Deconstructed Check Processing?

I just got back from an excellent Remote Deposit Capture Summit organized by RDC.com. It is fast shaping up to be the place to gain knowledge and network with key players in the check processing industry. Not so long ago, there were several events a year devoted to, or with a major emphasis on check processing. Most have fallen by the wayside- perhaps driven by the assumption that check processing is mature and uninteresting. That this was from true was attested to by many at the Summit who presented business and consumer adoption figures showing a vast, yet untapped market.

Whether adoption has been glacial or spectacular depends on perspective. Celent’s Bob Meara had done a study a while back showing that check imaging has had a faster uptake than most other technology introductions in the banking space. Yet, the impatience to drive distributed capture into every office, shop and home is understandable. There was continued debate at the Summit between risk perception and the need to drive customer convenience. It is my take that while the risk folks ruled the roost in the early years, the convenience advocates are beginning to scale the ramparts. 

Yes, mobile RDC is cool and growing, check scanners are growing smaller and more accurate, but what caught my eye at the Summit is a possible shift in industry tectonics. Remember the early days of distributed capture? The focus was on branch back counter and teller capture back then. The technology players in the marketplace were those that had a pedigree in traditional check processing- the people who could make documents fly down the track on a 3890 high speed sorter. You had to earn spurs in centralized, sorter-based processing to get a seat at the distributed capture table. 

The push to capture checks from outside a financial institution’s infrastructure through merchant capture, and the slow evolution of the X9 and image quality standards began the tear away from the “sorter-on-a-rope” paradigm, as an industry wag uncharitably put it. New players entered the field, and some leading names disappeared from the industry. Fast forward (yes, an obsolete term in the MP3 era) to 2012, and we have technology suppliers specializing in particular channels of capture. Clearing and settlement? Oh well, that’s something that someone does with the X9 file we give them. Now, toss in the down-loadable app, and we are perhaps set for more deconstruction of the check processing chain.

I am tempted to draw a parallel with the evolution of card processing. During the paper draft days, there were “paper factories” processing card transactions. Electronic Draft Capture (EDC), and the introduction of specialized terminals by Verifone , Hypercom and others changed the nature of the industry. Today, there are those that specialize in the acquiring front end and others who drive scale through the switch. Substitute the words “capture” for “acquire” and “clear” for “switch” and you may have a template for where check processing may go.

I know past is not always prologue, and checks are very different from cards. Draw the picture out nevertheless and contemplate the shape of the check processing industry in five years. Fascinating, right?

Teller Capture- Myths and Realities- Part I

While the U.S. check payments industry has seen a dramatic transformation from being awash in oceans of paper, to an almost all-image environment in less than a decade, there is debate about where images are best captured. The alternatives are many- teller stations, branch back offices, ATMs, central processing centers, offices, stores, homes and mobile phones, to name a few.

Capture points of entry can be broadly divided into two categories:

1. Interior points, within a bank’s infrastructure like tellers, branches and ATMs, where the driving imperative is one of cost reduction and efficiency.

2. Exterior points, like offices, stores, homes and mobile phones, where the drivers are combinations of revenue uplift, customer convenience and efficiency.

This is the first of a series of posts on the pluses and minuses of various capture strategies. We begin with Teller Capture.

Let me begin by saying that I have never liked the term “Capture”. It is a holdover from the times when MICR (and later image) data were read and “captured” on electro-mechanical reader/ sorters. While sorters have been relegated to museums and the odd eBay page, the term lingers. I find the term limiting because it tries to describe a workflow which is far more comprehensive than the mere capture of information. I submit that the capture-correct-balance continuum that is typical of the many “capture” processes in use today is better referred to as Deposit Automation.

Now that I have my pet peeve out of the way, let us look at Teller Deposit Automation (TDA). The quick take on TDA is to have a proofed, balanced, and ready-to-post deposit, before the customer making the deposit has left the teller station.

