Remote Deposit Capture: Do You Have a Strategy?

There has been a fair amount of "buzz" of late about Remote Deposit Capture, an "umbrella" term that includes the conversion of checks to either ACH or image format. While some of these conversions are being made by financial institutions themselves, the major potential for growth of remote deposit capture lies with business. The impetus is efficiency and cost elimination, for both businesses and the payments system.But lest there be any doubt about it, the "electronification" of checks also could pose a very real threat to the bottom line of your bank.

Is "Location, Location, Location" Outmoded?
Traditionally, bankers have captured their share of the business market with a combination of pricing, products, service and location, with location being a key variable for businesses that needed convenient access to a bank office to introduce checks into the payments system for collection. As businesses have spread into diverse geographic markets, many have found a need to establish several banking relationships to get their check payments collected. With the recent deployment of image-capture technology, businesses now have a tool that can allow them to eliminate the challenges of geography and distance, and consolidate their banking relationships into one with a bank that can accept and process those images.

T. Houston Technology Group, in their BankersOnline feature article A Tale of Seven Banks, illustrates how Remote Deposit Capture can make check processing both more efficient and less costly for a business with branch operations. Does your institution have a pro-active business retention strategy like ACME Bank's, or is ACME your competition?

Controlling Imaging Risks
Part of any financial institution's strategy for acceptance of remotely-captured check images should be a plan to manage any added risks created by those images under Check 21 and image-exchange agreements. If your institution will need to reconvert images to present substitute checks for payment instead of images, or if any of the images captured by your business depositor makes it to you as a substitute check, you'll be making a warranty under Check 21 and Regulation CC that the substitute check meets all the technical requirements for such an item, and that it won't result in a double debit. You'll also be indemnifying everyone "downstream" from you in the collection process against loss caused by the fact that a substitute check, rather than the original, is received by those parties.

BankersOnline.com's Executive Editor Mary Beth Guard reports that at a recent presentation to a statewide Oklahoma Fraud and Bogus Check Conferenceshe was besieged by District Attorneys complaining about the problems they are having prosecuting check fraud cases involving substitute checks and other image replacement documents. They suggested that many of the cases are lost solely because the original check was not available.

Each of those cases involving a substitute check could result in an indemnity claim against the reconverting bank and contract claims for those creating or handling the images from which the substitute check derived.
That will mean that anyone that agrees to exchange images with you will require that your exchange agreement will push responsibility for any losses based on image quality back on the institution that provided the image. You should ensure that your business depositor takes that responsibility for any image captured and forwarded by the business. The allocation of that responsibility should be a key provision of your agreement to accept images from your depositor.

Frank Abagnale and Greg Litster provide a detailed review of the risks involved in Remote Image Capture in their BankersOnline feature article, "Check 21, Remote Deposit Capture and Check Fraud."

ACH Check Conversion Growth Spurt Coming
NACHA started a huge shift from paper check processing to ECHK conversion with its introduction of the Accounts Receivable Check (ARC) entry just over five years ago. Retail merchants joined the ACH conversion movement as the Point of Purchase (POP) entry was introduced soon thereafter. Some retailers (such as supermarkets) with multiple points of purchase, however, have been reluctant to install the technology needed for POP conversions at all their check-out locations, due to the costs involved. Addressing this concern, NACHA has authorized a new Back Office Conversion (BOC) entry for introduction in March 2007, that will enable retailers with multiple purchase locations to accept checks that can be converted in a single location (the Back Office?) in a fusion of the ARC and POP concepts. This change promises to make ECHK conversions more popular and encourage a larger percentage of payments to go the ACH route.

ECHK conversions can be consolidated and electronically submitted to a single financial institution from multiple business locations, and reduce a business's need for multiple banking relationships, just as image-capture can.

ACH Is Not Without Risk
Although established customers are unlikely to get involved in fraudulent ACH transactions, your bank's involvement as an Originating Depository Financial Institution (ODFI) in the ACH process is not entirely without risk. Any of the ECHK conversion transactions submitted by your customer is subject to return for insufficient funds, closed accounts, and the usual problems that can cause a paper check to bounce. When a check is converted to ACH, however, there is an added risk of return up to 60 days after the item hits a consumer account, based on an allegation that the transaction was never authorized, or that some technical prerequisite for the conversion (such as proper notice) was not completed.

These and other risks to the bank of accepting ACH entries as an ODFI should be analyzed, understood, and mitigated to the extent possible. Your institution should review each Originator's notice and authorization procedures to ensure compliance with NACHA rules and the amended Regulation E requirements that will be effective in January 2007.

Executive Steps:

• Decide whether your business customers -- current and potential -- may be targets for deployment of Remote Capture technology.
• Consider whether your institution will be involved in that deployment, proactively or defensively.
• Determine whether your core processing vendor can supply Remote Capture technology, and at what cost.
• Investigate other sources of that technology, as well.
• Understand and manage the risks of accepting ACH check conversion transactions.
• Ensure that any agreement to accept check images from depositors includes the depositor's acceptance of responsibility for image quality.
• Carefully review your institution's pricing strategy. A shift toward electronic deposits can erode fee income based on traditional paper check deposits from business accounts. Will you replace "per deposited check" fees, and how?