Know your customer” is a term known mainly in the anti-money-laundering arena. But now the phrase has acquired important meaning in the area of remote deposit capture for merchants.

Ann Marie Mehlum’s Summit Bank, a $70 million-assets bank in Eugene, Ore., was an early adopter of RDC, and in more than one sense.

Summit began offering the technology not long after the advent of Check 21 made it practical. But it also began offering RDC only nine months after the young bank opened its doors.

At its core, RDC is an express ticket into the bank’s deposit column, and bankers taking part in a recent ABA Banking Journal roundtable discussion about RDC and Check 21 clearly understand that this is like a key to the gunroom—not something you place in just anyone’s hands.

“We have been very careful about who has it,” says Mehlum. “We probably have 40 business clients who use it, at this point. And there are about another 40 who are really glad that we have it, but they don’t actually want it yet.”

“I don’t think we have a client using it that someone in our bank doesn’t know pretty well, and hasn’t known for a long time,” she continues. “We know that what they’re doing with remote deposit capture is what they say they are doing.”

 

Fraud is a key concern for many bankers looking at RDC technology, including the members of ABA’s Community Bankers Council taking part in the roundtable. When a member of the roundtable commented that RDC was an area “rife with fraud potential,” this sparked a lively back and forth among the bankers. An edited excerpt:

 

Members of the ABA BJ RDC roundtable*

Larry Duckworth, president and CEO, OmniAmerican Bank, Fort Worth, Texas. $1 billion-plus. Credit union-turned-federal-thrift, ramped up with Check 21 early, to take advantage of charter conversion.

Randy K. Ferrell, president and CEO, Fauquier Bank, Warrenton, Va., $500 million-assets. Two-county market, where larger competitors are already offering RDC. Plans to implement RDC in second quarter 2007.

John A. Klebba, president and CEO, Legends Bank, Linn, Mo. $206 million. Is using RDC technology between branches in eight rural communities. Not yet using with customers.

Warren K.K. Luke, chairman, president, and CEO, Hawaii National Bank, Honolulu. $450 million. Got on board early with Check 21 because of Hawaii’s unique island geography.

Ann Marie Mehlum, president and CEO, Summit Bank, Eugene, Ore. $70 millions. Two-and-a-half-year-old bank started off with RDC as part of its business plan.

Lynda Messick, president and CEO, Community Bank Delaware, Lewes, Del. $22.6 million. Four-month-old de novo started up with RDC as part of business plan.

Patrick D. Redmond, president and CEO, Viking Bank, Seattle, Wash. $420 million. Bank is in beta test stage of RDC with customers.

Lynda Messick I think the reason that internet and e-mail fraud works is that, every day, somebody goes on the internet for the first time. Then all of a sudden they are ripe for the picking.

That’s how I’m looking at RDC. There’s always going to be somebody, somewhere, who’s a risk. Maybe not in my market because, as in Ann Marie’s market, there’s no anonymity. But when you get into a metropolitan area, there’s a huge turnover; there’s lots of anonymity, and people are able to move and fade between businesses. I think that’s where the frauds will start figuring out how to work the system.

Mehlum Our vendors set up software controls. And there is actually substantial contact with RDC customers. Even though they are not physically coming into the bank I know that the bank’s staff is talking with them and working with them all the time. So we haven’t lost touch with them that way. In part because this is still fairly new, in some ways we have more touch with them..

Messick Do your operations people have specific RDC reports that they review?

Mehlum Yes. I know they are looking at reports that indicate if there is something wrong.

Messick A few years ago there was a huge amount of fraud on the merchant side of credit cards that many banks began underwriting their prospective merchants. Do you see that happening with the RDC program?

Mehlum It’s in our policy, yes.

Pat Redmond We’re going to do that too, as we get into RDC. Fraud is going to be harder to catch, but it’s still about a check, even though it’s the replacement document. Knowing your customers is key.

Mehlum One of the big concerns has been someone trying to deposit the same check twice. Although I expected it to happen inadvertently, strictly in error, we haven’t had one.

Redmond What instructions do you give your RDC customers regarding handling the checks they’ve scanned?

Mehlum To keep them in a confidential place and destroy them within seven days.

Warren Luke Why can’t they program something in, so when you put it through, it cancels the check?

Mehlum A big X or something on it, right there?

Luke Yes. That’s what we should go after the manufacturers for. (Later, Luke suggested this idea to a vendor speaking at the ABA meeting. The vendor loved it, and said he’d take it back to his development experts.)

Randy Ferrell As I understand it, some of the documents that banks have customers sign shift the liability from the bank to the customer. Some customers don’t like that a whole lot. That’s something they’ve not had to contend with.

