Overcoming Deposit Risk in the C21 Marketplace
Not long after President George W. Bush signed the Check Clearing for the 21st Century Act – commonly called Check 21 – many voices around the banking industry raised a familiar and loud refrain: ‘Beware of thieves who seek to exploit weaknesses of Check 21 and perpetrate fraud on the banking industry.’
Make no mistake. Untold numbers of modern-day Willie Suttons exist and they will act if given the opportunity at a time of change in the environment. The new Check 21 environment enables a corporation and a bank to reduce the time to collect check transactions through the electronic capture and transmission of the original check and creation of a substitute check. As with any other new process, potential for risk and loss does exist. Having a proven common sense approach to this business problem is a powerful ally.
But how do you define ‘common sense’? Does it mean stepping slowly to minimize risk or stepping quickly to maximize business potential? This is the question that many executives in operations and cash management face today. Together, how they answer that question will in part redefine leadership in a banking industry reshaped by the Check 21 legislation. The winners, however, will be those banks and corporations who, working together, understand the new Check 21 environment and implement new business processes to maximize their respective positions.
Take a landscape-altering capability made possible through Check 21 such as corporate deposit taking. At first glance, this service is an enormous convenience because it allows commercial customers to make electronic deposits directly from their office. Just think – no more slogging through traffic jams or inclement weather to make it to a nearby branch before the doors close.
Even more important, though, is the potential for a new definition of what it means to be competitive. Now – from the convenience of a desk – any company can establish a relationship with their bank, without regard to physical geography. Already there are instances where forward-thinking corporations and banks have started to exploit this new business advantage. This is the C21 marketplace.
The irony of the C21 marketplace is that the best response to the very real requirement for security and risk mitigation measures is really not so different to past successful responses taken in the face of technological and business change. The payment industry as a whole has a solid track record in keeping safe its customers’ assets through a winning strategy that turns out to be something very simple: good, thorough (not slow) planning and execution based upon the understanding of the end-to-end business process. The past is rich with experiences that underscore the importance and effectiveness of the end-to-end business process approach. If you review the past 50 years of the payments industry you will find that checks with magnetic ink (MICR) were once new, as were ATMs, ACH, debit cards and Internet payments. Every new change in the payments environment has always brought some level of uncertainty and new potentials for risk/loss, but those who understood the new environment, built processes for it and entered it, were usually the winners.
Now, corporate deposit taking has emerged – another business opportunity for those who step smartly, understand the environment and build solid end-to-end business processes for it.
There is little mystery behind the creation of an end-to-end business process approach. It can be as simple as drawing boxes on a white board that describes in discrete steps the corporate deposit taking process. How does it operate? It is a thorough understanding of the interaction of people and technology within a business process.
Unlike former paper deposit approaches, an electronic approach requires that corporations, banks, technology providers and service providers understand that the new process, like all other electronic transactions, starts outside at a site that is not physically controlled by the bank. The transaction begins with the scanning of the original check on the customer’s premises that is electronically sent for deposit. From there, it moves electronically or via an Image Replacement Document (IRD) through the banking system to the payor’s bank, where the check is ultimately validated and funds released. In some aspects this process is similar to having corporations originate ACH transactions.
Without doubt, as with most other processes, there are vulnerabilities. For example, a check can be electronically scanned twice, a deposit can be sent multiple times, a deposit can be made both electronically and physically, counterfeit items can be scanned, etc. An end-to-end operational understanding by all parties in the process can successfully mitigate these items.
As you examine the process and the interaction of people, process and technology you will find key elements such as:
All of these business issues are identified and mitigated through a successful end-to-end process approach. The remedies to all of these potential business issues will be an effective combination of people and technology within the defined business process.
As in any other business project, when the interaction of the elements of people, process and technology are overlooked or minimized, problems will occur. Qualified people must be trained at every point of interaction with the technology; the business process must align with the corporate strategy; the technology must support the business process, etc. This interaction between these three components of a business process can be likened to strands of individual threads that, when effectively combined, make a very strong rope. Bypassing an understanding of the end-to-end process would be similar to a group of construction workers assembling at a site to build an office without having a blueprint.
With the emergence of the C21 marketplace and new capabilities such as corporate deposit taking, there has been a tendency for voices to take sides. Some say the risks are greater than those encountered at other times of industry change, such as the ATM and online banking eras. Others believe that the risks are less. The arguments will provide many hours of reading and debate.
The truth is, only time will tell which position has more merit. The only thing that one can say with any certainty is that new technologies create different challenges and opportunities. All businesses need to take these new and different challenges very seriously; good protections are only valid if your business is subject to that type of risk.
That does not mean, however, that the approach to the business problems and their respective solutions is different or that it needs to be difficult. In fact, it’s very much the same process that has been used effectively in the banking industry to assure security time and time again: a thorough end-to-end business process approach that identifies potential areas of vulnerability and executes operational, people and technological strategies for protection.
Corporate deposit taking has the potential to reshape the industry and to propel banks that step smartly to leadership ahead of those who decide to wait because ‘the risk is too high’. President Abraham Lincoln stated: “Things may come to those who wait, but only the things left by those who hustle.” Indeed now, to step smartly is to win.