COMMUNITY BANKS IN A REMOTE DEPOSIT CAPTURE WORLD WHERE IMAGE IS EVERYTHING

by: Timothy A. White Diablo Valley Bank P. O. Box 729 Danville, CA 94526 twhite@diablovalleybank.com (925) 314-2884

Submitted in partial fulfillment of the requirements of the Pacific Coast Banking School conducted at the University of Washington, Seattle, Washington, April, 2007

EXECUTIVE SUMMARY COMMUNITY BANKS IN A REMOTE DEPOSIT CAPTURE WORLD WHERE IMAGE IS EVERYTHING

by Timothy A. White

It used to be that a banks merchant teller line was the longest one in its branch. Now, thanks to the arrival of remote deposit capture, that wait is over and banking hours will never again be the same. Remote deposit capture is at the forefront of a new check imaging wave that is streamlining deposits, eliminating antiquated payment processing systems, and fostering a momentous change in the way businesses conduct their banking. Processes that were once conducted by banks inefficiently behind the scenes are being moved to the merchants desktop, where customers can enjoy greater flexibility and clear advantages in financial management. Demand for this service from the business market is increasing fast; and while many large banks have already introduced a remote capture product to their commercial clients, community banks have been slow to adopt a solution. The purpose of this paper is to analyze the disruptive impact of this product on the banking industry, outline the threats to institutions that dont implement a strategy, and identify strategic opportunities that banks might execute using remote deposit capture. Sources of information for this study include previously published background material as well as various interviews with banking executives, product experts, and technology providers. This research provides explicit evidence of the industrys fast movement toward remote capture and leads to the compelling conclusion that community banks that service business clients must take immediate action to become product enabled and should do so in a strategic manner that

Page ii

will allow them to maintain or enhance their competitive positions. recommended include the following: Targeting completely new geographic territories Targeting adjacent markets

Growth opportunities

Entering new markets with smaller branches or loan production offices Exploiting existing expertise in industry niches

This document will be of particular interest to the executives and management teams of community banks that have yet to consider a remote capture platform and to those that are just beginning the process. Within the material, readers will find an opportunity to become more educated on the evolution of this payment processing method. Issues that are covered also include the incremental operational risks inherent with this product offering and an overview of the many considerations banks must deliberate when deciding to proceed. There is remarkable growth in the remote deposit capture market and it is threatening the survival of banks that do not launch a competitive product. Accordingly, it is imperative that undecided community banks initiate a comprehensive plan; and while there are many challenges awaiting those that seek to offer a solution, the future benefits will far outweigh the implementation effort.

Page iii

TABLE OF CONTENTS EXECUTIVE SUMMARY______________________________________________________ ii LIST OF TABLES, FIGURES & EXHIBITS _______________________________________v I. INTRODUCTION __________________________________________________________ 1 II. THE EVOLUTION TOWARD REMOTE DEPOSIT CAPTURE ____________________ 3
Early Electronification _____________________________________________________________ 3 Check 21 Legislation ______________________________________________________________ 7 Innovation with Imaging ___________________________________________________________ 8

III. THE COMPELLING BENEFITS ___________________________________________ 11

Corporate Client Benefits _________________________________________________________ 12 Value to Community Banks________________________________________________________ 15

IV. RDCs INFLUENCE ON THE BANKING INDUSTRY__________________________ 18

Product Substitutes_______________________________________________________________ 18 Lowering Barriers to Entry ________________________________________________________ 20 Increasing Buyer Power ___________________________________________________________ 22 Bank Rivalry ____________________________________________________________________ 23

V. STRATEGIC GROWTH OPPORTUNITIES ___________________________________ 26

Targeting Other Markets__________________________________________________________ 26 Growth from the Periphery ________________________________________________________ 28 Business Center Branches _________________________________________________________ 29 Loan Production Offices __________________________________________________________ 30 Niche Banking ___________________________________________________________________ 30

VI. MAJOR IMPLEMENTATION CONSIDERATIONS ___________________________ 32

Risk Issues ______________________________________________________________________ 32 Delivery Methods ________________________________________________________________ 36 Costs & Pricing __________________________________________________________________ 39

VII. CONCLUSION & RECOMMENDATIONS __________________________________ 41 EXHIBITS _________________________________________________________________ 46 ENDNOTES _______________________________________________________________ 466 BIBLIOGRAPHY____________________________________________________________ 50 CERTIFICATE OF ORIGINALITY ____________________________________________ 56

Page iv

LIST OF TABLES, FIGURES & EXHIBITS

Tables 1. DVB Price Analysis

Page 39

Figures I. Distribution of the Number of Non-cash Payments in 2003 II. Annual Number of Non-cash Payments in the United States III. Dollar Amounts of Images & Substitute Checks III. Number of Images & Substitute Checks

Page 5 6 8 9

Exhibits A. The Remote Deposit Customer Agreement, from Remote Deposit Capture, A White Paper Addressing Regulatory, Operational and Risk Issues, NetDeposit, Inc., 2006.

Page

42-45

Page v

I. INTRODUCTION

It was a mere 10 years after the day online banking was born when industry leaders again began to warn of another significant change in the way banking was to be done. Shortly before that anniversary date, Congress passed a law that is proving to have sweeping effects on our countrys payment system, the banking industry, and banks significant commercial clients. Check 21, as the Check Clearing for the 21st Century Act has become known, was the monumental 2004 legislation that removed obstacles previously preventing banks from processing checks as digital images. Up to that point, most banks had to present physical checks for payment, resulting in time consumption and soaring handling and transportation costs. Imaging has now become one of the biggest priorities of banks technology departments and one of the most important pieces of this movement has been the development of remote deposit capture (RDC). This solution allows a banks commercial clients to scan checks at their own offices and send them electronically to the bank for deposit. Businesses not only save a trip to the branch, but they enjoy faster availability to their funds and many other conveniences offered by the advanced software. These benefits have resulted in a huge demand from corporations, without much sales effort from banks. According to John Leekley, chief executive officer (CEO) of RDC

aficionado, RemoteDepositCapture.com, the number of corporate locations with RDC in the United States (U.S.) increased from 3,000 in 2004 to over 90,000 in 2006. While this may only represent five percent of businesses, market penetration is expected to rise to near 40 percent in the next five years.1 The majority of large and mid-tier banks have introduced RDC to the marketplace, yet community banks have been slow to respond. Only 16 percent of the thousands of community

Page 1

banks offer this service now and more than 40 percent have no plans to offer it during the next two years.2 Regrettably, between 70 and 75 percent of small business clients currently demand full direct end-to-end payment processing from their banks.3 Most management teams simply continue to wrestle with the idea of implementing a solution, appearing hesitant to move forward for fear of the unknowns. Given the rapidly moving market, those with remaining questions should educate themselves to gain an understanding of the various risks and opportunities. Purpose & Scope The intent of this report is to determine the degree of influence that remote deposit capture will have on the future performance of community banks. It will first provide an evolutionary description of the product and later summarize the industry dynamics that are likely to be altered as a result of RDC proliferation. Further analysis within this study will attempt to identify the potential threats and opportunities that community banks will face as this technology advances. Finally, it will furnish an overview of the many risks and challenges associated with offering an RDC solution in order to help institutions ascertain their level of interest in moving forward with implementation. Recommendations will be made for full pursuit of a remote capture strategy and suggestions will be given on how this can be done to maximize competitive advantages. Method of Analysis Through a variety of research methods, information was gathered to provide the information and analysis necessary to meet the papers objective. To establish a foundation of knowledge and historical perspective, secondary research was collected from publications and white papers mostly written over the past few years. Meanwhile, primary research was obtained through several conversations with banking industry leaders, remote deposit capture experts and a variety of application service providers and third party processors.

Page 2

II. THE EVOLUTION TOWARD REMOTE DEPOSIT CAPTURE

Remote deposit capture is the latest enhancement to a payment system that has been slowly moving away from paper toward electronification. To appreciate this exciting new product and its impact on the banking industry, it is important to first trace the recent progression and diversification of the U.S. payment system. Early Electronification The modern era of U.S. payment processing has been greatly influenced by increasing automation and technological advancements. Beginning with the utilization of computing power in the 1960s, the Federal Reserve Bank and leading banks began to improve the efficiencies and speed of check operations by automating check movement and removing certain labor- and timeconsuming tasks. Concurrently, the reliance on checks by consumers and businesses increased to unprecedented levels.1 By 1979, over 85 percent of all non-cash payments were represented by checks 33 billion of them a year. Check payment transactions continued to grow over the next two decades, reaching approximately 50 billion annually by 1995.2 Resulting economiesof-scale allowed processing centers to become highly profitable in their own right.3 While historically dominated by paper checks, our payment system has welcomed various electronic alternatives over the last few decades. One of the first and most significant electronic payment vehicles to originate in the U.S. was the credit card. From 1979 until 2000, the estimated number of credit card transactions increased from 5.3 billion to 15 billion, an average annual growth rate of nearly 10 percent.4 By 2003, this instrument was used for 23 percent of all non-cash transactions, edging out all other forms of electronic payments.5 While check usage continued to grow in line with economic expansion, the high adoption rate of credit cards

