RDC enters the mainstream

Nearly a third of US banks have adopted remote deposit capture (RDC), branch capture solutions, or both. Over 2900 financial institutions have implemented (or are implementing) RDC through March 2007, corresponding to some 112,000 scanners. Based on aggregate vendor activity, Celent expects over 4000 institutions will have solutions deploying nearly a quarter of a million devices by year end 2007. Check 21 acted not only as a catalyst for image-based check processing but also as a catalyst for changing the way deposits are made, and arguably altering the competitive landscape in ways no other innovation has.

But despite the race to market among financial institutions for RDC solutions, client-level adoption has barely begun. Only 2 percent of US businesses are using RDC, and most banks have yet to launch comprehensive sales and marketing campaigns to capture their fair share of this burgeoning market. If banks are not vigilant, they risk losing significant core deposits as the market matures. Beyond mid-market and corporate clients, where most banks remain focused, Celent predicts strong growth among small businesses and micro-businesses, propelling adoption beyond 5 million capture points by 2012.

Competition at the client level is emerging. If RDC competition escalates like it has for small business Internet banking, we can expect significant small business adoption. The other key factor will be the extent to which alternative distribution channels emerge.

ENTERING THE MAINSTREAM

Several dynamics are causing distributed capture adoption – particularly branch capture – to grow steadily. With US processed check volume in 2007 projected to be 30 percent below its 2001 peak, banks of every size are challenged with efficient check processing. This is causing investment in re-engineering and leading to distributed capture. As image exchange networks mature and image exchange volumes grow, institutions are embracing a check processing future where paper checks are the exception rather than the rule.

The only way out is to remove the paper. The road to riches requires deep reductions in key cost components – and significant investment in the image processing and clearing infrastructures. Institutions face the mathematical certainty of rising unit costs unless they adapt their infrastructure. This poses a significant challenge: transportation costs, check reader-sorter operating costs, and personnel costs are all relatively fixed. As more banks adopt, the impact snowballs, creating even more favorable conditions for adoption.

But for RDC, the adoption drivers aren’t related to operations efficiencies, as is the case for branch capture. For RDC, it’s all about business. Banks are rushing to market with RDC products primarily for defensive reasons, fearing that, without an RDC solution, client loss will ensue.

RDC ADOPTION OVERVIEW

RDC is an enabler of a variety of electronic payments options. How those decisions are made and where in the processing flow such endpoint routing decisioning occurs will vary widely.

As mentioned, Celent estimates that through March 2007 over 2900 financial institutions have implemented one or more RDC solutions, with that number expected to exceed 4000 by year end 2007. Alongside this bank adoption has been a growing number of companies acquiring RDC solutions of their own apart from those provided by financial institutions. Although a small percentage currently, this type of adoption will alter the competitive landscape, with third parties deconstructing the RDC value chain, leaving financial institutions competing for low-margin image cash letter deposits.

The overall tenor among surveyed financial institutions of all sizes is that RDC is a must-have product. Among many banks, RDC is a defensive attempt to pre-empt client loss. A minority of banks view RDC as an opportunity for core deposit and fee equivalent revenue growth – and they are acting accordingly. They are also the ones with most of the clients.

Adoption is strong among financial institutions of all sizes. Among the top 100 bank holding companies, nearly two-thirds have an RDC solution. In the context of financial services technology, adoption by 63 percent of the largest institutions within a two-year time frame is unparalleled. More noteworthy is that a significant number of early movers were the largest banks, which have not been known for speed and agility. Among the top 100, it has been the largest banks that have adopted RDC solutions – all of the top 25.

Significant top 100 RDC adoption activity has been relatively recent. Nineteen banks have launched services within the past six months (nearly a third of RDC adopting banks among the Top 100). This portends a dramatic increase in client-level adoption in the coming months as these newcomer banks gear up sales and marketing efforts. It is also helpful in understanding why aggregate client-level adoption of RDC solutions has been modest.

A majority of adopting banks are still just getting started. But even among institutions that have been at the RDC game for some time, the focus appears to be on a small subset of existing client corporations who represent the most revenue to the bank’s treasury management department. Remarkably few banks appear to be embracing the larger market opportunity for RDC, and those that are most often smaller institutions.

CLIENT ADOPTION

Client-level adoption of RDC is understandably less robust than bank adoption may suggest, although signs of increasing momentum abound. At least one factor governing the rate of client adoption is that activity is still in its early stages. Even among the top 100 banks, very few have meaningful client deployments. Though March 2007, just a dozen banks had over 1000 client locations live. While 1000 distributed capture points may be operationally interesting, such deployments for institutions having commercial clients numbering in the tens and hundreds of thousands suggests the bulk of the RDC market opportunity lies ahead.

Client adoption among banks is anything but uniform. The picture among the top 100 banks is hugely lopsided. Through March 2007, 80 percent of total clients among the top 100 are deployed by just 25 percent of banks. Just five banks deploy 60 percent of the RDC clients among the top 100 banks. Not surprisingly, all five banks were early adopters of RDC, launching solutions in 2005.

The lackluster RDC performance among most large banks is indicative of the opportunity for large volumes of deposits to change hands – to smaller, more aggressive institutions. The large banks have little to gain and everything to lose (they already command a significant share of deposit volume and cash management revenue). Conversely, smaller institutions have everything to gain and little to lose. This dynamic will usher in a period of unprecedented competition among banks for deposit services business because of the geographic sensitivity of paper check deposits.

