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Remote Deposit Capture (RDC) iPhone App

posted by Adam Levitin

One of the quieter revolutions going on in the payments world is Remote Deposit Capture (RDC), the process of depositing checks electronically without ever going to a bank branch.  The paper check is slowly going the way of the dodo--many banks now do electronic conversion of checks that customers have deposited.  RDC takes this one step further by eliminating the need to physically deposit paper checks in their banks. 

I've previously written a short piece (here) about RDC that covers it more detail, but until I read about USAA's RDC iPhone app, I don't think I appreciated degree to which RDC could shake up retail banking.  We're just at the beginning of RDC (which has been growing like mad), but it is going to rapidly antiquate the retail bank branch, create truly nation competition for deposits (beyond brokered deposits and CDs), and help even the competitive playing field between large and small banks.  

RDC has the potential to seriously shake up retail banking.  Most people have little physical interaction with their bank beyond deposit checks and withdrawing cash funds.  These are important banking activities, however, so most people and small businesses choose their banking relationship based on the availability of local branches and ATMs.  That means that in any particular market, there are only a limited number of competitors.  It also means that large banks benefit from a type of network effect--the more branches and ATM the bank has in an area, the more valuable it is to consumers.   And the national scope of some banks' operations (BoA, Chase, Citi, Wells, in particular) only increases their value for consumers.  Smaller banks, which already have trouble competing on costs because of economies of scale are further disadvantaged, and have to emphasize service, rather than cost. 

RDC, combined with ATM fees waivers and e-banking (for transfers and payments) has the potential to make physical branch banking largely irrelevant.  This won't happen immediately--there are plenty of Americans (especially older ones), who will not quickly transition to doing everything electronically, and the fraud risk issues will have to be better addressed.  And branches won't entirely disappear (not least because of CRA pressures).

But if the bank branch becomes an outdated and expensive method of deposit collection due to RDC, small banks with lower overhead and employee costs will have a leg up on the behemoths with thousands of branches.  This isn't to say that the behemoths won't have plenty of offsetting advantages, but RDC will start to level the competitive playing field.  It will also create a national market for deposits--this is good, both in terms of ensuring the best deployment of capital nationwide--and in encouraging more competition. 

So RDC means better bank competition for deposits, but also fewer bank branches, which means fewer teller jobs and a bunch of commercial RE vacancies down the road. RDC poses some major fraud risks, not least the risk of multiple presentment:  a check can be deposited multiple times electronically at different institutions and the physical check can also subsequently be deposited.  For this reason, banks have rolled out RDC cautiously, starting with trusted business customers with whom they have multi-service relationships (and ample opportunity for set-off).  (I wonder what the bank regulators say about the safety-and-soundness of RDC and what acceptable levels of fraud loss are with it...)

Banks have been very hesitant to use RDC for consumers.  To my knowledge, USAA FSB has been the only major financial institution that has done a major roll out of consumer RDC, but it's clearly popular (and why wouldn't it be?)--a quarter of their deposits are now done remotely.  And now the USAA RDC iPhone app.  This is a major step forward in RDC and m-commerce in general, and it's a glimpse of the future of banking:  money will be electronic.  In 50 years, will we still have cash?  And do we care? 


A similar technology had a similar effect on one aspect of banking beginning in the mid-1980's. Prior to that time, credit card transactions were paper-based, with the charge slips bundled along with cash into a merchant's bank deposit bag at the end of the day and deposited at the local branch. The bank captured the sales draft information in a process very analogous to handling checks. What changed in the mid-1980's was the emergence of the electronic draft capture POS terminal - replacing the old paper-based "zip/zap" machine with a magstripe reading terminal that captured all of the sales draft details electronically at the time of the purchase transaction. Local bank capture of credit card sales drafts was no longer required. Some would say that it was the EDC POS terminal that got local banks out of the merchant acquiring business as it enabled national scale competitors to emerge who could compete for a merchant's card business without having any local presence. The parallels to RDC are, to me, striking.

Perhaps it's more relevant to small businesses that still receive checks. For this average consumer, I hardly get any paper check, one every other month at most. I can't see how RDC is able to change the competitive landscape. Banks have deposit by mail for a long time. RDC is just another way to do deposit by mail. If deposit by mail didn't kill the competitive advantages of large banks, how can RDC?

You'd think grocery and many other stores already serve as ATM machines for smaller banks through cash back with debit card. Somehow people still prefer a bank with a large number of ATMs in their local area. Smaller banks have to offer ATM fee rebates to compete. Guess whom those rebates are going to? The banks that own ATMs!

Frankly, the inability to obtain the canceled paper check a la Check 21 scared the hell out of me. Now, if the physical paper proof of payment is disappearing that much sooner consumers may potentially be completely and totally screwed.