That last statement sometimes lets loose a flurry of concerns:

• I don’t want to make sorter operators out of my tellers
• Error rates will go up because tellers aren’t trained to be proof and balancing operators
• Queue length will go through the roof because each deposit is going to take much longer
• Tellers (and perhaps customers) will not accept this new and different process
• A scanner, computer and software at each station will be tough to justify
  
  

To be honest, there are also issues of a political nature that can rise to the top. TDA lies in that No-Man’s-Land between Retail Banking and Operations. In some institutions, particularly larger ones, TDA can be a lightning rod for turf battles. Nevertheless, let us look at the other end of the telescope and examine the benefits touted by proponents of TDA.

The hard benefits that drive the business case are:

• Truncation and reduction of transportation
• Central proofing and balancing elimination
• Float gains through early capture (yes, I know…but interest rates will not always remain subterranean)

The soft benefits that supplement and sometimes drive the decision (depending on the institution’s strategic priorities) are:

• Keystroke reduction freeing up more teller time for customer service
• Error reduction through lower keyboard data entry
• Potential risk reduction through integration of TDA with risk management systems
• Potential for enhanced service through integration of TDA with Customer Relationship Management (CRM) systems

The business case battles are fought on multiple fronts with hard and soft benefits challenged, defended and examined from many angles. My next post will take you through some of the battlefields (I’ll admit I have a few scars from these skirmishes).

Why can't Tellers be Sellers?

Stepping into a debate that is as old as retail banking is perhaps unwise. There are passionate adherents ranged on both sides of the question. To some, the issue is not whether, but should tellers be sellers?

The question brings the raison d'etre of the retail branch network into sharp relief. Are branches retail storefronts with the primary mission to enhance customer relationships, or are they collection points for myriad transactions processed by centralized back office operations centers? Is the driving imperative one of customer intimacy, or does operational efficiency rule the roost?
A tilt towards operational efficiency has traditionally driven retail banking, with occasional overtures to the selling side of the equation. These overtures, however, tend to be fleeting, and with few exceptions, have not survived beyond some concerted marketing and employee incentive programs.

To understand why the push towards serving and selling the customer has not been sustainable, consider a few points. Making check deposits is by far the main reason customers visit a branch. When they do visit, the teller is the person they most often interact with. Regardless of all the training and incentives that may have been put in place, consider what tellers actually do. They are heads down punching numbers into keyboards (try counting the number of teller keystrokes the next time you're in a branch). They have barely enough time to complete the data entry and squeeze out a quick thank you before the next customer is at their window. Imagine a Neimann Marcus salesperson wordlessly packing what you've picked out and intently ensuring that the bow on the package is just right! Yes, the analogy is not quite right- but you get the picture.
So despite many a marketing push, it is the fundamental transaction tether that yanks the teller back into the role of a frontline operations clerk- the first cog in the vast infrastructure that we put in place to process paper checks, featuring planes, trains, automobiles and giant "paper factories".

There is an alternative, courtesy the legislative cover of Check 21 and advances in imaging and recognition technology. Teller Capture allows the teller to drop the entire deposit into a small foot print scanner and interact heads up with the customer, while an imaging application reads all the necessary information, ensures the transaction is balanced, and prints out a receipt when done. Teller Capture eliminates teller induced data entry errors, and also catches math errors up front. This "ready-to-post" transaction at the very beginning of the deposit stream results in major efficiency savings further down the value chain. It is as close to straight-through-processing as one can get in the check world.

"Not so fast," say some. "You want to make my tellers into check operators?" The reality is that the opposite is true. There is now evidence of major savings in teller time per deposit, including data from a Top 5 U.S. bank of having reduced keystrokes from 75 to 5!

"What about the cost of a scanner and software at every station?" challenge others. "It is really difficult to integrate these capture applications with teller systems." The cost per node for both hardware and software is steadily declining, making it well worth the while to examine the return on investment. The hard numbers on transportation savings, back office labor elimination, and funds availability make it interesting- leave alone the soft benefits in customer service and added sales. Capture systems are also increasingly being integrated into teller systems, both by teller vendors that have acquired check-capture technology, and pure play check imaging vendors that have certified their applications with leading teller vendors.

