Published on March 1, 2017 on ABA Banking Journal
New risks and opportunities mean it’s time to reassess your options
How long since your last serious look at how check payments are handled in your institution, all the way from initial capture, through the first day processes in your back office, to clearing up second day issues? Perhaps you’ve been thinking that with checks going away it’s simply not a high priority.
New research is bringing the fallacies in this thinking to light—along with the potential consequences of neglecting check deposit automation. Meanwhile, new technology advances mean taking a fresh look may offer significant opportunities for savings.
The shifting “CheckScape” and FraudScape
It’s been over a decade since Check21 made check images and remote deposits possible, and two decades since the boom started in payments by card and ACH. These changes gave rise to a general expectation that paper checks would soon become extinct. And checks have in fact declined. According to the 2016 Federal Reserve payments study, the volume of check payments fell at an annual rate of 4.4 percent in the three years from 2012 and 2015 alone.
Last year, however, overall check volumes held steady for the first time, and business checks actually increased by 1 percent. Checks also dominate payment types among businesses; the new AFP 2016 Electronic Payments Survey reports that over half—51 percent—of all business-to-business payments are still checks. Banks whose strategic goals target business accounts will quickly recognize the importance of these numbers.
With the current median cost of processing each check now reaching $1.50, according to the same study, the plateau in check volumes also directly affects bank costs. An institution receiving 10,000 checks a month, for example, is looking at a cost of $180,000 a year just to handle paper.
Unlike the bigger past drop-off in check volume, the total dollar value of checks only declined 0.5 percent between 2012 and 2015, which means that the average dollar value of a check is continuing to grow. The 2014 Payments Studies Group of the Federal Reserve Bank of Richmond also reported that the value per transaction is higher for checks than for cards, wire, or cash payments.
The cost impact for banks becomes clearer when you consider that checks also continue to be the leading target for payment fraud, measured both in terms of attempts and actual losses. The total cost of fraud, including preventing, investigating and resolving losses, escalates proportionately.
Paper-based processes and checks remain the number one source of payment fraud for business accounts, outpacing card and wire fraud by a good margin. Fraudsters quickly adapt to change and develop new ways to exploit systemic weaknesses, so that by 2016, the AFP Payments Fraud and Control Survey found that 73 percent of institutions have experienced actual or attempted fraud.
New technologies, new opportunities
Most banks have continued to evolve, most notably in the technologies they use to capture check transactions—for example, by adding mobile and business remote deposit capture. These features add options and convenience for both customers and employees on the front end, where checks come into the payments stream.
Some institutions have adopted fraud prevention methods based on the use of shared databases, and have significantly trimmed their losses due to counterfeit and duplicate checks. This strategy is especially effective when deposits and payments from all capture points are aggregated in a single stream. Yet, the majority of banks have not taken—or cannot with their present back office operations take—advantage of advanced fraud protection.
Many financial institutions turn over the back end of item processing to one or more outsourced providers. These decisions often date from the enactment of Check21, based on assumptions that were true in their day but may no longer apply:
- Direct clearing of check payments is difficult to implement and manage.
- The benefits of direct payment management do not justify the cost of acquiring and operating the necessary technology.
- Only the largest institutions can capture hard savings from deposit automation.
- Outsourced providers are more likely to offer the most advanced technologies and keep them continuously upgraded.
The path of least resistance—that is, staying with the status quo—might make sense if check payments were predicted to quickly dwindle. But in today’s reality, a deposit workflow that relies on multiple processes, providers and manual interventions is more likely to be causing serious productivity leaks, vulnerability to fraud and accountholder defections, especially among valuable business accounts.
Banks today can choose how to automate deposits: direct control has become a realistic option with today’s technology; a variety of outsourced providers continue to exist; and more banks than ever before are able to use nearby or regional banks for clearing providers. Accurately evaluating these options has also changed, as each institution has its own unique mix of direct and indirect, upfront and ongoing costs.
Deposit automation technology is also evolving, offering new opportunities for saving. Clearly, technology providers are continuing to invest in this area:
- In-house deposit management is now readily available, at a much lower cost of both acquisition and operation compared to a decade ago.
- Integrating capture points reduces manual interventions and duplicate steps, and facilitates effective fraud protection and prevention.
- Creating an end-to-end workflow combine to slash overtime, virtually eliminate errors and automate burdensome decisioning.
While outsourcing remains a viable choice, it does not guarantee the availability of the latest technology, especially when it comes to dealing with fraud. Banks that outsource must rely on what their third-party providers offer, whether or not the products use the most advanced fraud detection and prevention. And more than the actual losses and post-fraud costs are at stake—accountholders and especially businesses want fast, even real-time, access to funds, which may not be available without real-time fraud detection technology.
Taking control over back office processes reduces direct costs, including monthly storage fees and commitments, transport and courier fees, labor and overtime, research/retrieval/replacement costs for lost documents, document storage and destruction and, of course, hard-to-predict outsourcing costs. Other gains from in-house deposit automation include enhanced customer service through faster access to check images and funds, fewer lost items and faster resolution, less time researching customer requests. Employee productivity surges when a fully-automated system takes minutes a day to operate, with little or no end-of-day clean up. The most sophisticated technologies today are affordable, fast to learn and easy to operate.
It’s time to recalibrate. Checks are not going away, fraud is rising, and both business and individual customers are demanding faster deposits, funds availability, and inquiry responses.
This is a call to action for banks to take a deeper dive into the technologies, opportunities and risks in deposit automation, to consider the whole picture against the backdrop of today’s environment.