For the last few years, we've all heard about the references to loan originators sending documents to their "photoshop" department for "adjustment". Imagine the potential for fraud if the ENTIRE monetary process becomes digital.

Had Check 21 been enacted before 2002, I most likely would not have been able to walk into court with the actual, physical canceled checks in my possession as proof of payment. If this entire process becomes digitized, how difficult do you think it will be for less than upstanding corporate entities - and others - to simply adjust a few pixels on an image to make it read whatever is required for evidence?

There is already ample evidence of the "Wal-Martization" of banks. Heck, Wal-Mart itself has been trying to become a bank in the U.S. for years. I think I heard something about them succeeding in Mexico a year or two ago. Once the small community banks and credit unions are gone I'll be hard pressed to trust ANYONE with any money that I may have. Steel reinforced mattresses may become the hot "nostalgic" security item to store your flash drives that hold the digital information that represents your individual net worth in.

Funny that BoA is mentioned. Well, not so funny actually. This is probably old news by now but an acquaintance attempted to cash a state cut check drawn on a BoA account the other day at a BoA branch drive thru. They were told that, since they did not have a BoA account they would have to enter the bank and be FINGERPRINTED in order to cash the check. Supposedly, this is for anti-fraud protection and the fingerprints are in no way databased. They're simply held until the check clears and then destroyed. (Right!)

Most likely drawing too many Orwellian parallels, they decide to try a second BoA branch. The 2nd branch does not mention anything about the fingerprinting but instead attempts to charge a $6 processing fee - to cash a paper check drawn on a BoA account. It's all done under the guise of "anti-fraud" protection and increased expense.

If that isn't evidence of attempting to abolish paper from the financial world.... Mr. Franklin and Mr. Jefferson both had incredible foresight considering that neither could possibly have envisioned the technologies and politics that would be embraced 300 years after them...

Contrary to the comments in the original post, RDC should ultimately be much more resistant to fraud than paper checks. The risk of multiple presentment exists only because banks are currently incapable of processing the check in real time. If this turns out to be a major problem, then it's straightforward (though not cheap) to put those systems in place. Real time verification could similarly avoid the problem of not-sufficient-funds checks: the merchant would know instantly that the check was bad, and refuse to accept it.

But I can't see this affecting consumers very much. RDC has good potential for businesses, for convenience and for fraud prevention. But consumers handle many fewer checks, and usually receive them from trusted payers; and in any case receive them when it's too late to do anything about a bad check. And as other commenters note, it's already possible to deposit checks by mail. That's what E*TRADE does, for example; their checkbooks include deposit slips and mailing labels.

Eventually, I would expect North America to move away from checks and toward purely electronic bank transfers. These create still fewer opportunities for fraud, as long as only the sender may initiate the transfer (unlike ACH payments), and the recipient doesn't consider the funds received until their bank confirms it. This treatment is identical to wire (SWIFT, etc.) transfers now, or to the giro transfers typical in Europe.

I can understand how real-time payor bank verification could prevent kiting. But how exactly would banks prevent deposits of counterfeit checks drawn on real accounts with real balances, and then having the suddenly available funds e-transferred elsewhere? This raises some fascinating questions for payment systems classes...

Well, they wouldn't. But paper checks have that problem too. RDC might exacerbate it somewhat, by decreasing the amount of time that banks have to discover the fraud. But if that became a problem then the banks could provide a tentative answer in real time, but hold the funds for a couple of days before they permitted a withdrawal.

I wonder to what extent physical branches are important as an anti-fraud measure for large value transactions, on the theory that criminals will be more afraid to show up in person with fake ID than to commit their fraud by mail or wire. E*TRADE, for example, won't send a bank draft or third party wire without an act of god; last I remember, a notarized request by mail, and a couple weeks processing time. But a bricks-and-mortar bank will put the wire through in a couple of hours.

I'm glad to see that this post has generated a really interesting discussion. Some thoughts in response:

1) Competitive landscape issues

Direct deposit has certainly limited the number of checks most consumers receive every month. But that plus deposit-by-mail doesn't negate what will be the likely impact of RDC.

My non-empirical sense is that deposit-by-mail is not widely used other than for investment-linked accounts (like E*Trade), where the depositary relationship is secondary to the brokerage relationship. In such a case, consumers are willing to forgo the local banking relationship. But for stand-alone transaction accounts, I guessing that deposit-by-mail use is quite limited. I doubt the 25% of USAA's deposits that come from its consumer RDC program merely replaced deposit-by-mail deposits; I'm guessing most of these are from customers who never used deposit-by-mail. (Anyone know of deposit-by-mail stats?)