Coming back to the tellers-to-sellers paradigm, what do you do with the saved time? Do you use it to push even more transactions through? Do you have tellers refer customers to other branch personnel based on prompts from an integrated CRM system? Or do you have tellers take on more of a sales and service role themselves? Those are decisions that will be driven by your overarching strategic intent. Do you want tellers to be sellers in the first place? As you ponder that question, you may want to look at teller capture as an opportunity to cut the transaction tether that keeps pulling you back, yo-yo-like, to the paper factory of another era.

Changing Face of Check Fraud

Check fraud has morphed to adapt itself to the digital world. Here's an interesting article by Karen Hoffman in Banking Strategies that has insights from several industry insiders, including me.

Enjoy!

http://www.bai.org/bankingstrategies/risk-management-and-fraud/security-and-fraud/the-changing-face-of-check-fraud#

Image Payments- Commoditization Redux?

The payments industry has seen the uncanny repetition of a pattern. It starts with innovation driven by software companies, followed by ambitious "hockey stick" adoption predictions, fits and starts a la Geoffrey Moore's "chasm" model, an initial trickle followed by a torrent towards outsourced processing and a brutal race to scale and commoditization.

Not all that long ago, there were around thirty U.S. providers of in-house credit card processing software, addressing both the issuing and acquiring ends of the spectrum. Today, there are none that I can think of. A few providers remain, serving niche international markets which are yet to be served by giant multi-national transaction processors. The card processing market is otherwise dominated by transaction processors(or should we call them Software as a Service(SaaS) providers in keeping with contemporary monikers?).

The early years of both credit and debit card payments were characterized by battles for recognition by relatively unknown players, using innovation as a weapon of differentiation. The now distant introductions of electronic draft capture (EDC) and even the automated teller machine (ATM) were ground breaking and transformational. With the move to outsourced processing, however, the overarching imperative shifted from innovation to operational efficiency. Efficiency allowed scale, which in turn drove ever lower costs, resulting in tremendous operating leverage.

A few factors accompanied the shift to outsourced processing. There was massive consolidation in the rush to scale- independent software vendors were elbowed out in the melee. Banks exited the business, and allowed third parties to soon dominate the landscape, despite dire warnings from some that disintermediation could result in banks surrendering access to strategically important customer franchises. The rules of governance and the interchange system created by Mastercard and Visa provided the ideal platform for global acceleration. The availability of inexpensive telecommunications bandwidth and distributed terminal technologies has given us a world in which a card issued in Minneapolis can be swiped in Manila, and then processed by a switch in Melbourne, Australia.

Great, you say, but what does this have to do with imaged check payments? It is true that check images originate at more varied points, including branch back offices, teller stations, image-enabled ATMs, corporate offices, retail points of sale, and even people's homes. In contrast, card transactions are limited to points of sale and ATMs (not counting card-not-present transactions). The need to capture images of a certain quality, recognize amounts, correct errors, and balance transactions involving multiple checks makes this a more complex cat to skin.

Nevertheless, there are early indicators that check image payments are following a path similar to their plastic cousins. There has been significant consolidation in the industry with independent software vendors having been acquired by transaction processors- witness Metavante (AFS, Vectorsgi), Fiserv (Carreker), Fidelity (Bankware), to name a few. There is an acceleration of images being exchanged between banks through networks like Endpoint Exchange, The Federal Reserve, SvpCo, and Viewpointe. Independent Sales Organizations (ISOs) are adding check capture to their kit bag of offerings to the merchant community. While the so-called X9.37 standard for image exchange still exhibits Babel like inconsistency, it is markedly less opaque than it was a few years ago. The check scanner vendors are gingerly feeling their way towards including more check processing workflow capability in their devices, lest they fall afoul of their software provider partners.

So then, is the past necessarily prologue? Are we on a one way track to a First Data type transaction processing behemoth covering the span from capture to settlement?