In relation to that, I’ve heard larger customers wonder, “What am I going to do with all these checks? I don’t want to sit on them. I don’t want them under my desk or in the closet.”

I hadn’t even thought about the risk of someone from a smaller operation stealing the checks and taking them to another bank to try to redeposit.

Messick I can see the headlines now, “Bag Of Checks Falls Off Trash Truck And Blows Through Town.”

Getting going with RDC
Mehlum was clearly the pioneer of the group, while others were at earlier stages, either by design, or by default. There were also often widely differing perceptions of how well various markets would take to remote deposit capture.

Take Legends Bank’s John Klebba, whose bank serves a collection of small rural markets.

“We actually remote capture off of two of our branches,” says Klebba. “But we don’t have any business customers on remote capture. We’ve offered it to a couple and they have not expressed any interest. The most effective use is for customers who have relatively large items coming in, and we don’t have very many of them.”

“It’s going to be more hassle for many of them to go with remote capture than it is to bring their deposits to the bank and let us take care of all of it,” says Klebba.

There was some disagreement with this line of reasoning, from the perspective of bankers in bigger markets. Viking Bank’s Pat Redmond, for instance, serves urban markets in and around Seattle and Tacoma, Wash.

“We’re just testing our equipment now, but we see an advantage in convenience,” says Redmond. Traffic is a big problem in his markets, and for a community bank like his, competing for customer convenience in number of branches versus very large banks is tough. The larger community banks in his area—those with $2-$3 billion in assets—have actually made the most of RDC thus far.

“We think remote deposit capture is going to be a home run,” says Redmond. “It will have cost advantages for us, and service improvements for our customers. And we know that we have a lot of prospects who say they won’t move to our bank unless we have remote capture.” He explains that the bank has more than 150 customers using courier service that the bank pays for. He believes that customers will actually be willing to pay something for remote capture, for the convenience and speed in processing.

“Right now, everything has to be done and ready by the time the courier gets to the customer’s office,” Redmond explains.

Roundtable bankers pointed out the extended deposit times that RDC can bring to customers, with several also pointing out how optimistic vendor promises and predictions have been. But some participants felt there is more appeal to smaller customers than might meet the eye.

Fauquier Bank operates in a suburb of Washington, D.C. Says Randy Ferrell: “We sent our chief information officer to a peer group meeting, and he learned that they have found that more smaller customers were really embracing RDC. I guess when you have only one or two people in the office, you don’t want to send someone to the bank and back.”

Meanwhile, Ann Marie Mehlum says her bank has found appeal in both camps. The first companies the bank targeted for remote capture were firms that had branches of their businesses in Portland, Ore., which is about two hours from her bank’s base in Eugene.

“We wanted to be able to do all their banking, so at first it was really a way to get their whole banking relationship under one roof in a more convenient way than couriers. But we have small customers that have started to use it very recently who don’t want to spare someone to go to the bank.”

One customer—a software development firm—was only a block away. “They wanted it bad, and they’re loving it,” says Mehlum. She agreed with other bankers who felt the new generation would in time expect remote capture to be available: “Why get in your car and drive anywhere for anything, if you can do it from your desk?”

In Summit Bank’s case, demand grew because of the advertising of larger banks. Summit was first in Eugene to offer RDC, Mehlum says, but tends not to advertise the service because it aims at a niche business—small firms and professionals. “They were educated by other banks, and then started asking us about it,” Mehlum explains.

OmniAmerican’s Larry Duckworth observes that while larger banks in his market pretty much all offer remote capture, they don’t seem to have the touch that many small firms want.

“They’re not looked at like the home-grown community bank,” Duckworth says. And that’s what we’re capitalizing on. Now, if someone wants that big bank look, I feel they’re going to be able to outprice us. Their distribution points are much, much broader. But we feel that we’ve got a home grown local community mix that’s going to be pretty hard to beat.”

But there’s another, nonphysical aspect to the choice, Mehlum says, and that’s information management. “RDC represents a good bookkeeping system,” she explains. “Many of the firms are used to photocopying checks and doing all sorts of manual accounting procedures. Marrying RDC and a good software program helps them a lot in that regard.”

 

Hawaii’s Warren Luke, head of a family-owned bank himself, believes that the ongoing generational transfer of business ownership is playing its own part in the appetite for remote deposit capture—and banks’ need to get into it.

 

“The next generation won’t necessarily use it,” says Luke, “but they want to see that you have it, as a demonstration that your bank is up-to-date.” Indeed, Luke says his bank broke ranks with larger competitors when Check 21 came in. The other banks asked customers if they wished to go to image-based processing and signed up those that agreed—generally less than 20%, according to his information. Luke says his bank “just switched everybody over, and out of all our customers we had three complaints.”