RDC offers a major advance over deposit-by-mail. RDC eliminates two of the major drawbacks of deposit-by-mail: the risk of lost checks and the delay in the deposit being credited. The first is a major concern for consumers, while the later is particularly important for businesses (although neither is exclusive). Good luck getting a second check if you've lost the first--that's asking the drawer (if they're responsible) to place a stop payment order, which probably means a fee and will only protect them for 6 months. Once the drawer has tendered payment, it's not their problem that its been lost.

If RDC doesn't offer much of an advantage over deposit-by-mail, it raises the question of why retail banking remains so intensely local. Are consumers just not that sensitive to the differential in interest rates and account fees? Perhaps. Most consumers don't have a lot of money in interest-bearing accounts, so the difference between 1% and 2% annually might not be worth the search. Similarly, consumers might underestimate the likelihood of various account fees.

Regarding ATMs, it is a very strange market as TFB notes. (I don't want to get into ATM interchange and surcharging issues.) Clearly there is a consumer preference to use an ATM associated with the bank where the account is held, and I don't think it's just a matter of fees. It might be driven by some sort of privacy or security concern or another factors, such as a confusion of debit cashback with very expensive credit card cash advances. But given that one doesn't have to be a bank to operate an ATM (to the best of my knowledge), when small banks pay ATM fees, they aren't necessarily just funneling the $ to the big banks, and the payments might well be worth the savings of not operating the ATMs.

All that said, maybe the RDC phenomenon will remain largely confined to businesses with an effect similar to the one Scott Loftesness highlighted. But it's pretty striking that 25% of USAA's deposits are from RDC (and I think those are all consumer deposits).

There's definitely a business model to be had of raising lots of low cost funds by attracting deposits via low or no-fee demand deposit accounts, competitive interest on savings, RDC and ATM fee waivers, and making the money entirely on the lending side, rather than trying to have account fees cover the cost of raising deposits.

2) Fraud Issues:

First, let me make clear that I wasn't claiming RDC presents greater risks than paper checks, just different ones, and ones that I think are hard to overcome; were it otherwise, we'd see much more consumer RDC.

Second, I don't see physical branches as much of an antifraud measure, given the possibility of indorsement to third-parties who have no problem showing up in banks and the wide availability of check cashing outlets. (Hence the fingerprinting about which Mike Dillon complains. As an aside, there are some issues with fingerprinting: privacy (this is old school biometrics--imagine being asked to give a fingerprint for cashback withdrawal using a signature debit card!); potential selective application; disparate impact on low-income individuals; inefficacy--it can't prevent fraud because it's not real time and is only used to report consumers who deposit counterfeit checks--a far better, but hardly failsafe antifraud method would be to request multiple forms of ID; and its use as a lever to encourage consumers to open accounts.)

I personally banked with E*TRADE exclusively for about a year, and they're pretty close (modulo the RDC) to what you describe. But I eventually gave up when I couldn't figure out how to buy a car (due to the wire and bank draft issues). I now use a bank with local branches.

I would guess that most people are similar: they could do most of their banking electronically, but there's a couple of infrequently-used services that require a visit to the branch: large value transfers, large cash withdrawals to pay a tax-averse tradesman, maybe investment advice, maybe some limited estate planning, traveler's checks or foreign currency for a trip, safe deposit boxes for valuable documents, and so on.

Of course, the lending side didn't work out too good for E*TRADE either.

A measure like BAC's fingerprinting is still effective, even if it can't identify fraud in real time. As long as it increases the probability that the criminal will be caught in the long run, and the criminals are aware of this, it will discourage them from attempting the fraud in the first place. A lot of security measures are like this; like when a car dealer wants a photocopy of your driver's license before they'll let you take a car for a test drive.

If RDC has unacceptable fraud risks when deployed to consumers (which I don't believe), then it would still be possible to accept checks for deposit at ATMs. Of course, the current implementation of that is completely insecure. As far as I know, it's generally possible to deposit an empty envelope and then withdraw a couple hundred dollars. I presume that they've generally got enough personal information on the depositor that it's not worth preventing that fraud, because it's so easy to track them down later.

USAA is a special case. It serves customers with military ties. It has only one branch in Texas, but its customers are all over the country and internationally. You bet its deposit-by-mail usage was very high because there's no way to visit a physical branch. Prior to the iPhone app, USAA also offered deposit-at-home using a scanner and dropping off a deposit at a UPS Store.

I didn't realize that USAA was a 1-branch operation. So RDC really is just replacing deposit-by-mail in that case. On the other hand, USAA shows that branches really aren't necessary for running a bank.

The commonly-viewed benefits of this new service, referred to as Remote Deposit Capture (RDC), include convenience, better deposit availability and reduced transportation cost & risk.


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