Based on observation of industry evolution, StratEx, LLC predicts the following:

In the next five years,

• There will be no independent check imaging software vendors in the U.S.
• Core processors will convert acquired software companies into captive suppliers to assist outsourced item processing
• Severe price pressure on transaction fees will be the norm as core processors bundle (and perhaps give way) item processing with core deals
• The outsourced processing market will have several players serving niche markets dictated by institution size, and geography (dictated by sales coverage not technology)
• The commoditization will be most pronounced in consumer and merchant capture
• Branch capture (particularly teller capture) will not see as drastic an erosion in value
• Teller capture will increasingly be combined with teller systems as teller platform providers either make or buy their own capture applications
• ATM capture will continue on its very slow adoption curve

In ten years,

• There will be a significant consolidation of transaction processors for item processing as scale becomes all important
• This will include a few "bank agnostic" processors representing a replay of the disintermediation seen in card acquiring
• Merchant and consumer capture applications will become part of scanner firmware, resulting in a "terminal-to-switch" path typical of card processing today
• Merchant and consumer capture will also be widely available as embedded applications in home banking and accounting software packages (the latter facilitating the "bank agnostic" processing referred to earlier)
• ISOs will dominate the sale of merchant capture to businesses, with capture application enabled scanners being their flagship "plug and play" products
• There will be no interchange fee system for check transactions; rather there will be risk adjusted transaction fees depending on transaction type and source
  
  Whether or not these predictions are borne out exactly, providers and buyers of item processing software and services will be well advised to factor these possibilities into their strategic scenario planning.
  
  After all, it is always better to ask "what if" as opposed to "now what?"

Payment Convergence- Vision or Hallucination?

According to a recent study by McKinsey, the U.S. payments industry is a $282 billion business. In a report entitled "Weathering the Storm: Global Payments 2009", The Boston Consulting Group estimates the global payments business at $805 billion, ramping to $1.4 trillion by 2016. It goes without saying that payments is big business. But is big beautiful? It could be, if those that ascribe to a converging payments paradigm are right.

Silo'd be thy name. Payment during early times was as simple as trading bartered goods or exchanging coins. The last two hundred years have seen an explosion in the many ways value can be transferred, including cash, checks, wire transfers, automated clearing houses (ACH), card payments in various hues, mobile- the list is endless. Each of these evolved separately to meet a specific need, creating distinct processing systems and organizations in their wake. Today's financial institutions have multiple systems, with separate rules of governance, and organizational fiefdoms that resist attempts to blur boundaries.

Holy Grail anyone? The idea of a unified infrastructure to process all payment types has been mooted for decades. It is argued that, at a notional level, there is little difference between "capture-validate-clear-settle" in check-speak, and "acquire-authorize-switch-settle" in card-talk. So, would it not be simpler, as some would argue, to have one system that did it all? But given that we have spent the better part of a century perfecting these older systems, does it makes sense to go where angels fear to tread? If it is not broken, why fix it?

Can I call you Sybil? The world, unfortunately, is not that simple. Checks can now be converted to ACH payments forcing an erosion of previously impervious walls. In an even more bizarre twist, checks can be imaged, transmitted, and reprinted as paper substitute checks. Newer forms of payment like mobile and prepaid use the debit or ACH rails as the basic underpinning for moving money. Automated bill payment is essentially an Internet front end to ACH transfers. With payments morphing from one to another with the skill of Dickens's artful dodger, financial institutions are pressed to ensure profitability across payment channels, adherence to disparate rule sets, and risk management that spans silos.

Brave new world. The 21st century has ushered in the need for compliance with a dizzying array of legislation. There is the Patriot Act, Sarbanes-Oxley, Basel II, and OFAC- to name just a few. The post bailout era will likely herald significant new legislation, if I am reading the winds from Washington correctly. The cost and complexity of updating legacy systems one at a time to ensure compliance is prohibitive. Moreover, it is difficult to find skill sets to modify dated systems within an acceptable lead time.