Page 3

suggested that they had become a significant force as a check substitute, especially for consumers. The number of electronic payments in the U.S. grew even more rapidly with the introduction of debit cards in the 1990s. Touted for their relative safety and convenience, debit cards became a practical alternative for check writing consumers. In the eight-year span from 1995 to 2003, debit card transactions rose at a compounded annual growth rate of over 35 percent to represent approximately 20 percent of all non-cash payments.6 According to the 2004 Federal Reserve Survey of Consumer Finances, an estimated 60 percent of U.S. households used debit cards in 2004.7 Although a clear substitute for the use of currency, debit cards have also been facilitating consumers migration away from checks. Automated Clearing House (ACH) transactions also account for a significant portion of non-cash payments, growing at an annual rate of 13 percent from 2000 to 2003.8 This networked payment system between depository institutions is used frequently by businesses as well as consumers. Businesses primarily benefit by using ACH when processing repetitively large batch payments such as payroll. It saves time and costs associated with writing, distributing and reconciling paper checks. Consumers and businesses, meanwhile, have taken advantage of the conveniences ACH delivers via preauthorized or automatically recurring debits for such items as loans, utilities, and memberships. We have recently seen increased use of ACH in the retail sector through consumer-initiated online bill-payment and merchant check conversion, whereby checks are scanned at point-of-sale locations and transformed into electronic ACH debits. These activities provide further direct evidence of the ongoing replacement of checks. Other electronic payments include bank wire transfers, which have been in use for many years. Unfortunately, despite the beneficial elements of speed and irrevocability provided to a

Page 4

wire payment recipient, the relatively high cost and inability to link wire information with internal corporate accounting and data systems has prohibited their everyday use.9 In all, electronic forms of payment have become very popular due to their convenience and lower cost. While all types of non-cash payments continued to increase every year through the mid-1990s with population and economic expansion, electronic methods in particular exceeded the growth of check usage. By 2003, aggregate credit card, debit card, and ACH transactions finally overcame the domination of paper checks, growing to account for more than half of all non-cash payments as shown in Figure I below. 10 FIGURE I. Distribution of the Number of Non-cash Payments in 2003

(Source: The 2004 Federal Reserve Payments Study, Federal Reserve, 12/15/04)

However, the truly revealing milestone was revealed in the mid-1990s when the actual number of checks paid began declining for the first time in history. (Shown in Figure II.) This momentous statistic clearly suggested the migration away from checks toward alternative payment methods.11

Page 5

FIGURE II. Annual Number of Non-cash Payments in the United States.

(Source: Trends in the Use of Payment Instruments in the United States, Federal Reserve, 2005)

It is further anticipated that this trend will continue as the Federal Reserve (Fed) predicts greater use of existing or new electronic instruments as technology adapts to changing needs, drives down payment processing costs, and becomes increasingly accessible by consumers and businesses.12 However, this progression does not translate into a checkless society anytime soon. Checks are still the most commonly used type of noncash payment, despite slowly losing favor, and their presence is diminishing only gradually. Furthermore, it continues to be apparent that checks are heavily relied upon for larger payment transactions, as their total dollar value exceeds the aggregate value of all aforementioned electronic vehicles.13 According to a recent Fed publication, it appears likely that checks will continue to play a significant role in the U.S. payment system, particularly when electronic payments are not well-suited for meeting consumer or business needs. The Fed further added that the fact that checks are still widely used suggests either that checks are an efficient means of payment for many purposes relative to alternatives or that barriers to innovation are inhibiting the development of alternatives.14

Page 6

Unfortunately, the drop in check usage has translated into higher per item processing costs, posing new challenges in operating a cost-effective check processing system. Without the ability to squeeze more efficiency out of this system, the industry has been forced to consider further enhancements in check processing.15 Fortunately, the Fed recently acted to help streamline payments initiated by check by pushing through legislation intended to foster innovation. Check 21 Legislation The Check Clearing for the 21st Century Act (Check 21), which became effective in October 2004, has led to an exciting transition within the realm of check processing. This law facilitates the use of current imaging technology to process checks by preventing paying institutions from requiring an original paper check for settlement. Collecting banks are now allowed to either present an electronic image of the check or, if the paying bank wants to continue to receive paper checks, a substitute of the imaged item called an image replacement document (IRD). According to The Federal Reserve Board, the IRD is the legal equivalent of the original check and includes all the information contained on the original check.16 Previously, most state laws had required that banks submit original items for payment unless agreements were signed between institutions allowing for such action. This created an impediment in the system that necessitated costly centralized check processing systems, redundant data-entry, and significant transportation and staffing expenses. Time consuming logistics also meant delays in making funds available to depositors. By enabling the creation, transmission and utilization of the digital image of a physical check, the payments industry has an opportunity for efficiencies and cost savings that have not been achieved for quite a long time. Imaging was used by banks prior to Check 21, but only for isolated back-office functions such as check archiving and signature verification. In 2004, however, imaging was extended to

Page 7

the area where check clearing takes place -- the banks centralized operations centers or with contracted processors. These departments have historically been burdened with high staffing requirements and the large fixed costs of real estate leases and equipment such as check readers and sorters. Converting the majority of checks to digital files upon deposit would reduce, or in some cases eliminate, these centers. Transportation costs and back-office labor costs typically comprise 75 percent of total check processing costs and according to research published by Panini North America in 2004, nearly half of those can be eliminated as a result of check imaging.17 Furthermore, by eliminating redundancies and human handling, banks will likely reduce check processing errors and avoid associated adjustment costs and client attrition that can often result. Innovation with Imaging Back offices clearly achieve benefits stemming from Check 21 legislation by having the ability to ease the pain of handling checks. As a result, the historical trajectory of performance improvement in check processing can be restored. Data collected by the CheckImage

Collaberative shows that $9 trillion in check payments per year are already being converted to digital images (Figure III). Even more interesting is the evidence (Figure IV) of an increasing ability to carry those images straight through the system, eliminating the need to print IRDs. The data further points to the fact that substitute checks levels are flattening.18

Page 8

FIGURE III. Dollar Amounts of Images & Substitute Checks.

Annualized Jan. 2007 dollar amount = $9.6 trillion. (24 percent of total dollars cleared by check.)

(Source: Industry Adoption Updates, CheckImage Collaberative, March 30, 2007. http://www.checkimagecentral.com)

FIGURE IV. Number of Images & Substitute Checks.

Number of Images

Number of IRDs
(Source: Industry Adoption Updates, CheckImage Collaberative, March 30, 2007. http://www checkimagecentral com)

While imaging capabilities are important, the longer-term value to banks is centered in the opportunity to leverage the new processes and technological capabilities to strategically develop products and services that will ultimately help in developing and enhancing client relationships. Over the last few years, several institutions have introduced new services that allow the conversion of checks to images near the first point of presentment. For instance, branches are being equipped with scanning devices and software to facilitate the conversion of checks to

Page 9

images behind the teller line.

Many branches are even transferring this image capturing

procedure to each teller station, where scanners and advanced software are integrated with existing deposit systems. Keyed-entry is replaced by scanning and recognition technology that allows tellers to minimize errors by verifying deposit integrity while the customer is present. This reduces the time and costs associated with potential adjustments later. Branches thus avoid costly end-of-day courier trips to a processing center as items are transmitted electronically.19 Another application that is grabbing the attention of many banks and their customers is the movement of imaging to automated teller machines (ATMs). Wells Fargo was one of the first banks to launch check imaging at its automated teller machines, which it markets as envelopefree ATMs. Customers insert up to 10 checks at once directly into the machine, which scans each item and immediately displays the images on the screen. The ATM reads the amounts, totals the deposit, and automatically directs funds to the appropriate account. In most cases, up to 30 bills in cash can also be deposited in the same manner, but with immediate credit. Not only does the client service level improve from getting satisfactory validation of the deposit accuracy, but the bank benefits from the elimination of fraud that couldnt otherwise be detected inside an envelope.20 While all of these imaging services manifest enhanced efficiencies promised by Check 21, no new product or service has been as innovative or is more potentially disruptive to the competitive landscape of the banking industry than remote deposit capture. This is a service that enables bank clients to scan checks at a location other than the bank branch and transmit their deposit electronically to the bank for credit to their account. As explored further below, it has far reaching capabilities that can improve the performance of both community banks and their commercial clients.

Page 10

III. THE COMPELLING BENEFITS

Remote deposit capture, which has at times been referred to as image capture, distributed capture, and merchant capture to name a few, was initially established for commercial bank customers. Although a few banks, such as USAA Federal Savings Bank, have begun to offer the service to consumers, this market is currently not as compelling for most community banks to pursue. Given the relatively high prices for equipment and setup, the low volume and dollar amount of average consumer checks makes RDC cost prohibitive for individuals. Furthermore, the limited abilities of home-office scanners and the higher risk of fraud have, for the most part, restricted the target market to trusted businesses. Accordingly, this paper focuses on RDC primarily as it applies to businesses and their community banks. The remote deposit process is initiated when a commercial client captures the front and rear image of a check using a special scanner. Typically, these two-sided scanners are obtained from the clients bank or a third-party provider and usually come with the capability to endorse the check and mark it deposited in a way to prevent duplicating deposits. Information captured from the check includes the critical MICR (magnetic ink character recognition) line as well as other important information including the payment amount. The scanner is connected to a personal computer (PC) with integrated software that employs character recognition tools to assist in building an electronic version of a deposit slip. Multiple items can be scanned and automatically added to the deposit while the company, looking at a display of the checks on its screen, can verify that amounts were correctly interpreted. The software then totals the deposit and creates a deposit ticket. If necessary, these items and balances can be integrated with the

Page 11

clients accounts receivable system, removing often error-ridden manual keyed-entry. Also, checks can usually be sorted by payee in order to accommodate deposits to appropriate accounts. Once checks are scanned and the deposit has been tabulated, and checked for accuracy and duplication, the business transmits the file electronically to its bank for clearing. Files must, however, be in a standardized, bank-acceptable format called X9.37, which allows the institution to use this electronic data elsewhere in the clearing process. Usually, a confirmation of the deposit is returned to the client electronically. Finally, rather than sending the original items to their institutions, clients retain them in safekeeping and destroy later when deemed appropriate. Customers typically have access to the images of recent or archived items and can generate reports or conduct data mining to search for specific items. Corporate Client Benefits In its essence, this product moves the initial deposit location from the branch teller line or ATM directly to the clients office, saving the company both time and money. With RDC, commercial clients no longer need to be inconvenienced by filling out deposit slips, endorsing and photocopying checks, making daily trips to the branch and waiting in line to make their deposits. This is particularly convenient for many community banks small business clients, whose owners have little or no administrative staff. Likewise, larger corporations improve the productivity and reduce the risks of employees who would normally drive to the bank. Customers subscribing to couriered deposits no longer need to pay for pick-ups, nor do they have to comply with the couriers schedule or be concerned about their physical checks while in transit. Companies with an extraordinarily high volume of checks will have saved more time to process checks that they might otherwise have had to hold until the following day. In fact, since businesses with RDC services dont necessarily need convenient bank branch

