The State of Remote Deposit Capture: Entering the Mainstream
Few topics in banking have enjoyed such hype as remote deposit capture (RDC), and rightly so. Unintentionally, perhaps, Check 21 acted as a catalyst not only for image-based check processing but also for changes to the way deposits are made. This arguably altered the competitive landscape in ways no other innovation has.
RDC refers to the use of distributed capture of image and data beyond an institution’s infrastructure. In this context, we view RDC as synonymous with ‘merchant capture’ or ‘corporate capture’. RDC is a deposit-taking mechanism, but its function does not need to be limited to deposits. Furthermore, RDC has been associated with specific Check 21 mechanisms for clearing and settlement of deposited items, but RDC is not simply a Check 21 product. In our view, RDC is an enabler of a variety of electronic payments options that may be driven by institutions, their clients, or both.
In the two years since Check 21 came into effect, over a third of all US banks have adopted RDC. Over 2,900 financial institutions have implemented (or are implementing) RDC up to March 2007, corresponding to some 112,000 scanners. Based on aggregate vendor activity, Celent expects over 4,000 institutions to have solutions deploying nearly a quarter of a million devices by the end of 2007.
Such broad and rapid solution adoption is without precedent in financial services. To our knowledge, RDC adoption far outpaced online banking system adoption in the 1990s. By mid 1998, approximately 10% of financial institutions had adopted online banking solutions. This was well into the third year of online banking’s gold rush. By comparison, 36% of financial institutions have adopted RDC solutions in under three years. Among large financial institutions, adoption is even more robust. For example, 63 of the top 100 banks are already deploying RDC. Online banking solutions were adopted by just over half of the top 100 banks in the first three years.
Even 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, the largest banks have adopted RDC solutions. In part, this may be a result of the early interest in RDC from the treasury management community. In virtually every bank we spoke to, RDC owes its roots to treasury management. A small but growing number of banks are establishing related initiatives within their small business services lines in 2007.
Adoption of RDC among financial institutions shows signs of acceleration. As more banks adopt, the impact snowballs, making the conditions for adoption more favorable. Application providers improve product efficacy, fueled by experience and infusion of revenue to fund R&D. There is an imaging bandwagon picking up speed, and financial institutions of all sizes are jumping on it, and it is affecting many parts of the organization. Remote deposit capture has been a treasury drama. It is now becoming a commercial and retail bank product as adoption sweeps downmarket. Branch and ATM capture involve much more than IT and check operations, with the retail bank weighing heavily on the outcome of each bank’s story. Cash vault capture touches another constituency that previously cared little (or so it appeared) about check payments. All these initiatives are interdependent. Of all the distributed capture inventions, however, none has been as disruptive as remote deposit capture.
Part of the disruption is due to the fact that banks aren’t the only ones in the RDC game. Alongside bank adoption has been a growing number of companies acquiring RDC solutions from non-financial providers. Such adoption will significantly alter the competitive landscape, with third parties deconstructing the RDC value chain, leaving financial institutions competing for low-margin image cash letter deposits.
But, as much as there has been a race to market among financial institutions for RDC solutions, client-level adoption has barely begun. Only 2% of US businesses are using RDC, and most banks have yet to launch comprehensive sales and marketing campaigns designed to capture their fair share of this burgeoning market. If banks are not vigilant, they risk losing significant core deposits as the market matures.
The overall tenor among surveyed financial institutions of all sizes is that RDC is a must-have product. Within this consensus, however, is a wide disparity of opinions. Among many banks, RDC implementation is an inherently defensive attempt to prevent client loss. A minority of banks view RDC as a spectacular opportunity for core deposit and fee equivalent revenue growth – and they are acting accordingly. They also have most of the clients.
Client-level adoption, however, is increasing as more banks enter the picture. 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. But even among institutions that have been in the RDC industry for some time, the focus appears to be on a small subset of existing client corporations that 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 do are most often smaller institutions.
Two factors will increase implementation of RDC. First will be the voracity in banks’ competition for small business RDC clients. At present, most banks enjoy first mover advantage. Competition at the client level is emerging, with the potential for significant small business adoption. The other key factor will be the extent to which alternative distribution channels emerge.
Information aggregated from financial institutions and RDC vendors suggests that through March 2007, 80% of the total clients among the top 100 US financial institutions are deployed by just 25% of banks. Just five banks (Wells Fargo, Zions Bank, Bank of America, Wachovia, and HSBC) deploy 60% of the RDC clients among the top 100. Not surprisingly, all five banks were early adopters of RDC, launching solutions in 2005. The picture is lopsided among larger institutions, but what of community banks? A closer look reveals impressive and growing influence among community banks, which represents a bona fide risk for larger banks content to rest on their laurels.
Comparing RDC to the larger cash management product mix is instructive. The top 20 largest banks dominate the cash management services market with an 84% share of total revenue, according to the Ernst & Young’s US Cash Management Services Survey 2006. But these same banks have only captured 46% of total RDC clients over the same time period, indicating smaller institutions have proven capable of competing for RDC services apart from a strong portfolio of cash management business. This should serve as a wake-up call to large banks not yet aggressively marketing RDC.
The relatively lackluster RDC performance among large banks is indicative of the opportunity for large volumes of deposits to change hands – to smaller, more aggressive institutions. 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 escalating competition among banks for deposit services business in a way that never historically occurred because of the geographic sensitivity of paper check deposits. Beyond simply escalating, competition will migrate from the mid-market and large corporate realm to the small and micro business (SMB) client realm.
The rate of SMB RDC adoption will be a function of many variables: awareness, availability, pricing, growth in electronic payments, and the emergence (if it occurs) of alternative distribution channels. In the near term, we believe the most influential variable is in the hands of financial institutions. Adoption will only follow focused, purposeful product launch activity targeting small business. By 2009, small business RDC adoption will go one of two ways. If it goes the way of traditional treasury management products, RDC will remain a niche product among SMBs. If it goes the way of Internet banking, competition for small business deposit volume will drive price points well below today’s levels, spurring adoption. We expect the latter. Soon, low-cost RDC capability will be a staple of online business banking services, part of the price of entry.