CHANGING LANDSCAPE

The RDC landscape is changing rapidly, with adoption driven by competitive pressures. As a result, many banks rushed to market well before they may otherwise have based on infrastructure readiness. Undeterred, many banks launched RDC products knowing full well they would have some cleaning up to do. Much of this cleaning up has been in their in the back offices. Other cleaning up consists of integrating RDC products sensibly into online banking systems. Beyond this expected evolution, RDC appears to be in the midst of a replacement cycle, particularly among a number of large, early-adopting banks.

First-generation solutions are being replaced and augmented. In some cases, this is taking the form of replacing Windows client solutions with web or smart client variations from the same vendor. In other cases, institutions are switching vendors. Little of this activity is taking place among early-follower institutions that purchased more modern solutions from the start. In addition, a growing number of banks are launching small business initiatives alongside existing activity within treasury departments.

A significant driver of solution evolution is the changing target market for RDC. At the outset, most early mover banks embraced RDC as a product for middle market and large corporate clients. In response to broad-based client interest in RDC, banks of all sizes are migrating both upmarket and downmarket. The result has been a rapidly evolving set of market requirements. Among them are a number of enhancements designed to make RDC solutions simpler to use while being faster and less costly to deploy.

• Growth in web clients
  
  A number of first-generation deployments in 2005 were disproportionately thick (Windows) clients. In 2006, a number of other vendors gained market traction with Web client solutions even as Metavante et al launched thin client versions based on Microsoft.NET architecture. With no exceptions that we are aware of, however, vendors are maintaining both solution variations – thick and thin – arguing that there will likely always be a place for Windows clients, most notably client processing environments requiring high throughput.

• Growth in ASP delivery
  
  The inexorable growth of ASP and managed services delivery of solutions is also significant. Many banks cite RDC’s uncertain upside as a powerful reason to choose ASP delivery. Beyond the generic arguments favoring ASP delivery, many banks choose ASP-based RDC solutions in order to hasten time to market with minimal upfront investment. It is an easy ‘yes’ for most banks, and virtually every RDC solution provider offers an ASP deployment option.

• Growth in automation and verticalization
  
  Since 2006, a number of vendors have developed automated remittance processing capability, typically offered as a separate product option and often using a Windows or thick client. The difficulty associated with fully automated remittance processing at the client desktop is not merely technical. Deployers of such solutions tell of unique client requirements, unique business rules, and time-consuming implementation, testing, training, and support. Clients drawn to such solutions tend to be on the large and profitable side – perhaps justifying the effort. But, the end result is that deployment of such solutions has been limited – less than one percent of total RDC clients. Despite the low numbers, however, banks deploying such solutions are glad they did, because the capability appeals to higher-valueolume depositors.

• Growth in nonbank solutions
  
  A significant change that took place during 2006 was the growth in adoption of solutions procured apart from banks. This has been concurrent with development of vertically specialized solutions from a number of vendors. These solutions, a mixture of Windows and web client products, appear to have been successful in luring a significant number of large companies through tailored functionality and user interface design, integration with existing systems of significance, and bank independence. These solutions provide for a wider benefit than simply facilitating remote deposit capture.

• Impact of back office conversion (BOC)
  
  BOC’s biggest impact will be to move a number of large retailers toward adoption of check electronification solutions after passing on previously offered POP and RDC alternatives. Ironically, BOC has also served as a catalyst for some retailers to revisit POP check conversion. After nearly 10 years, consumers are more aware and accepting of POP as well as other forms of check conversion. Plus, most large retailers capture MICR at the point of sale for check verification and guarantee processes, so little investment in new hardware might not be required for POP among many retailers. That’s because, unlike ARC and BOC, POP does not require retailers to capture check images, just the MICR line.

An array of BOC solutions have already entered the market. To our knowledge, the solution providers farthest ahead are those with a legacy serving midsize to large retailers with check payment solutions –TeleCheck, Certegy, Solutran, and processors such as NOVA Information Systems.

BOC rules became effective in March 2007. Thus, it is early to present a credible forecast for adoption. Vendor consensus is that adoption will be gradual with a number of likely pilots in 2007. Rollouts would occur over the next two years. In the longer term, we don’t see a plausible argument for non-adoption from among the several processing choices – several of which require no investment in check scanners at individual stores. BOC adoption will be enhanced to the extent that independent sales organizations (ISOs) embrace RDC alongside card payment alternatives they have sold for years. With check volumes declining at 13–15 percent at retail, Celent sees a credible argument to minimize investment in check electronification systems. The longer retailers wait, the more marginalized the business case for investment.

FUTURE TRENDS

As more banks adopt RDC, the impact snowballs, creating even more favorable conditions for adoption. Further iImage exchange adoption will causes the inevitable increase in paper processing costs – improving the business case for image adoption. In the past, device manufacturers have attempted to differentiate themselves through adding sophistication and capability to their firmware. Going forward, Celent believes that manufacturers will concede proprietary firmware in favor of mechanical innovations. Driven primarily by emerging remote deposit capture demand, Celent expects to see a few emerging trends in capture devices: lower-cost platforms, full-page capture for B2B payments, multifunction devices, and diagnostics and remote management.