Page 12

locations, they will have more freedom over who handles their banking relationship. No longer will a business be forced to deal with a particular bank because it is easy to get to. Furthermore, with the ability to essentially deposit checks from anywhere, multiple-office businesses, such as property management firms or title companies who have typically been forced to maintain several banking relationships near their offices, can consolidate these into one institution. In addition to improved operational efficiencies, businesses can enjoy earlier availability to their deposited funds. Items can be deposited through remote deposit capture throughout the day and, in some cases, later than branch hours or traditional cut-off times. In an electronic banking environment, the faster the bank receives the deposit, the quicker it can get the checks cleared. According to officials at Heritage Bank of Commerce in San Jose, CA, the funds availability on straight-through image clearing outside the local Fed district is generally one to two days quicker than paper. They have a client who was regularly depositing checks of over $700,000 drawn on a Chase controlled disbursement account in Dallas. The checks took three days to clear. With its new remote capture application and image processing, they sped this up to one day. Faster check processing could also reduce payment fraud by providing earlier notification of return items. With quicker availability to funds and accelerated check clearing, corporate cash flow can improve significantly and have a positive impact on financial performance. Most of the basic features included in remote deposit systems today were developed by early pioneers of the new software in 2005. Several of the large banks, such as Wells Fargo, U.S. Bank, JP Morgan, and Wachovia, had developed their own proprietary systems by then, wasting little time in seeking to lock in commercial clients. Although corporate acceptance was favorable and demand began to increase with awareness, many banks were still treading softly

Page 13

into the market. Meanwhile, rapid entries into the space by application service providers over the past year have stimulated continued product enhancements, further benefiting both commercial end users and banks. Armed with improved software, providers have introduced advanced character recognition, better image quality, improved security and encryption and a multitude of integration solutions that allow for communication with other banking applications, remittance applications and a wide array of corporate applications. While the visual quality of imaging was of great concern when RDC was first introduced on a large scale, more recent sophisticated technology has turned out results that have suppressed this problem. Since computer recognition has never been 100 percent accurate, users have been required to validate scans via balancing or confirming amounts via a keyed entry. However, image usability and legibility has improved such that assessments from leading experts of electronic clearing and image exchange reveal a drop in image defects from 3 percent to 0.6 percent.1 Image interpretation tools such as CAR/LAR (courtesy amount recognition/legal

amount recognition) and ICR (intelligent character recognition) as well as image quality analysis tools are practically standard features accompanying new RDC solutions. On the integration front, enhanced RDC technology is improving business cash flow management and the operations of the treasury by connecting with corporate databases. Intuit Incs. QuickBooks, whose accounting software is used by many small and middle market companies, recently announced its ability to integrate with remote imaging solutions.2 Other applications not only upload scanned data to accounts receivable databases, but the check information can be assimilated with other enterprise resource applications, updating records such as customer information and sales results.

Page 14

The latest image capturing applications can also be effectively used in remittance processing. This is used currently within the lockbox arena through accounts-receivable

conversion (ARC), the code that allows recipients to convert consumer checks to images along with other remittance documents such as payment coupons. In fact, remittance processing is progressively converging with image processing, allowing both applications to be completed with one system or platform according to John Leekley, CEO of RemoteDepositCapture.com. Meanwhile, a recently implemented point-of-sale payment option has been introduced to retail merchants who typically accept a high volume of low-value checks. These businesses previously couldnt justify the cost of RDC due to the need to pay for the production of an IRD for those paying banks who require them. Now, however, merchants can scan the checks and convert them to an ACH file for transmission to their bank.3 Value to Community Banks As we have seen, internal imaging capabilities enabled by Check 21 make it possible for banks to save money and gain efficiencies in check processing. By extending this capability outward to the client in the form of remote deposit capture products, community banks can realize several additional benefits. In addition to reduced costs for physical transport of checks between branches, processing centers and other banks, financial institutions stand to save money on customer courier runs. Because community banks usually have a small number of branch locations, they have historically relied on internal or contracted couriers to pick-up deposits from their business clients locations. Unfortunately, this high level of service has come at a price as all or a portion of those costs are typically absorbed by the bank. RDC solutions should eliminate a majority of courier pick-ups.

Page 15

Additional savings are almost assured through a reduction of clerical mistakes. Bank efficiencies will result from advanced character recognition and balancing software. The costly efforts that result from manual bank adjustments could shrink substantially. Branch staff, and the branch itself, could experience consolidations as much of the operational duties of tellers and operations personnel will be replaced by RDC functions, which provide a virtual branch on the top of a clients desk. Like their clients, financial institutions will gain from accelerated clearings and better float management. RDC imaged checks clear faster on average than paper checks that need to be transported and deposited at the branch. All else being equal, if funds are received by the bank earlier for credit to the client account, this could result in higher average deposit balances. (Unfortunately, as the industry moves closer to full imaging at every institution, this advantage may be neutralized.) Also, faster clearing translates into faster notification of return items and a quicker ability to detect fraud, whether from forgeries or stolen checks.4 But the most compelling rationale for launching an RDC service is the advantage achieved in obtaining new business. For opportunistic institutions, remote capture can foster significant growth. Since most remote deposit customers do not need physical access to a branch, many of them are likely to be indifferent to branch locations when choosing a banking partner and more apt to choose based upon other factors. Larger banks have had clear advantages in luring clients with their extensive and convenient locations, but now community banks are able to compete. Geographical barriers, which had previously limited the ability to grow beyond a branch or courier network, will be removed. Financial institutions can more easily infiltrate new territories without needing to establish additional branches.5 As discussed further in the next chapter, this

Page 16

opportunity alone has the potential to transform the competitive landscape in the banking industry and could force many community banks to rethink their strategic plans. At the very least, RDC-enabled banks have the ability to retain and strengthen existing client relationships. Due to heightened awareness of remote capture and its value-added Large banks have offered the

corporate benefits, demand from businesses has increased.

technology since early 2005 and many regional mid-tier banks have followed. As a result, many have built further loyalty with their customers and thus a stronger attachment. Even some small, more visionary banks have begun to introduce the product or are in the process of developing an answer to the need, and plan to call on their competitors clients with it in hand shortly. Banks without a response will generally be at a competitive disadvantage when selling depository services.

Page 17

IV. RDCs INFLUENCE ON THE BANKING INDUSTRY

The various attributes of the banking industry define the range of operations and constraints facing each institution. They influence how banks conduct business and what level of performance they can achieve over time. One trait that has historically shaped banking is the regulatory environment within which it must operate. Changes in banking laws and regulations can affect industry characteristics, remove barriers to entry, and ultimately impact the ability of banks to differentiate and sustain competitive advantages. Check 21 legislation and its derivative products such as RDC represent changes that are proving to be disruptive forces to the banking landscape. Accordingly, it is important for community banks to recognize how such changes alter the environment in which they compete. By doing so, they will understand the impact on their own strategy and might be more effective in developing new strategies to neutralize or take advantage of the modified surroundings. Using a framework developed in 1980 by Michael Porter of Harvard Business School, we can analyze the degree of impact that check imaging and remote deposit capture have on banking. This model suggests that five specific attributes of industry structure can threaten the performance of companies within that arena.1 The emergence of check imaging, especially at a remote location, has a significant bearing on four of these five forces and threatens to alter the industrys playing field. Product Substitutes Substitutes can ultimately replace an industrys products and services when they are better performing relative to the previous products. To stay competitive, banks are required to

Page 18

continually improve both their product offering and processes.

As demonstrated by the

aforementioned corporate benefits, remote deposit capture is clearly a superior substitute for businesses that have historically prepared paper check deposits and delivered them to their banks nearest branch. The image processing infrastructure that supports this product provides further advantages in terms of expedited clearing and funds availability. In its essence, remote deposit capture continues to meet the same customer need, but does so in a different and more favorable way than clients are accustomed. The replacement of traditional check deposits and processing with remote capture and imaging has significant implications on the economics of the industry. Although requiring an initial investment of time, effort and money, the development of Check 21 technology can provide an opportunity for long-term savings both in back office processing as well as branch and courier expenses. Traditional paper-based and centralized check processing systems have required large capital investments, significant transportation expenses and a high level of staffing. By electronically passing check images directly from their client completely through to the clearing bank, institutions can achieve astounding efficiencies. Thus, the shrinking maze of paper alone provides early adopting banks with obvious competitive advantages. Those who havent adopted the new technology or arent planning to introduce a distributed capture plan will be at a disadvantage and will exhibit below normal profitability relative to the industry. In fact, as physical check processing volumes continue to decline, the cost to process each item will increase, posing an even higher burden on banks that insist on traditional methods of clearing checks. On the revenue side, non-conforming banks will begin to lose their best customers core deposits to those banks that can offer the convenience and cost savings provided by a remote

