our deposits. When we get a thousand customers doing this and managing that process, it s going to be expensive unless you have invested appropriately in thinking about the backend of this whole process. Michael: I think one of the things we haven t really touched on is that we are also putting a piece of hardware in our customers sites. Regardless of who owns that hardware, whether the customer owns it directly or we ve given it or sold it the customer, even if you put a big fat sticker on there that says with the original checks and how do you instruct your customer to make sure their procedures are appropriate to protect the customer and the bank from things like double cashing or fraud for that matter? A couple of customers that we ve been talking to are a little nervous about taking on more responsibility. When you explain to them that they are also assuming some risk, and at some point down the road you are going to ask them to sign documents that commit them to that risk, there are some customers who are skittish about that. And it all stems from the operation aspects of what we are talking here. I very much like the idea of trying a pilot mode to address these issues. That brings up a good point - to introduce some tools and mom and pop shops that really want to do this but they don t want to spend $800 to $2000 on one of these image machines. Option 3 is to partner with a hardware provider or NCR or somebody else to provide it to that customer. They don t own it. They just spend $50 or $10 a month. So from a hardware perspective, that s what we are going to do set up those three different options for the customers. Michael: I think there s an education process that has to take place. We are going to leverage what we have today. We have people who have spent their careers understanding how MICR works and how the scanning process works. I have to support everything said here about the back office. It s so important. What is going on, what the customer is capturing, what the long term is going to be when we go into we can send images straight into processing, huge benefits. Getting to market now outweighs l expense. for support call this 800 number and it s NCR, they are going to call the bank first. And we are not tech support people. So how are we going to address those issues? Who s going to support it and how are we going to work that support of the hardware? Many of the banks that are in the bankcard industry know some of those issues. You are putting a bankcard reader out there and you have to support it. Andy: I totally agree. If the scanner goes down, how are you going to get another scanner out to that site? But the other thing is ease of upgrade of that software. You have to have that thought process in place before you get to that point. Steven: A chief concern for us is operational, but it s also legal. What do you processes so that we make sure that our customers continue to have good relationships. What are you doing to make ensure this process doesn t get out of control? Chuck Welch, Vice President, UMB Financial Corp. Steven: I can speak about the hardware. I think we are going to have to basically give our customers three options. Option 1, we will just sell them the hardware. This is the piece of hardware we recommend, here you go, here s the price. We ll sell it to you, and we will have some type of support structure set up. Option 2 is we are going to have customers who are going to want to own this piece of machinery or already have this imaging device. And as long as it s certified with the software we are using, it is acceptable. I think we are going to have some quality is, and also duplicate texture, which is a huge issue that we are just coming across with substitute checks today. So it s front and back office that we are going to have to support. Denton: We are taking a little bit different approach in that we are actually going to buy the scanners, and send them a scanner(s) and a CD that will load the program on to their PC. And therein lies a huge issue when you start putting software on a customer s PC. How do you upgrade it? Our long-term model is obviously going to be some type of push down from our website so that the customer actually does their deposit through our business online banking product. When they sign on, we can update what s on their PC. There are some

5 pieces of this that will require the client s software to drive that scanner. I don t know if there is anyway you can get around that and be totally web-based. We are going to hopefully cover the cost of the scanner in the monthly fee that the customer pays. The scanner goes down, you send that one to us and we will send you a new one, you plug it in to the right port. That s what you have to deal with. This is a brand new world and everybody is learning. So a lot of this depends on the customers and what they are willing to do. So, who do you think are the customers who are going to choose this kind of service? Who is coming to you and how are you deciding who is a good candidate for this? certainly a good opportunity. Of the roughly ten customers who have approached us, all but one of them fits the niche. The other nine are similar to what Andy said, distributors and wholesalers, so it s been very interesting. Denton: I think it s everybody. I don t think there s any particular niche out there that has expressed an interest more than another. The value proposition is in the ones that we talked about: medical professionals, wholesale distributors. Those kinds of folks who have high dollar checks and relatively low volume. I think retail would be the very last place where you could go. Retail has the same problem we have and that is scanning individual transactions is not very productive. We think it applies more for that high dollar, needs are. And now we have these products that we come up with to say this actually fits you better. I think this is kind of jolting our relationship with our customers a bit. So back to the customer, just to elaborate some more. Do you see this as something you would offer to the new customer who came through the door? Steven: We would definitely try to attract new customers with this and offer it to new customers. But it s just one of a whole range of products that we want to be able to offer. We have customers who do business with us and have their own locations pay for overnight mail so they can deposit every day. The procedure would be a logical place for those. But the surprising places are the Denton Lee, Group Vice President, First Citizens Bank & Trust Co. It s one of