If there is one reason that trumps all others, it is the need for improved customer service. Customers are decidedly unsympathetic to the self-inflicted tribulations of their financial institutions. They need to be able to interact through branches, call centers and the Internet to get information across accounts and payment vehicles. The new "millenial" generation is not likely to have the patience to wait while an operator logs in and out of multiple systems.

End or the beginning? While few would argue against the case for convergence, there are practical considerations to be addressed. Does one begin with the settlement end of the value chain and work one's way forward? The move towards Real Time Gross Settlement (RTGS) systems, particularly in emerging economies, suggests that "the end as a beginning" idea has some takers. Nevertheless, I suggest that the greater payoff is at the other end of the telescope. The conversions from one payment to another take place closer to the point of origination, and that is where the greatest benefits are to be garnered from a unified infrastructure. It is also where the functional and technical challenges are acute.

Buckets or pipes? While there are varied perspectives on how to get there, all are agreed on one thing- do not try to redesign existing legacy systems. There are two approaches to a convergent payments platform. There is the data-centric model based on a central repository for all payments information, and customized one-to-one interfaces with the various payment and core processing systems. An alternate approach is message-centric with a central hub through which all communication between payment, core and other systems is routed. The nirvana is a combination of both, governed by versatile business rules engines that financial institutions can control.

Does size matter? The technology vendors in this space are faced with an interesting choice. Does it make sense to target large financial institutions where the payoff from convergence is likely to be greatest? Or is it better to focus on smaller institutions, where implementations of this kind are not akin to open-heart surgery? The answer depends squarely on the vendor's positioning and business model. If the major contribution to profits is from systems integration and professional services, the high end segment suggests itself. On the other hand, if the model is tilted towards license sales with a modest service component, the lower end would make sense. Technology vendors would be well advised to pick their poison. It is a toss up as to whether it is harder to scale up or scale down. They are both incredibly difficult. This is an instance of clear positioning and alignment at the outset being critically important.

Back to the future. It is perhaps counter-intuitive to suggest that the way forward involves re-engineering legacy processes with the introduction of new convergent systems. Nevertheless, evidence indicates that there is an emerging synthesis between checks and ACH to be followed by online debit. The path is fraught with challenges, some of which I have touched upon.

A mentor of mine once told me that there is a very thin line separating a vision from a hallucination. Where do you think payment convergence lies? Let me know.

TransPay Perspectives

I was in San Diego this week to attend the Bank Administration Institute annual TransPay conference. This conference which has its roots in check processing has been gradually repositioned as a venue addressing a broader payments ambit. As someone who spends a lot of time advising companies on positioning and alignment, I understand the challenge of balancing legacy wealth with future promise. I will say that BAI has made partial gains on its journey. The conference sessions had a mix of topics that included ACH, pre-paid, mobile, gen-Y and other subjects, along with check processing, while the exhibit floor was dominated by image based check products and services.

Debbie Bianucci, BAI's president and chief executive officer, aptly set the tone for the times we live in by evoking the memorable opening lines from Dicken's Tale of Two Cities, "It was the best of times, it was the worst of times/ it was the epoch of belief, it was the epoch of incredulity/ it was the season of Light, it was the season of Darkness/ it was the spirit of hope, it was the winter of despair/...in short, the period was so far like the present period".

Dr. James Canton, the futurist emphasized how consumers drive adoption, and enterprises follow later. He shared interesting facts- 2 billion Internet users, 4 billion cell phones, total world population 6.5 billion, 5 billion You Tube videos per month, 150 million active Facebook users, 900% growth in Twitter users in one year etc.. You do the math- somewhere in that mind boggling array of statistics is a case for a collaborative, device independent future where payments will play a part.

Dave Stewart from McKinsey & Company had a more earthbound perspective on the $282 billion payments industry, suggesting that the winning financial institutions will be those who proactively focus on competitive advantage, using the capital base from the historic growth in deposits as consumers flee from risk.