Page 19

capture product. Faced with increased competition for deposits, they will most likely be required to pay more for these funds, resulting in declining net interest margins and lower profitability. To maintain normal economic performance relative to the industry, banks will be forced to follow industry leaders by implementing an imaging strategy including remote deposit capture. Those who dont will be subject to failure. Community banks must also look to the horizon to consider what potential substitutes might threaten their RDC offering in the future. They must be conscious that the popularity of ACH payments is increasing and it, or some variation of electronically initiated payments, could someday remove the check from our system entirely. Also, the type of file into which checks are converted is subject to change. Image clearing could be replaced by the accounts receivable conversion (ARC) process introduced in 2002.2 This allows payment recipients or banks to convert a check to an ACH debit. While currently only checks drawn on consumer accounts qualify, cost and other advantages could change this regulation and threaten current check imaging applications. Lowering Barriers to Entry One of the significant barriers historically preventing new banks entry into the market has been the cost of establishing branches. Certain size and economies of scale must be met in order to justify the overhead associated with staffed offices. Another burden has been the cost of having and operating a check processing center or back-office system. (Although many

community banks outsource this function to third-party providers, there are still some fixed costs associated with this relationship.) Check 21 technologies with remote capture shifts the

economies-of-scale curve by removing the need for extensive branch networks and supporting check processors, thus lowering traditional barriers to entry. Lower entry costs could invite new

Page 20

banks into the market, spurring greater competition and limiting the performance incumbent institutions might otherwise enjoy. Meanwhile, the shrinking volume of paper checks will continue to reduce the economies of traditional processors and hurt those that choose not to adapt to full imaging. Larger existing banks have traditionally had advantages independent of scale. One of these advantages has been their favorable geographic reach. Generally, bank territories have long been limited to areas in which their branches can be placed. Community banks can usually only attract business in close proximity to their headquarters and branch offices and cannot compete with banks in other markets. Armed with a bigger capital base, however, larger institutions based far outside of a particular market can easily enter a territory by establishing a new branch. In addition, banks such as Wells Fargo have leveraged the size of their network by selling the convenience of having accessibility to their multiple locations across the globe. Their extensive branch system provides easy depository access for highly mobile depositors or multi-office businesses. Remote deposit capture removes the need for traditional branches in pursuit of business in a geographical market. Not only can new banks open without a large branch investment, greater opportunity is created for existing banks to reach beyond their established footprint to build corporate relationships. The advent of RDC creates a more level playing field between large and small institutions and will increase competition from many unfamiliar names trying to gather deposits in new marketplaces. Independence Bank, a one branch de novo headquartered in Rhode Island, has leveraged Check 21 legislation to pull in commercial deposits from around the nation. Utilizing a network of sales representatives and state of the art technology, the bank has made remote deposit capture

Page 21

its primary platform for building new business. Bob Catanzaro, president and CEO, says were a community bank in East Greenwich, and yet we can go out and court business anywhere in the country.3 Formerly a non-bank SBA lender, Independence Bank has grown to over $45 million in assets4 and has depository clients in multiple states outside of Rhode Island5 -- evidence that RDC can help community banks to compete for commercial accounts with the likes of Bank of America, Citibank, and Wells Fargo. Increasing Buyer Power Given the industrys relatively low level of product differentiation, commercial banking clients have traditionally enjoyed the ability to shop their services among various institutions. By having alternative banks among which to compare pricing and products, these customers benefit from a significant amount of power when making requests of a bank. This has limited the extent to which any particular institution can obtain above normal profits through higher fees and larger interest margins. Providing these clients with remote imaging and deposit capabilities will only intensify their power within the banking industry. Given the current movement and demand for RDC, banks will obviously lose the significant amount of fee income they have historically received for processing paper items. By pursuing an electronic path, profits could be affected by both fee income as well as an increase in the per item cost to move and process a diminishing number of paper checks. Furthermore, as RDC becomes more of a standard product with decreasing differentiation among banks, prices for the new service will be reduced. Numerous alternative offerings will force banks to keep image processing fees low, thereby neutralizing profitability. If any bank continues to charge fees like those for traditional paper check processing, their cost conscious clients will simply sever their relationship and move to a lower-priced bank.

Page 22

Corporate empowerment has and will continue to grow with the evolution of remote deposit capture. Since this service has the ability to make significant improvements to a

companys cash flow, treasury departments will be concentrated on achieving ultimate benefit. According to industry authority, John Leekley, large companies will have the ability to essentially generate their own cash letters and clear check payments without the use of a collection bank. In effect, RDC has enabled this by placing a virtual check sorter on their desktops, allowing them to sort checks by routing transit number and send images directly to paying banks or bank associations for clearing. This provides those corporations with the most immediate availability and has removed their bank from the payment processing supply chain. This ability to partially integrate backward will thus minimize certain processing fees. Even those who believe that their corporate capture service further ties in a client to the bank, making the relationship less vulnerable to competitive institutions, must consider the new development of independent service platforms that take the image management process out of the banks hands. Third party service providers such as eGistics are providing the flexibility not only for banks, but end-users as well, to more easily change their RDC vendor relationships while maintaining continuity in their document management.6 Bank Rivalry The arrival of remote deposit capture will only heighten the already extreme rivalry within the U.S. banking industry that has historically been characterized by a lack of significant product differentiation, intense advertising, and rapid competitive reaction. Although early pioneers of remote capture products have gained first-mover advantage, the wave of banks embracing this service is quickly rising, eroding any sort of separation and relative economic gain the leaders may have established.

Page 23

A proliferation of third party service providers and the launch of web-hosted solutions in 2006 opened the door for many banks of all sizes to get up and running. Banks no longer have to spend precious time and money creating their own proprietary systems and software. Instead, there are plenty of application service providers who can customize Internet-based software at minimal initial cost. As a result of this phenomenon, the percentage of community banks offering remote capture grew to approximately 16 percent by the end of 2006, with an additional 33 percent of American Bankers Association (ABA) Banking Journal survey respondents saying they will offer it in 2007.7 Among other things, the degree of rivalry within an industry can be gauged by the number of competing firms and the industrys relative growth rate. In March 2007, there were 8,673 commercial banks and savings institutions in the U.S., many at a similar size. Meanwhile industry-wide deposits have grown at a modest compounded annual growth rate of 4.7 percent over the past 15 years.8 Despite the overwhelming number of banks in the U.S., a community banks competition has historically only been limited to the dozens of banks with physical locations in its immediate geographic market. However, since remote capture allows banks to extend their reach beyond a branch territory, community banks will be faced with a greater number of competitors. While it is obvious that thousands of banks will not seek to compete in one particular market, it is certainly reasonable to expect an entrance by banks who have established a branch presence in adjacent territories. Also, competitive threats could derive from specialty banks in search of relationships with businesses in certain niches. Given the industrys historically slow expansion and its numerous participants, institutions seeking to grow faster must acquire market share from their competitors. Often, banks use attractive rates and low fees to lure new business from their opponents, forcing other banks to

Page 24

compete on price. Now, as mainstream adoption of remote deposit capture continues and the number of banks seeking business in any one market amplifies, rivalry will continue to rise and price wars could intensify. In particular, banks are currently in search of low cost deposits in order to fund a growing demand for loans and to offset contraction in net interest margins. The FDIC currently reports that banks had over $7.8 trillion in deposits at December 31, 20069 and many think that hundreds of millions of this amount is up for grabs. It is unmistakable that the introduction and high demand of remote deposit capture is moving the banking industry into the midst of a significant transformation. Lacking a

compelling need for branches in every targeted community, boundaries are dissolved and rivalry is heightened. Further progress in imaging technology and bank demand for commercial

deposits will increasingly provide businesses with greater purchasing power. Without these latest deposit capabilities, community banks will place existing corporate relationships at risk and growth will languish behind those that are equipped. Ultimately their performance will be threatened.

Page 25

V. STRATEGIC GROWTH OPPORTUNITIES

Given remote captures compelling functionality, rapidly rising client demand, improved bank efficiencies and economic benefits, and an altering banking industry landscape, those community banks that have yet to introduce RDC must make it a high priority to do so. This product is rewriting the rules of branch banking and changing the way independent banks service their clients. Without it in their arsenal, most banks will be at a competitive disadvantage. Aside from this obvious recommendation, however, management teams must carefully consider how a remote capture product will be launched and used to a banks advantage. Like any new product, the development and launch should be aligned with the banks overall strategic plan. If the strategy needs to be altered to fit new objectives arising from RDC capabilities, then management must address these changes to allow for a seamless integration. While the plan can simply be built to preserve the banks competitive position, it can also be used to take advantage of new opportunities that employ RDC as a platform for growth and improved performance. Targeting Other Markets Over the past few years, one of the chief concerns of community banks has been their ability to find new low-cost deposits, the primary tool used to fund their growth. For various reasons, including heightened competition from both banks and non-bank financial service providers, core deposits have fallen short of matching the increased loan demand at many institutions. In fact, FDIC compiled statistics indicate that core deposits of commercial banks with assets between $100 million and $1 billion have fallen steadily from 67.9 percent of total assets in 2003 to 63.7 percent of assets by the end of 2006.1 The contraction of core deposits can eventually force banks into paying more for alternative funding sources, thus impacting their net interest margins and damaging profitability.