the first win-win products for customers a time. The customer can self-serve. They can extend th to rush for some banking deadline. They can conso work for the bank. I think this is gaining momentum. Wh exchange and IRDs and things of tha and you really can because everyone Andy: Our customers came forward saying we want to do this. They were wholesale food distributors and a beer distributor, one of our larger customers. It wasn t exactly what we were expecting. We were surprised how these customers were similar and they have been excellent test cases for us. They wanted to do it, were very aggressive, and open for us to go out and do the training with them. You have to know who your good customers are. Steven: I think it s obvious that retailers are certainly a huge opportunity, but we ve found so far, although you have an idea who you think your mixed market is going to be, it s not going to turn out to be that. The retailers we have approached want to do it, but they move a little bit slower. Property managers in apartment complexes are but I don t see any reason that small mom and pops will not want to do this if it s economical. And that s what it s going to be about. It is about eliminating that trip to the bank, being able to make deposits late in the day, to maybe gain a day or two on a return item. That s very important to wholesalers and distributors who are interested in how quickly can they know that they have good funds. Those are the targets to me that we should go after because those are the ones that pay. They would pay for that additional day of clearing time that might save them a day on the return cycle on the back end. Michael: What s interesting is this transition from traditional banking relationships to more of a partnership where we are actually going out and understanding what their customer across the street from a branch. One customer told me he s 12 blocks from our branch, and he says it s an hour chore to go to the bank and they wait until they have $40,000 in the office before they make a run to the bank. That s pretty interesting. We may be pleasantly surprised. So what do you see as the future? If you have to guess, five years down the road, three years down the road, what do you think this means for your bank, the way you process payments and also the type of services that you are offering? Chuck: I think you are going to continue to see a decline of checks, but it s going to be slow. You are going to see more of an

6 exchange, again, it wasn t a big bang theory, it did not happen over night and it won t. It s going to be five, ten years before you see exchange really take hold. I think one thing that we are underestimating is that we focus so much on consumer checking, but consumers using other methods of payment eliminate those items. I don t think businesses are ready to eliminate checks and I don t think they will be anytime soon, so I think that s one thing that the people are not talking about in the industry today. We are going to continue to see the paper and we ve got to work toward these types of solutions that help process those items as efficiently as possible. Andy: I agree. Check writing is bread and butter for banks. The core of small business to middle market customers is still very do currently. We are still going to have customers giving us straight deposits and still have customers coming into the branches. Some of those customers will be doing both. Denton: We have no choice right now. We ve had banks in the payment franchise of checks for a long time and if we are not careful, we will lose it. We have to maintain and make that a faster, cheaper, better process in the check processing cycle and to me that means moving the capture of that item, and trying to get it electronically as quickly as possible. And this is one step in that direction. Where is it going five years from now? The payment world is gaining fast and furious over the check world. If you think about it, there s no other payment mechanism that carries as much information as a check. You can t put that much information on any presentment in all arenas. We have to speed that process up and make that a day one or day zero process to be able to clear that item. And if we go to electronic, and I m clearing directly with Andy at Frost Bank, he can tell me it s not good before the deposit even hits. And if you can do that with checks, with plastic and other means of electronic payment, then the check will be a very viable payment for a long, long time. Steven: I think 2010 we are still expecting 25 billion checks to still be in circulation. That s a lot of checks. You are going to see all the big banks start exchanging. I guess agreements would have to be worked with the exchangers. That s all going to shake out eventually just like it always does. I think this is gaining momentum. When we start looking at all nd banks that we ve seen in a long eir business day and they don t have lidate accounts. It will also eliminate much dependent on that paper checkbook. I think we are creating a new channel to allow those customers to get those items into the bank. We don t see it as replacing. If we fast forward five years, we will have this channel added on to support what we other electronic medium. We can put a lot of information on a check. That s why people like it as a payment mechanism. And we ve made it efficient. So I still see the check as being a very viable product five years now but moving capture closer to the point of en we start looking at all the positive benefits of image t nature, it makes sense for people to move forward has invested so much time. Steven Schumer, Vice President, M&T Bank the positive benefits of image exchange and IRDs and things of that nature, it makes sense for people to move forward and you really can because everybody has invested so much time. You have to take the step forward. About Financial Insights, an IDC Company Financial Insights provides independent research, custom consulting, and detailed multiclient studies on the technology issues and challenges facing the financial services industry. Our global research covers topics of strategic importance to corporate and retail banks, insurance carriers, asset management firms, securities and brokerage firms. Our local practices in Asia Pacific, Europe, Latin America and Canada add an in-depth regional viewpoint. Financial Insights, an IDC company, is headquartered in Framingham, Massachusetts, USA. IDC is a subsidiary of IDG, the world's leading IT media, research, and exposition company. Visit for more information.