The eminent author and business expert Ram Charan painted a picture of our descent into madness from the repealing of the Glass-Steagall act to facilitate the Citibank-Traveller's merger, through the secured derivative hall of mirrors, to the deft transfer of risk from financial institutions to investors. His take was to cut costs deeply now to create cash reserves to fuel the innovation that is imperative to pave the way out of this crisis.

FiServ had two interesting takes on payment convergence. Denny Carreker and Dave Robertson presented a vision of a "silo-busting" platform that spanned from transaction initiation to settlement for multiple payment vehicles. Mike Reagan came at it from the perspective of exceptions management through common case tools and data repositories.

An engaging panel discussion on mobile banking with representatives from Amazon, Clairmail, and Wells Fargo addressed questions regarding revenue sharing between the wireless carriers, and banks. Notable quotes: "AT&T is the largest bill payment company in the world", and "What the carriers want is like saying, 'If you use the phone to order pizza, I want a piece of it!'" Other points included the need for relevant and personalized text alerts, like bill payment reminders as due dates approached.

Romina Abel and Beth Costa from Edgar Dunn presented insightful research on pre-paid cards use by the unbanked. I found it interesting that 25% of the unbanked had a standard credit card (High, I thought- versus 54% overall), and 18% had pre-paid cards (almost the same as 17% overall). The main reasons for pre-paid use were ease of use, wide acceptance, use of own money, safety and security, and control over finances. Notable quote: "Pre-paid as an alternative to The National Bank of the Mattress!"

Putting formal research and industry perspectives in sharp relief was an enjoyable dialogue between four 'generation Y' youngsters, and the audience of (significantly older!) conference attendees. For me, the defining moment was this interchange: Question, "Do you have Direct Deposit?"... Answer, "I don't know what that is". As you create tomorrow's systems, keep in mind that this is what you're up against.

On the exhibit floor, there were a few vendors that caught my attention...

At the top of my list is Clear 2 Pay. This is the first transformation that I have seen of payment convergence from an idea to a product. While convergence is a journey and not an event, these folks have cut their teeth on SEPA (Single European Payments Area) integration in Europe and are getting set to penetrate the Americas. The white papers on their website spell out an intriguing vision. As they say in the billboard business, watch this space.

In the vein of convergence, Mitek had their mobile check image capture application in view. While the jury is still out on how widespread adoption might be, their announced integration with mFoundry's mobile banking application, and their relationships with J&B Software and RDM Corporation for remote deposit capture suggest promise. There was also research recently from FiServ that indicated that one third of their financial institution survey respondents showed interest in offering mobile deposit capture to their business customers. Taking pictures of checks with cell phones, and sending them for deposit...who would have thought?

The folks from Alogent, now part of Goldleaf, have an approach to tailoring the user experience to match the needs of various market segments for remote deposit capture. Their Payment Web Services toolkit allows financial institutions to offer user experiences appropriate to the needs of consumers, merchants of varying size, and corporations. "Yes, so what's new in having different products suited for markets?" you say. But that is precisely where the uniqueness lies; this is a single infrastructure that can be configured to effect flexibility. It should help the total cost of ownership in not having to manage multiple products- each with its set of features, and product release calendar. With this toolkit that also allows integration with cash management systems, Goldleaf may have a compelling case for a look under the hood.

In the days prior to the passage of Check 21 in 2004, exhibitors at this show used to bring reader/sorters, which were electro-mechanical monsters that took up much space, and made a lot of noise. While those sorters have gone the way of the buggy whip, their place has been taken by desktop scanners. Panini launched their latest Ideal scanner at this conference. It is targeted for small businesses at a low MSRP of $299, and has a compact form factor that would fit a crowded point-of-sale counter. I found the automatic alignment capability where a check could be fed in at odd angles, and yet have the sensors and feed rollers line up the document for a good image scan an eye-catcher.

I'll go back to how Debbie opened the conference, "It was the best of times, it was the worst of times...". Given the ideas I saw and heard, and the will to prevail that I sensed from many, I am inclined towards the former disposition.