Page 26

The industry's net interest margin -- the difference between the rate banks earn on interestbearing loans and investments and the rate they paid to fund those assets -- declined to a 17-year low in 2006 according to the FDIC. Over the last 10 years through December 31, 2006, the aggregate net interest margin for all U.S. commercial banks plunged from 4.06 percent to 3.26 percent.2 While most of this erosion was attributable to larger institutions, smaller banks also reported the compression. Banks with assets of less than $1 billion experienced a drop in their margins from 4.44 percent to 4.05 percent.3 The trend suggests that community banks future growth will be limited to the amount of earnings they are willing to sacrifice and, should this downward movement continue, an increasing number of banks may not even be able to survive. Although there are few things that can be done to prevent the cost of funds from growing as banks try to expand faster than the industry average, remote capture can assist by attracting new business relationships which see benefit in the product. Reduced float from faster clearings could also result in higher average balances that benefit banks. Although implementation

requires an investment, the implications can be positive. Post a 5.5 percent two-year CD (certificate of deposit) rate and money flows in, observes the Banc Investment Group. Rolling out a remote capture product will take over a year or more before the results are viewed, but it is the better path.4 Early adopters of RDC will have the best opportunity to attract business in their existing territories, but as RDC costs and availability become less of an impediment, the rest of the industry is bound to follow. Another potential way for banks to source cheap funding is to extend their service area. RDC is an essential tool in landing new core deposits from specifically targeted markets without the investment in a new branch and staff. Many success stories have surfaced, illustrating the ability of banks to use RDC to escape the geographic boundaries of their branch networks,

Page 27

extending into neighboring communities or further. Even the seemingly impossible accounts to obtain, such as those of a multi-office business prospect, can be targeted and effectively banked. As previously mentioned, a one-branch Rhode Island bank has deployed several representatives in various locations across the country. Equipped with remote capture hardware and software, these individuals are charged with bringing in new business banking relationships, including deposits. Although this gun-slinging strategy might sound attractive, it is easier said than done, says Christopher Gust, Senior Vice President and Manager of Cash Management Services at Heritage Bank of Commerce. Gusts San Jose, California-based bank has been offering a remote capture solution for over six months, but had previously banked clients outside its branch footprint using the branches of its correspondent bank, Wells Fargo. Remote deposit capture does create the perception that, Oh my gosh, we have the whole U.S. in which to develop business now and we dont need bricks and mortar anymore. But you didnt before. Prior to remote capture, we had 70 clients using Wells Fargo offices in the Bay Area, and we had the capability of extending our reach to businesses all over the country. When considering all the effort we put into banking businesses in our home-town market, we realized that this was just not feasible. What truly drives the business is still the people within the bank, says Gust. There may be opportunity for banks like Independence, but it appears that unless an institution can build brand recognition in the markets it targets, growth will be slow. Even then, they would still be buying deposits, much like what Internet banks have done -- less the overhead. That is why banks starving for non-interest or low-interest bearing deposits are best served by a strategy that utilizes RDC to expand outward from their core market(s). Growth from the Periphery While community banks are inherently chartered for the purpose of serving specific and usually small territories, there are often opportunities provided by referral sources or other types of connections to meet prospective business clients that reside just outside the immediate target

Page 28

market. While no direct marketing efforts are placed on these areas, growth-motivated bankers will nevertheless make an effort to accommodate this potential new business. Unfortunately, without a branch in the vicinity or a sufficiently large courier route, the distant banks cannot win the new client in many cases, even though they may be favorable in other aspects of the relationship such as credit and service. Despite the level of any banks ability to deliver loans, companies still require an easy and fast way to get their check payments cleared, says the head of business development and marketing for Diablo Valley Bank (DVB), Steve Tessler. Accommodating the clients depository needs with other arrangements, such as using a correspondent banks branch network or through overnight transfers or sweeps from other banks, can be noticeably inconvenient, costly to the bank and client, and may delay both the arrival of funds into the account, as well as funds availability. Also, as Mr. Tessler mentions, we dont want our clients stepping one foot into the branch of another bank. It is an embarrassing thing to ask of your client. Plus, we dont want to indirectly provide introductions to other bankers. By putting many of the routine branch functions on top of their clients desks, community banks offering RDC are no longer challenged with an inability to easily and effectively bank companies in outlying locations. Furthermore, if the intentional plans of RDC equipped banks are to expand outward, management now has the option to do so without a physical branch. Strategic considerations can be made to either build an office or reserve a portion of those funds to deploy business development personnel into the new markets. They also have the option to divest existing branches or scale them down should branch visits decline. Business Center Branches Should remote capture-enabled institutions absolutely require an office to be placed in new markets for branding or other banking transactions, consideration should be given to alternatives

Page 29

such as a business center branch or even a loan production office. The business center branch, a smaller office housing up to three or four individuals within strip malls and office buildings, is gaining popularity for its cost effectiveness. Average branches typically cost $1.8 million to open, while business center offices cost less than one-quarter of this. Although a fullservice branch, these offices cannot accommodate a large amount of activity and rely in part on remote capture.5 With key personnel who are known to the community and a location that is strategically situated in the heart of the target market, these offices would be an excellent complement to a banks remote capture service. Loan Production Offices Although less of a branding approach due to their lack of sufficient signage, loan production offices could provide the human presence needed to balance a growth plan led by RDC. Existing loan teams could certainly benefit from the addition of this product, but banks specifically seeking small and middle market business relationships in new areas should seriously consider matching their remote deposit capability with a team of commercial lenders. Banks seeking geographic loan diversification can enhance their case for establishing new remote loan offices with the undeniable ability of RDC to serve the related depository needs. As evidenced by the number of existing loan production offices, many new business banking opportunities are driven by a need for credit. Community banks entering a new market without local lending capabilities might be like opening a toy store with no inventory. Niche Banking The final significant strategic growth opportunity afforded by remote deposit capture presents itself to banks who specialize in banking certain industries or business segments. These

Page 30

niche players cannot be limited by geography since their target clients are not typically concentrated in one location. In fact, they may have very few in many locations. As an example, banks such as Silicon Valley Bank and Square One Bank are focused on high-technology and venture capital-backed companies. Their clientele has historically flocked to areas such as Boston, Austin, and Denver. Although one branch office in these metropolitan areas may make sense, these banks would also be well served by remotely capturing client deposits instead of using an inefficient courier system or correspondent banking arrangement. Similarly, several community banks have developed high aptitudes in other commercial markets such as homeowner associations, utility companies, and government agencies. They have valuable knowledge about specific business lines that allows them to better serve the unique financing requirements, cash management needs, or investment desires of that particular business segment. Management teams should consider leveraging remote capture to exploit their

distinctive industry specific know-how in new areas within their state or other parts of the U.S. All of these ideas represent new opportunities for community banks to grow by utilizing a remote deposit capture solution. If only to secure their own market share, the case for

implementing remote deposit capture with urgency is compelling for community banks. Although employing it does require an initial investment, the primary costs that should be of concern are the opportunities that would be lost without it. RDC will soon be expected by commercial clients as an integrated part of an entire business banking package. To maintain a competitive advantage, banks must continue to think about how else they can differentiate themselves. Those with an effective strategy will succeed.

Page 31

VI. MAJOR IMPLEMENTATION CONSIDERATIONS

Aside from considering the strategic growth and performance opportunities of remote capture, bank management intent on developing an RDC solution must think through and plan for the various risk factors, distribution tactics, and products economics. Risk Issues For small community banks, one of the biggest deterrents to embarking on a remote capture initiative is the perception of increased risks. According to a cash management officer at Heritage Bank of Commerce, the biggest challenge was that its board of directors and CEO believed that there was more risk in the product than the tenured operations officer did. When confronted with the suggestion to implement remote deposit for Danville, California-based Diablo Valley Bank, CEO Jim Mayer replied, How do you insure against the losses? It is certainly correct that with increased opportunity comes heightened risk; and the same is true with new technologies. Banks faced many of the same concerns when going through similar transitions, such as to on-line banking, ACH processing, and ATM cards. However, as was done then, institutions must set up proper processes and controls to mitigate the exposure and prevent losses that might result from fraud in the RDC process. Some of these prevention techniques are presented below and should be used as a supplement to existing risk management procedures, including technology safeguards such as multifactor authentication and data encryption. Duplicates Obvious vulnerabilities unique to a banks RDC system include the possibility of one check being scanned and deposited multiple times, an entire duplicate deposit being transmitted,

Page 32

and the chance that a check is deposited both electronically from a remote location and physically at a branch or a different bank. This activity could be a sign of fraud, but also may be the result of a mistake by the client. Fortunately, all well-regarded software today relies on duplicate detection abilities that prevent checks from being scanned and deposited twice. In addition to current operational safeguards, banks should internally maintain duplicate detection software to prevent a previously scanned item from being presented to a branch.1 Many

scanning devices today have the ability to both endorse the back and void the front of the original check to indicate that it has already been deposited. According to Leekley of RemoteDepositCapture.com, many exciting software applications are being developed to enhance risk management at the time checks are scanned. These include real-time signature verification, immediate identification of checks associated with closed accounts or that have stop payments placed upon them, connectivity to a national fraud and Office of Foreign Asset Control (OFAC) database, and the ability to recognize if a particular check has already cleared or if it is okay to pay. In addition, he added that checks will be produced with image survivable barcode security features to facilitate detection of counterfeits. Counterfeits Community banks must consider that the potential for loss arising from the presentation of counterfeit, altered, or otherwise fraudulent checks could be increased as a result of remote imaging. When scrutinizing an imaged item, whether on a computer screen or as an IRD, bank employees do not have the ability to see the physical color and texture of the original check which often contains authentication features such as watermarks.2 For this reason, many risk

management experts advise that banks integrate a Positive Pay feature, whereby the institutions automatically clear only those items that match an electronic check register obtained from the client.
Page 33

Check Retention / Destruction Once scanned and their deposit has been confirmed, original checks should be destroyed or kept at the discretion of the client. However, check retention does create the possibility for theft and subsequent fraudulent activities like those mentioned above. As a result, it is very important that the corporate client set and follow strict check safeguarding and destruction policies.3 If not, their clients critical bank account number and signature could be obtained by theft, thus jeopardizing a business relationship. As with its own unused checks and paid items (if paid items are still physically returned by the bank), scanned and deposited items should be kept secure and separate from those that have yet to be deposited. RDC clients must also make their customers aware of these safekeeping and destruction procedures to obtain consent and ensure piece of mind. Since remote capture is relatively new, many businesses may not immediately understand the exposure that accompanies the conveniences. Accordingly, it is imperative that banks

educate their clients on the dangers of holding checks and why proper controls are so important. They must recognize that anyone, including employees, could attempt to conduct fraud with an original, copy, or any piece of information from a check. Like on-line banking, they must also restrict access to the software application. Heritage Bank conducts educational training sessions with its customers and provides worksheets to further teach them about check safekeeping and destruction. We work with them pretty closely on that, claims Christopher Gust, senior vice president (SVP). Thats really what makes the difference, instilling the importance of keeping checks in a locked cabinet until theyre ready to be destroyed, and organizing them in a fashion that prevents duplicate deposits. Its in our agreement with them. We spent a lot of time reviewing the agreements.