But a key concern Luke has is that community banks don’t go so far down the technology road with customers that they lose the personal connection that makes their business viable. “That makes banking a commodity, and if it is a commodity, customers will go with the cheapest option available, such as online. You still want them to come into the bank so you can really develop that relationship,” Luke says.

“We’re looking at remote capture as a tool, but we don’t intend to be all things to all people,” says Lynda Messick of Delaware. “Our headquarters is in an area where people still expect pretty high touch.” Messick thinks the online banks, such as ING Direct, have already taught many people that, while their high rates are attractive, that banking problems happen, and when they do, they are not solved by technology, but by bankers.

Larry Duckworth of Texas points out that the ultimate client and the “gatekeeper” are not always coming from the same place. “There are some very wealthy family-owned businesses in our market, particularly on the Fort Worth side,” he says. “They tend to hire very young professionals to run their businesses for them. These young professionals, I don’t know that they’ve ever set foot in a bank branch. They want to do it all online. They love remote deposit capture. If you are going to do business with them, you’ve got to have it. Once you’ve sold them on your technology, you’ve pretty well got that account.” Duckworth says simply the word that OmniAmerican was bringing in RDC brought in accounts in anticipation of implementation.

The products: integrated or third party?
For some bankers, making the technology work on the same schedule as their strategic planning has been a hassle.

 

Pat Redmond of Seattle points out that community banks frequently find themselves facing two options in payments and related processing technology.

One is to go for a tightly integrated package of software and systems, and this often means using one vendor. The result is a smoothly functioning, well-orchestrated overall effort, the banker says, but the drawback is that the bank is entirely at the mercy of that vendor’s schedule and priorities. In his own case, this is the management preference, and, as a result, he says his bank’s entry into RDC was delayed because of delayed delivery by the bank’s vendor.

“We made a decision a few years ago that we wanted to be tightly integrated with our core processor. So we very rarely buy third-party software,” says Redmond.

Ultimately, Redmond believes, the end result is superior for the bank customer. But the trip to that destination can be frustrating, and potentially more expensive. Indeed, Virginia’s Randy Ferrell likes the service he gets from his major vendor, but admits that “they are very expensive, and very slow to implement things.”

“It takes us a while to get their attention,” says Ferrell, “and there sometimes needs to be a groundswell. If there are several hundred bankers out there that ask for something, then they seem to get it.” In the RDC area, this experience had Ferrell considering outsourcing its item processing to a different vendor.

The other option is dealing with an open system that enables the bank to mix and match hardware and software from several vendors. Many of the roundtable members have gone that route with RDC as well as other aspects of technology.

“We went with a third party for remote capture and it’s great software” says Ann Marie Mehlum. “It’s very user friendly and the customers love it.” She admits that in the long haul the third-party solution won’t be the most cost effective choice the bank could have made, “but we don’t have a good solution in our core firm yet, so we went with it.”

This is not to say, by the way, that all third-party providers are Superman. The roundtable bankers say there are plenty of third-party vendors calling on them every week, pushing their firms’ offerings.

“They all think that they can integrate with anybody,” said Redmond, to the approval of his fellow roundtable participants.

Scanners as freebies?
The gadget that makes RDC happen, at the customer end, is the check scanner, and pricing customer access to it remains a “work in progress.” When asked what her bank’s pricing philosophy would be—give, lease, rent, or sell—Delaware’s Lynda Messick answered: “Yes.” Her point was that the decision would hinge on the individual customer’s relationship with the bank. Some other thoughts:

Duckworth I would tend to agree with Lynda. We are working hard to use a customer relationship approach to banking business customers and pricing for them, so our leaning is to give them the scanner. They aren’t that expensive.
Redmond We’re hoping to lease them, at roughly $100 a month, and subject to analysis.

Mehlum We price through relationship analysis. This means that we have several customers that get the machine for “free.”

Redmond What kind of scanner do you use?

Mehlum We started with a $500 scanner that scans one check at a time, one side at a time. Now the scanner we offer costs $600 and it scans both sides simultaneously. But we still haven’t seen a good machine for a pile of checks.

Redmond We’ve been looking at a $1,200 scanner that features auto-feed.

Mehlum We tested some of those, but we haven’t had very good results with them yet so we don’t offer one. We’ll be looking at others.

Redmond Hearing you, I realize now that it is probably a good idea that we should offer both types. Some customers will have really low volumes and why would you spend $1,000 or more on equipment for them? BJ