Remote Deposit Goes Mainstream

More than two years after the inception of Check 21 and the subsequent introduction of remote deposit technology, US financial institutions continue to exhibit signs of excitement and enthusiasm for this technology. Not since the introduction of the ATM has a financial services technology received so much attention and such fast adoption. Remote deposit promises a range of benefits including broader geographic reach, cost savings, improved customer service and a new stream of fee-based revenues. Institutions of all sizes – from large financial institutions down to the smallest community banks –recognize these benefits and believe they have much to gain by deploying this technology. Remote deposit has become a “must-have” in today’s financial services landscape.

Today, the remote deposit industry has reached a crucial point. Deployment of technology has moved beyond the early adopters, and is no longer in the test phase. Remote deposit has been deployed at some institutions long enough to demonstrate real results, and its return on investment is now better understood. This article will explore the current and forecasted deployment of remote deposit, as well as the major trends currently shaping the industry as the product becomes more mature.

Deployments

The number of remote deposit deployments by US banks is on the rise. All of the top 20 and most of the top 100 US banks (based on asset size) have already deployed remote deposit, while approximately 45% of small banks have also done so. Credit unions have been the slowest adopters, though technology vendors have started to see interest from this group pick up in recent months.

Aite Group estimates that approximately 1327 financial institutions deployed remote deposit in 2006, and approximately 2344 did so during 2007, representing an adoption growth rate of more than 70% for the period. This year, an additional 1564 banks and credit unions are expected either to deploy the technology for the first time or to replace first-generation solutions. While this represents slower growth than the previous year, it merely reflects higher penetration and a smaller pool of institutions for vendors to target.

The largest number of deployments in the coming months is expected within the small bank market – primarily among the community banks (those banks with less than $5 billion in assets). Many of these banks see remote deposit as a way to grow their geographic footprint and a less expensive and more realistic alternative to opening new branches. A large number of community banks are also finding that they are left with no choice but to either deploy remote deposit, or risk losing customers to the competition. Aite Group forecasts that at least 65% of small banks will have deployed remote deposit by year-end 2009.

Key Trends

While remote deposit was initially offered to banks’ largest and most trusted customers, we are now seeing many financial institutions offer it further downmarket to smaller businesses. In fact, a November 2007 survey of 303 small-businesses conducted by Aite Group found that 16% of small businesses are currently using remote deposit. Aite Group estimates that 25% will do so by year-end. A July 2007 Aite Group survey of 16 of the top 30 US banks found that 69% were already offering the service to small businesses, while the remaining 31% stated plans to offer it to the small-business customer segment by July 2009.

As remote deposit deployments move further down market to the smallest banks, vendors are seeing greater demand for ASP deployment environments – especially over the last two quarters. This represents a major shift in the market, as most early adopters deployed the solution in a licensed environment. While larger banks continue to have a greater propensity to deploy the technology in-house, the majority of banks currently deploying the technology are small and/or adopting more of a defensive strategy, and are therefore more attracted to the ease of entry and lower costs offered through ASP deployments. Aite Group estimates that 88% of remote deposit deployments are currently in an ASP/hosted environment.

When remote deposit technology was first introduced to the market, there were several concerns about the potential for fraud, especially in regard to duplicate presentment of an item. Today’s solutions have robust built-in features to detect duplicate scans. These features compare scanned items to those images stored (often on a central server).

In addition to duplicate detection, vendors have taken several other steps to lessen a financial institution’s vulnerability to fraud, and decrease concerns regarding the security of remote deposit including marking, setting thresholds, fraud suspect review, multi factor authentication, risk management tools and web-based solutions.

Some financial institutions are now considering offering remote deposit to their consumer customers. USAA was the first institution to announce such a service, and very few banks to date have followed in its footsteps. Talk about offering it has increased significantly over the last few months, however, and at least two vendors – Fiserv and Diebold – have already announced pilots of a consumer capture products. The Diebold solution is the same as its corporate solution, so all banks live with the corporate solution will instantaneously be able to offer it to consumers as soon as it moves beyond the beta phase. Those banks thinking of offering this service are likely to begin with their high-net-worth customers.

In order to succeed with consumer remote deposit, financial institutions will not be able to dictate the scanning device the customer can use, and the user interface will have to be simplified even further. Institutions must also recognize their greater vulnerability to risk (due to larger end-user numbers), making it essential that the solution can interface with the bank’s existing fraud prevention products.

Financial institutions are increasingly recognizing the revenue potential of remote deposit. In its early days, when the technology was first introduced and customer awareness was low, many banks felt they had to give remote deposit away. Today, most banks are charging for the service. The most common pricing model involves a one time, up-front licensing fee for the service – sometimes rolled into the monthly maintenance fee – in addition to a monthly charge and a per-item charge (often equivalent to the clearing fee). Although the model is similar across most banks, none of the banks interviewed were willing to share information on the amount of revenue earned from the service, since monthly fees are often dependent on the bank’s relationship with the customer. Some charge modest fees based on the size of the client, the depth of the relationship and activity in the account. Most banks also charge their customers for the scanner. Banks are finding all customers, from the largest down to the smallest businesses, see value in remote deposit and are willing to pay for it. Of those banks that give the service away free-of-charge (less than 15%), most require the customer to maintain a minimum account balance with the bank. These banks typically view customer retention as the greatest benefit of the service.

A key benefit of remote deposit is its ability to level the playing field and enable banks – especially small ones with limited branch networks – to extend their reach and attract customers and deposits beyond their traditional geographic footprint. As this technology continues to become more mainstream, businesses are increasingly choosing their financial institutions not based on geographic location, but instead on service responsiveness and costs. Financial institutions, regardless of size and location, will be able to compete for business customers located anywhere in the country. This will create even more of a buyer’s market for business customers, and will place greater pressure on banks to differentiate themselves and ramp up their customer analytics and customer service capabilities.