Page 34

Legal Agreements Legal agreements, legal agreements, legal agreements, exclaimed John Leekley of RemoteDepositCapture.com as he emphasized the critical bank/client documentation in an RDC relationship. Check 21 legislation not only introduced new risks and processes, but also a new form of interaction between the bank and the user. Customer agreements define the duties, responsibilities, and liabilities of both parties and establish certain procedures to which the customer must adhere.4 Community banks are advised to work with their attorneys to develop an effective legal agreement. However, there have been extensive discussions and outlines on what should be included in these customer agreements, many of which have been summarized in the attached four page excerpt from Remote Deposit Capture, A White Paper Addressing Regulatory, Operational and Risk Issues, a 2006 document by NetDeposit, Inc. (Exhibit A.) KYC & Underwriting While agreements, software, education, policies can go a long way to prevent losses stemming from the use of remote deposit capture, it all comes down to the principle of knowing your customer (KYC) says DVBs Mayer. Gust adds that if a customer is going to rip you off, they can do it just as easily over the counter as they can remotely. Community banks are in an especially good position to do this, as management typically remains closer to the customer than the management of larger institutions. Being active in and understanding the local community, dealing with businesses known for many years or those referred from trusted clients and associates, and spending time with new client management teams and their operations are all ways to flag potential risks with new accounts. Many of the standard KYC questions used by banks in the account opening process can help assess risks in offering remote capture. Remote deposit-ready banks must decide to whom RDC should be offered and why. Many banks have formalized a process in determining who qualifies. Since many commercial banking
Page 35

relationships are driven by a credit need, banks are often assessing an entire realm of client risks and will not need to conduct additional analysis. However, for non-credit clients, banks should consider the clients time in business, references, and backgrounds to the extent possible, and assess the quality of management. Banks, such as Heritage, are formally underwriting as if granting unsecured credit while taking loss reserves the way ACH activity is typically treated. They also place various limits on the size of checks and deposits that can be processed by remote capture. While many disagree that image risk is on par with ACH, banks are wise to use caution and conservatism when offering RDC until fraud detection technologies improve. Delivery Methods Until RDC reaches a point of maturity when there are fewer vendors and the product is standardized, community banks will be required to dedicate a substantial amount of time and effort in evaluating various methods of product delivery. This section summarizes a few of the major decisions that institutions must make along the path to implementation. Thick vs. Thin Among the many alternatives facing banks is whether to provide RDC using software that is installed on clients computers or accessed from a server via the Internet. These options are referred to in the industry as thick and thin solutions, respectively. If a thick solution is employed, the institution has the choice to develop its own proprietary version or purchase it from another institution or an application service provider. In most cases, thick solutions require ongoing management and upkeep of the system, frequent upgrades to their clients PCs, and secure transmissions between both parties. For most community banks, who on average have low check volumes relative to the industry, web-hosted solutions make better economic sense. Instead of paying a large upfront cost to develop or purchase software and maintain their own server, banks using a thin solution
Page 36

pay a significantly smaller access fee and bear a per item fee for the checks being imaged. These fees can be directly passed on to the customer. The disadvantage of a thin solution is that banks and clients dont have as much control as they might have with a thick solution. Banks must rely on an offsite web server while client information is released to a third party provider. In the end, justification for either option will essentially depend on the organizations size and ability to achieve economies of scale relative to its investment. Full Image Enabled or IRDs For various reasons, the cost and effort to convert from a paper to an image-based system may be undesirable to a bank or its processor. That has led some institutions and processors to offer RDC to their clients without carrying the image all the way through to the paying bank. As discovered in Diablo Valley Banks due diligence process, many third party providers are simply printing IRDs for normal processing after receiving images from the clients. Community banks should be aware of how providers are proposing that funds be paid with an image or IRD and decide on the most appropriate clearing method. As mentioned earlier, full image processing will shorten the delay in funds availability by at least one to two days when drawn on distant banks. System Capabilities Given the past and potential growth of remote capture, application service providers have multiplied. Choosing a vendor depends on a variety of factors, but utmost consideration should be given to how their system will integrate with a banks existing on-line program, as well as its current check processor. For instance, Diablo Valley Banks core processor, Fidelity, offers a turn-key solution that integrates seamlessly with the existing relationship and the banks on-line provider. Meanwhile, although its processor is FIServ, Heritage Bank of Commerce opted for an National Cash Register (NCR) product sold by Goldleaf Financial, due to its concurrent interest
Page 37

in switching to that vendors on-line banking system. Heritage thus processes its RDC images directly through the Federal Reserve, via the cash letter issued by its correspondent bank Wells Fargo, while maintaining physical check processing service with FIServ. Whether developing a proprietary system or contracting with a web-hosted vendor, banks should shop for key functionality and preferred capabilities. Many of the features mentioned in the product description above are standard, while more recent developments are premium addons. The option of scanners provided to the bank client should include a dual-sided scanning capability with automatic endorsement of the back and a marking of the front to prevent duplicate deposits. Software should provide CAR/LAR quality recognition and check sorting features, and should allow the user to search a database of archived checks. Meanwhile, the application must integrate with programs such as QuickBooks or data must be exportable to other applications. Lastly, if remittance and lockbox processing is desired, many services can now accommodate payment stubs, invoices, and coupons. Many hosted solutions have the ability to convert these items to ACH, if consumer checks, or have them cleared as an image or IRD. Other Considerations Before deciding on a final plan and beginning a test phase, additional due diligence must be conducted. In addition to ensuring adequate security measures will protect customer

information, the bank must plan for disasters by making certain there is a recovery and business continuity plan in place. Vendors and banks must assure their remote clients that their data will not only be protected, but that they can continue to process items should an accident occur. A few other decisions to be made involve the deployment and ongoing customer support for this product. Whether conducted in-house or by a vendor, hardware testing, system

compatibility analysis, and training is needed to ensure a smooth installation. Settlement and
Page 38

transmission cut-off times should be established, while ongoing service and support should be accessible via the phone or Internet.5 Bank employees should be adequately trained to both sell the product as well as be able to interpret client issues. Finally, bank marketing departments must decide how they will inform targeted clients of the benefits and how the bank should assure ongoing customer contact given the fact that these clients branch visits will be curtailed. Costs & Pricing Bank costs will obviously vary by the type of system. As previously stated, community banks will likely gravitate toward a thin (web-hosted) solution, matching costs with volume. While conducting its initial analysis, Diablo Valley Bank evaluated the costs of three different merchant capture providers. After a short negotiation process, the bank determined that the lowest cost vendor (who also happened to have the most attractive application) would have charged the bank an initial set up fee as well as a monthly fee. In addition, the firm would apply a fee per user and for every item. A detail of these costs are shown below in Table 1. TABLE I. DVB Price Analysis (Source:Fidelity National Financial) RDC Vendor Fee 1) One-Time Set Up Fee 2) Monthly Image/IRD Fee 3) Monthly User Fee 2) Per item processed Diablo Valley Bank Cost Unit Price $5,000.00 250.00 30.00 0.08 Price/Customer* N/A $ 5.00 30.00 4.00 $39.00 Total Price* $5,000.00 250.00 1,500.00 200.00 $6,950.00

*Based on 50 users processing 50 items per month. Costs exclude other options such as Call Support and Return Item Processing.

Costs are similar at other institutions. Chris Gust at Heritage Bank of Commerce disclosed the cost from its provider, Goldleaf Financial, as $28.95 per month and $0.06 an item. Although they may not be sustainable as competition increases, at least for now it appears that these costs can easily be passed on to the clients. Its amazing how insensitive clients are
Page 39

to the cost of this product. We get nickel-and-dimed on every little service charge, but when they want remote capture theyll pay $1,000 for a scanner and $80 per month without hesitation, says Gust. His bank, Heritage, bundles the service into one monthly price for its clients, allowing for room to make a profit. Although clients would save on a per item basis from what these two banks charge for paper checks, they pay a premium, given the monthly fees. However, excluding all the intangible savings, businesses could pocket up to $200 per month on courier fees or other transportation costs it normally pays to transport checks. Equipment is essentially limited to scanners, most of which range in price from $500 to $2,000, depending on the features. Since most banks are currently able to pass the price of this equipment on to their clients, and even enjoy a small markup in some cases, it can be excluded as an economic variable when conducting a cost analysis. Finally, initial due diligence, decision-making and integration into the current procedures of the bank will take time and cost money. Heritage Bank estimated that it spent over $10,000 to implement its RDC solution. However, as Gust remarks, it was a no-brainer. Bank and customer benefits far outweigh the cost of examining and deploying an effective merchant capture product.

