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While the banking industry waits for conclusive evidence of the current volume and rate of decline in the use of paper checks in the US system, we are compelled to take note of just how far we have come and what may propel us to the next level. We offer one suggestion among the many of what may constitute progress from this point, an explanation at the heart of most any successful technological adoption – the consumer.
Remote capture’s humble beginnings
The Check Truncation Act for the 21st Century (Check 21) was passed into law in the fall of 2003 and became effective a year later on October 28, 2004. Though the events of September 11, 2001 brought the inefficiencies and risks in the US system of check clearing to the forefront – thousands of boxes of paper checks were halted from moving through the system’s airports much less through the system’s well oiled reader/sorters – the Federal Reserve intended the legislation to serve a broader purpose. The legislation was introduced specifically to foster innovation in the payments system and only secondarily to improve efficiency by encouraging check truncation – and thereby ridding the system of the need to physically clear paper checks. Check truncation allowed a bank to return to the maker not the original check but a legal substitute for the original check. Thus, checks could be imaged and the physical check truncated and then destroyed with the image or a copy of the image passing forward through the payment processing stream. Clearing checks via image processing thereby ridded the system of the need and cost of physically clearing paper checks.
From our vantage point in 2007, it would appear that 2004 was a year of analysis, 2005 business case development and infrastructure investments, and 2006 cooperation and testing. The industry expects to see significant volume achieved in 2007.
Of course only a government mandate to move to image or electronification could have resulted in rapid and conclusive adoption of alternative, more efficient payments methods. But nonetheless, a market-driven approach may accomplish the same end.
The Federal Reserve will update its study of the decline in check volumes this year. The long anticipated study will provide the first official accounting for the decline – estimated at far more than the 4% compound annual rate reported in the last study.1
As the banking industry began to plan for exchanging images of checks as allowed by Check 21 rather than the actual physical paper checks, the industry also started tackling the next logical progression. While banks were keen to the idea of reducing or even eliminating the cost of transporting cash letters from their back office transit operations, they also started to investigate what additional areas of their operations might benefit from image.
The evolution of remote capture
Initial benefit calculation studies identified that the highest payback from Check 21 would occur by reducing the costs of the back office check or item processing operations – everything from FTEs and related costs to nightly transportation costs to clearing partners. Equipment and facilities costs were seldom seen as major sources of savings – in part because many major banks’ item processing equipment had been fully depreciated and the facilities themselves were not candidates for sale or redeployment for other purposes.
At this juncture, business cases were the driver. The next step in the evolution was realizing that even greater cost savings could be realized by trimming transportation costs into the back office – i.e. capturing checks as they arrived at the branch. Branch Capture was born.
Falling almost immediately on the heels of branch capture was a series of other remote capture alternatives. This included image enabling most of the other “mid-office” facilities where checks are received, primarily corporate deposit facilities, vaults, and check processing hubs sites. No longer merely the province of branches, the industry referred to the larger opportunity as “Distributed Capture”. For some institutions, distributed capture would provide even greater savings, though much depended on the bank’s footprint and the number and cost of existing check courier runs from the remote operating points into the back office.
The next occurrence should not have been a surprise; however, most banks were diligently going about developing business cases and evaluating image solutions when the phone rang. Bank corporate customers had been digesting the legislation and its aftermath and quickly discerned that Check 21 offered significant benefit to them as well. After all, if banks were going to clear checks faster and less expensively, shouldn’t they be willing to do so at less cost?
And, if the banks were beginning to think about image enabling their points of capture, couldn’t the corporate office be just one more point in the distributed capture network? Corporate Capture was born.
The advent of Corporate Capture did perhaps more to move banks forward than any non-mandated compliance event could. It was hard to argue with a major corporate customer who demanded to participate in image capture or move that portion of their business to a bank that could. We have witnessed many Corporate Capture offerings come to market. Many of course were implemented with whatever solution happened to be in the market and whether the bank was actually able to clear the checks captured electronically in an electronic format or, more likely, whether they had to convert the images to paper and clear them the old fashioned way.
The technology parallel
Soon after the enactment of Check 21, the industry began the process of agreeing on the underlying technology – everything from the basics of image exchange (scanning, standard image formats, and file and transmission protocols) to the surrounding applications (duplicate detection, fraud management, and image archiving, for example).
It is difficult to overstate the degree to which hardware and software vendors brought solutions to the market – whether or not some were just re-packaging existing solutions with a Remote Capture twist.
One of the most interesting, but hardly surprising, technological developments in the Remote Capture saga is Web Capture.
Banks and their customers quickly surmised some of the obstacles to achieving the desired “straight through processing”. For corporate customers to play a commanding role in the capture and transmission of check images deploying the hardware and software must be, above all else, user friendly and inexpensive. Imagine a corporation with thousands of sites of their own where checks are received. Imagine deploying hardware and software to each of these sites, training end users on scanning checks and transmitting deposits, managing end user turnover, and software upgrades. Web Capture is born.
Most Remote Capture solution providers are enhancing their original products to allow for Web Capture to address this obstacle. Essentially, the end user of a Web Capture product does not need local software. They interact with their bank through the bank’s online banking or cash management portal as they may already do today for other purposes.
Remote capture revolution
Today, Corporate Capture has all but become the norm. It is considered “table stakes” for a bank, regardless of whether the entity conducting the capture is a large corporate customer, middle market customer or small business customer. Unfortunately, for most banks, what actually occurs in the back office after Corporate Capture is still a mixed bag.
But the banking industry is not one to rest. Almost as soon as the focus of image capture turned to Corporate Capture, we uttered the forbidden words: “Consumer Capture”. After all, how far behind could this be?
Consumer Capture extends Remote Capture to its ultimate point on the value chain. The product calls for a customer to use a scanner connected to their PC to capture the front and back of a check they wish to deposit. As in a Web Capture-based system, the consumer would connect to their bank’s online banking site and upload the captured check image for deposit. Many of the initial concerns for this product remain, the primary of which is fraud and the associated liability.
The technological and business capabilities that banks need to support the rollout to the consumer segment include:
- Customer registration and disclosure of responsibilities and liabilities
- Customer authentication
- Scalable and robust image quality analysis
- Robust fraud detection and fraud management systems, including advanced business rules capabilities
- Duplicate detection
Despite these issues, we are now seeing institutions explore the potential of Consumer Capture. In fact, in the last few months, one financial institution has announced the capability for a limited set of customers.
The extension to the consumer is just what the industry will need to take check truncation to the next level. If the banking industry can manage to keep the solution simple and low cost (if not free), the viral nature of the convenient, Web-based solution could make check truncation pervasive.
References:
1 The 2004 Federal Reserve Payments Study, Analysis of Non Cash Payment Trends in the US 000-003.
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Ronna Simmons is the lead payments industry partner in IBM Global Business Services. She can be reached at rona.simmons@us.ibm.com.
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