Page 40

VII. CONCLUSION & RECOMMENDATIONS

There is an undeniably convincing case for community banks to adopt a remote deposit capture solution. The cost benefits and added conveniences to both banks and their commercial clients are irrefutable. An increase in the number of capable third-party service providers now gives smaller institutions and their clients simple, practical, and inexpensive alternatives via web-hosted solutions. Competition in this arena has helped to bring about innovation that has reduced potential risks, provided improved functionality, and lowered prices. business demand is strong and rising, despite the low level of marketing. Those community banks without a current RDC offering must act with urgency to install a solution. Fence-sitters must understand that this product enables the disruption of current industry attributes, resulting in significantly greater competition from banks near and far. Accordingly, individual bank growth and performance could be negatively impacted. Without action, banks will have difficulty expanding and will risk the loss of valuable corporate clients to those institutions that offer remote deposit. Bank leaders must call their teams to action and develop a corresponding marketing strategy that can give them a distinct advantage over their competitors. There are several opportunities to utilize remote capture for growth if implemented properly and matched with current resources and assets. Finally, every opportunity has its challenges. Community banks must educate themselves on risks inherent to RDC and be diligent in assessing and mitigating potential exposure. These immediate initiatives and measures should ensure a successful product launch. Meanwhile,

Page 41

ENDNOTES

I. Introduction
1

Look Before You Leap, Banc Investment Daily, Banc Investment Group, LLC, January 19, 2007, www.bancinvestment.com Community Banks See Survival, New Business in Remote Capture, Digital Transactions, February 19, 2007, http://www.digitaltransactions.net/newsstory.cfm?newsid=1253

Small Business Payments in 2006, BAI, March 30, 2007 (accessed), http://www.bai.org/pdf/SmallBizReport_F.pdf II. The Evolution Toward Remote Deposit Capture Santomero, Anthony M., The Changing Pattern of Payments in the United States, Federal Reserve Bank of Philadelphia, October 16, 2004, http://www.phil.frb.org/publicaffairs/speeches/santomero/2004/10-16-04_25th-suerfcolloquium.cfm Gerdes, Geoffrey R. and Jack K. Walton II, The Use of Checks and Other Noncash Payment Instruments in the United States, The Federal Reserve, 2002, http://www.federalreserve.gov/pubs/bulletin/2002/0802_2nd.pdf Santomero, Anthony M., The Changing Pattern of Payments in the United States, Federal Reserve Bank of Philadelphia, October 16, 2004, http://www.phil.frb.org/publicaffairs/speeches/santomero/2004/10-16-04_25th-suerfcolloquium.cfm Santomero, Anthony M., The Changing Pattern of Payments in the United States, Federal Reserve Bank of Philadelphia, October 16, 2004, http://www.phil.frb.org/publicaffairs/speeches/santomero/2004/10-16-04_25th-suerfcolloquium.cfm.
5 4 3 2 1

The 2004 Federal Reserve Payments Study, Federal Reserve System, December 15, 2004, http://www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf Gerdes, Geoffrey R., Jack K. Walton II, May S. Liu, and Darrel W. Parke, Trends in the Use of Payment Instruments in the United States, The Federal Reserve, Spring 2005, http://www.federalreserve.gov/pubs/bulletin/2005/spring05_payment.pdf Mester, Loretta J., Changes in the Use of Electronic Means of Payment: 1995-2004, The Federal Reserve Bank of Philadelphia, January 21, 2007 (accessed), http://www.phil.frb.org/files/br/br_q2-2006-4_changes-electronic-means.pdf
7 6

Page 46

The 2004 Federal Reserve Payments Study, Federal Reserve System, December 15, 2004, http://www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf
9

A Summary of the Roundtable Discussion on the Role of Wire Transfers in Making Lowvalue Payments, The Federal Reserve, January 21, 2007 (accessed), http://www.federalreserve.gov/paymentsystems/lowvaluepay/default.htm

10

The 2004 Federal Reserve Payments Study, Federal Reserve System, December 15, 2004, http://www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf Gerdes, Geoffrey R., Jack K. Walton II, May S. Liu, and Darrel W. Parke, Trends in the Use of Payment Instruments in the United States, The Federal Reserve, Spring 2005, http://www.federalreserve.gov/pubs/bulletin/2005/spring05_payment.pdf Gerdes, Geoffrey R. and Jack K. Walton II, The Use of Checks and Other Noncash Payment Instruments in the United States, The Federal Reserve, 2002, http://www.federalreserve.gov/pubs/bulletin/2002/0802_2nd.pdf Gerdes, Geoffrey R., Jack K. Walton II, May S. Liu, and Darrel W. Parke, Trends in the Use of Payment Instruments in the United States, The Federal Reserve, Spring 2005, http://www.federalreserve.gov/pubs/bulletin/2005/spring05_payment.pdf Gerdes, Geoffrey R. and Jack K. Walton II, The Use of Checks and Other Noncash Payment Instruments in the United States, The Federal Reserve, 2002, http://www.federalreserve.gov/pubs/bulletin/2002/0802_2nd.pdf Gerdes, Geoffrey R. and Jack K. Walton II, The Use of Checks and Other Noncash Payment Instruments in the United States, The Federal Reserve, 2002, http://www.federalreserve.gov/pubs/bulletin/2002/0802_2nd.pdf Check Clearing for the 21st Century Act, The Federal Reserve, January 21, 2007 (accessed), http://www.federalreserve.gov/paymentsystems/truncation/.
17 16 15 14 13 12 11

De Jesus, Angie and Michael Pratt, Distributed Check Processing in a Check 21 Environment, Panini North America, November 2004, http://paninina.com/pdf/solutions/Distributed_Check_Processing_in_a_Check_21_Environment_ 1.pdf
18

Industry Adoption Updates, CheckImage Collaberative, Accessed March 30, 2007. http://www.checkimagecentral.com/industryAdoptionUpdates/

19

De Jesus, Angie and Michael Pratt, Distributed Check Processing in a Check 21 Environment, Panini North America, November 2004, http://paninina.com/pdf/solutions/Distributed_Check_Processing_in_a_Check_21_Environment_ 1.pdf

Page 47

How to Capture The Market - Discovering the Value of Distributed Capture at your Bank, NCR Corporation, 2005, January 21, 2007 (accessed), http://www.remotedepositcapture.com/Downloads/NCR-DistribCaptureWPaper_050922.pdf

20

III. The Compelling Benefits

1

Dowdell, Chris, In Remote Deposit Capture, Image is Everything, RemoteDepositCapture.com, June 26, 2006, http://www.remotedepositcapture.com/Insider/rdci_6_26_06.htm

BankServ Announces New Remote Deposit Product Integrated With QuickBooks, July 6, 2006, BankServ, http://www.bankserv.com/press/news/2006/july_06_2006.html BOC Could Open Merchant Market for Remote Deposit Capture, Digital Transactions, February 6, 2007, http://www.digitaltransactions.net/newsstory.cfm?newsid=1240 Lange, Bill, Combining Remote Capture and IRD Printing - A Check 21 Strategy for Community and Regional Banks, AllMyPapers, August 2005, http://www.allmypapers.com/whitepapers.htm
5 4 3

David Peterson, Growing the Bank Through Deposits: The Directors Role, Western Banking, October-November 2006, p. 20.

IV. RDCs Influence on the Banking Industry Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, New York, NY., Free Press, 1980. Patricia A. Murphy, Deposit Gathering Goes Remote, The Checkless eVolution, Payments in Transition, A supplement to the American Banker, Bank Technology News and U.S. Banker, Summer 2006, p. 12.
3 2 1

Patricia A. Murphy, Rocket Launch, Independent Banker, February 2006, p. 73-78.

Reports - Uniform Bank Performance Report (UBPR), FDIC, March 30, 2007 (accessed), http://www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp
5

James Swann, Waving the Wand of Image Technology, Community Banker, June 2006, p 24.

Page 48

Leekley, John T., On the Radar Screen: eGistics - A Clear Winner in our Image-Enabled / Image Archive World?, RemoteDepositCapture.com, February 26 2006, http://www.remotedepositcapture.com/News/feb__21_2006.htm
7

Cocheo, Steve, Remote Deposit Capture: Bucks into Bits Begin to Bite, ABA Banking Journal, Community Bank Competitiveness Survey, 2007, March 2007, p.S4.
8

Institution Directory, FDIC, Accessed March 22, 2007. http://www3.fdic.gov/idasp/ Institution Directory, FDIC, Accessed March 22, 2007. http://www3.fdic.gov/idasp/

V. Strategic Growth Opportunities Statistics on Depository Institutions Report, FCIC, March 30, 2007 (accessed), http://www2.fdic.gov/sdi/main.asp Statistics on Depository Institutions Report, FCIC, March 30, 2007 (accessed), http://www2.fdic.gov/sdi/main.asp. Statistics on Depository Institutions Report, FCIC, March 30, 2007 (accessed), http://www2.fdic.gov/sdi/main.asp.
4 3 2 1

The Way of the Deposit Warrior, Banc Investment Daily, Banc Investment Group, LLC, June 26, 2006, www.bancinvestment.com

The Rise of the Business Center Branch, Banc Investment Daily, Banc Investment Group, LLC, February 9, 2007, www.bancinvestment.com

VI. Major Implementation Considerations Carrubba, Paul, Mary Hockridge and Michael K. Harris, Remote Deposit Capture - A White Paper Addressing Regulatory, Operational and Risk Issues, NetDeposit, Inc., April 2006. http://www.netdeposit.com/rdc/documents/NDRemoteDepositCaptureWhitePaperRV2.pdf Carrubba, Paul, Mary Hockridge and Michael K. Harris, Remote Deposit Capture - A White Paper Addressing Regulatory, Operational and Risk Issues, NetDeposit, Inc., April 2006. http://www.netdeposit.com/rdc/documents/NDRemoteDepositCaptureWhitePaperRV2.pdf Carrubba, Paul, Mary Hockridge and Michael K. Harris, Remote Deposit Capture - A White Paper Addressing Regulatory, Operational and Risk Issues, NetDeposit, Inc., April 2006. http://www.netdeposit.com/rdc/documents/NDRemoteDepositCaptureWhitePaperRV2.pdf
3 2 1

Page 49

Carrubba, Paul, Mary Hockridge and Michael K. Harris, Remote Deposit Capture - A White Paper Addressing Regulatory, Operational and Risk Issues, NetDeposit, Inc., April 2006. http://www.netdeposit.com/rdc/documents/NDRemoteDepositCaptureWhitePaperRV2.pdf
5

King, Lui, Remote Deposit Capture: Deployment, Fulfillment, Service & Support What you need to know about RDC Implementations, RemoteDepositCapture.com, June 20, 2006, http://www.remotedepositcapture.com/Insider/rdci_6-20-2006.htm

BIBLIOGRAPHY

Books Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New York, NY., 1980.

Periodicals Cocheo, Steve, Financial Kinetics, Community Banking on a Rocket Sled, ABA Banking Journal, Community Bank Competitiveness Survey, 2007, March 2007.

Page 50

Cocheo, Steve, Remote Deposit Capture: Bucks into Bits Begin to Bite, ABA Banking Journal, Community Bank Competitiveness Survey, 2007, March 2007. Murphy, Patricia A., Deposit Gathering Goes Remote, The Checkless eVolution, Payments in Transition, A supplement to the American Banker, Bank Technology News and U.S. Banker, Summer 2006. Murphy, Patricia A., Rocket Launch, Independent Banker, February 2006. Peterson, David, Growing the Bank Through Deposits: The Directors Role, Western Banking, October-November 2006. Valentine, Lisa, Remote Deposit Capture, Hot Just Got Hotter, ABA Banking Journal, March 2006. Swann, James, Waving the Wand of Image Technology, Community Banker, June 2006.

Management Reports Quinn, John P., Check 21 Enabling Image Exchange, The Value Proposition to Financial Institutions, Pacific Coast Banking School Thesis, Seattle, WA, 2004 Wolcott, Andrea, What Happened to the Checkless Society?, Pacific Coast Banking School Thesis, Seattle, WA, 1987

Interviews Gust, Christopher, Senior Vice President / Manager, Cash Management Services, Heritage Bank of Commerce, San Jose, CA, March 29, 2007. Kassar, John, The Zemma Group, San Rafael, CA, July 31, 2006. Koonce, Julie, Vice President / Product Manager, Diablo Valley Bank, Danville, CA, January 23, 2007. Leekley, John, Founder and CEO, RemoteDepositCapture.com., February 10, 2007. Mayer, James, President and CEO, Diablo Valley Bank, Danville, CA, February 10, 2007. Mitchell, Pam, Strategic Account Manager, Fidelity Integrated Financial Solutions, Los Angeles, CA, August 11, 2006.

Page 51

Tessler, Steven, Senior Vice President / Manager, Business Development & Marketing, Diablo Valley Bank, Danville, CA, March 22, 2007.

Internet Balakrishnan, Vijay, Crossing the Check Image Chasm, Bank Technology News, February 2007, http://www.banktechnews.com/article.html?id=20070129FT8F3TD8 Brown, Royce and Mike Harris, Overcoming Deposit Risk in the C21 Marketplace, RemoteDepositCapture.com, November 8, 2005. http://www.remotedepositcapture.com/Insider/rdci_11_08_05.htm Carrubba, Paul, Mary Hockridge and Michael K. Harris, Remote Deposit Capture - A White Paper Addressing Regulatory, Operational and Risk Issues, NetDeposit, Inc., April 2006. http://www.netdeposit.com/rdc/documents/NDRemoteDepositCaptureWhitePaperRV2.p df De Jesus, Angie and Michael Pratt, Distributed Check Processing in a Check 21 Environment, Panini North America, November 2004, http://paninina.com/pdf/solutions/Distributed_Check_Processing_in_a_Check_21_Enviro nment_1.pdf Dowdell, Chris, In Remote Deposit Capture, Image is Everything, RemoteDepositCapture.com, June 26, 2006, http://www.remotedepositcapture.com/Insider/rdci_6_26_06.htm Gerdes, Geoffrey R., Jack K. Walton II, May S. Liu, and Darrel W. Parke, Trends in the Use of Payment Instruments in the United States, The Federal Reserve, Spring 2005, http://www.federalreserve.gov/pubs/bulletin/2005/spring05_payment.pdf Gerdes, Geoffrey R. and Jack K. Walton II, The Use of Checks and Other Noncash Payment Instruments in the United States, The Federal Reserve, 2002, http://www.federalreserve.gov/pubs/bulletin/2002/0802_2nd.pdf Hoffman, Karen Epper, Making the Case for Remote Deposit Capture, BAI, May/June 2006, http://www.bai.org/bankingstrategies/2006-mayjune/PaymentsStrategies/RemoteDeposit/index.asp Kehrer, Daniel, Guide to Remote Check Deposit, Work.com, February 11, 2007 (accessed), http://www.work.com/remote-check-deposit-1145/

Page 52

King, Lui, Remote Deposit Capture: Deployment, Fulfillment, Service & Support What you need to know about RDC Implementations, RemoteDepositCapture.com, June 20, 2006, http://www.remotedepositcapture.com/Insider/rdci_6-20-2006.htm Lange, Bill, Combining Remote Capture and IRD Printing - A Check 21 Strategy for Community and Regional Banks, AllMyPapers, August 2005, http://www.allmypapers.com/whitepapers.htm Leekley, John T., The Rise of Remote Deposit Capture, A New Era in Banking Takes Hold, RemoteDepositCapture.com, October 10, 2005, http://www.remotedepositcapture.com/Insider/rdci_10_24_05.htm Leekley, John T., On the Radar Screen: eGistics - A Clear Winner in our Image-Enabled / Image Archive World?, RemoteDepositCapture.com, February 26 2006, http://www.remotedepositcapture.com/News/feb__21_2006.htm Martin, Dwight, Next Stop: Distributed Processing, Aquracy, LLC, January 21, 2007 (accessed), http://www.aq2tech.com/Portals/0/Documents/Aquracy percent20Remote percent20Deposit percent20Capture percent20White percent20Paper.pdf Mester, Loretta J., Changes in the Use of Electronic Means of Payment: 1995-2004, The Federal Reserve Bank of Philadelphia, January 21, 2007 (accessed), http://www.phil.frb.org/files/br/br_q2-2006-4_changes-electronic-means.pdf Santomero, Anthony M., The Changing Pattern of Payments in the United States, Federal Reserve Bank of Philadelphia, October 16, 2004, http://www.phil.frb.org/publicaffairs/speeches/santomero/2004/10-16-04_25th-suerfcolloquium.cfm Spieker, Ronald L., Future of Banking Study: Bank Branch Growth Has Been Steady Will It Continue?, FDIC, August 1, 2004, http://www.fdic.gov/bank/analytical/future/fob_08.pdf A Summary of the Roundtable Discussion on the Role of Wire Transfers in Making Low-value Payments, The Federal Reserve, January 21, 2007 (accessed), http://www.federalreserve.gov/paymentsystems/lowvaluepay/default.htm BankServ Announces New Remote Deposit Product Integrated With QuickBooks, July 6, 2006, BankServ, http://www.bankserv.com/press/news/2006/july_06_2006.html BOC Could Open Merchant Market for Remote Deposit Capture, Digital Transactions, February 6, 2007, http://www.digitaltransactions.net/newsstory.cfm?newsid=1240 Check Clearing for the 21st Century Act, The Federal Reserve, January 21, 2007 (accessed), http://www.federalreserve.gov/paymentsystems/truncation/

Page 53

Community Banks See Survival, New Business in Remote Capture, Digital Transactions, February 19, 2007, http://www.digitaltransactions.net/newsstory.cfm?newsid=1253 How to Capture The Market - Discovering the Value of Distributed Capture at your Bank, NCR Corporation, 2005, January 21, 2007 (accessed), http://www.remotedepositcapture.com/Downloads/NCRDistribCaptureWPaper_050922.pdf Industry Adoption Updates, CheckImage Collaberative, Accessed March 30, 2007. http://www.checkimagecentral.com/industryAdoptionUpdates/ Institution Directory, FDIC, Accessed March 22, 2007. http://www3.fdic.gov/idasp/ Look Before You Leap, Banc Investment Daily, Banc Investment Group, LLC, January 19, 2007, www.bancinvestment.com Navigating A New Payments Landscape - Fraud Prevention, Risk Management & Regulatory Compliance, AP Technology, October 2005. http://www.remotedepositcapture.com/Downloads/APT percent20Pmts percent20Lndscp percent20060124.pdf New WAUSAU Remittance Archive Technology To Be Showcased at TAWPI 2006, RemoteDepositCapture.com, June 8, 2006, http://www.remotedepositcapture.com/News/june_8_2006.htm RemoteDepositCapture.com 2006 Newsletter and News Headline Summary, RemoteDepositCapture.com, February, 2007, www.remotedepositcapture.com Remote Deposit Capture and Its Unintended Fraud Consequences, Jodi Pratt & Associates, July 2006. http://www.remotedepositcapture.com/Downloads/RDC percent20Risks percent20White percent20Paper percent20072006.pdf Small Business Payments in 2006, BAI, March 30, 2007 (accessed), http://www.bai.org/pdf/SmallBizReport_F.pdf Statistics on Depository Institutions Report, FCIC, March 30, 2007 (accessed), http://www2.fdic.gov/sdi/main.asp The 2004 Federal Reserve Payments Study, Federal Reserve System, December 15, 2004, http://www.frbservices.org/Retail/pdf/2004PaymentResearchReport.pdf The Rise of the Business Center Branch, Banc Investment Daily, Banc Investment Group, LLC, February 9, 2007, www.bancinvestment.com

Page 54

The Way of the Deposit Warrior, Banc Investment Daily, Banc Investment Group, LLC, June 26, 2006, www.bancinvestment.com Reports - Uniform Bank Performance Report (UBPR), FDIC, March 30, 2007 (accessed), http://www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.asp

Certificate of Originality I certify that this paper represents and contains my own work. I have placed all quotations from other sources in a form to indicate that they did not originate with me and I have cited the work from which the material was taken. I have included footnotes for all information and ideas that I have taken from other sources. I have not shared and will not share my completed work with any other PCBS student nor have I read the completed work of any other student. _______________________ Timothy A. White April 2, 2007

Page 55