A Dialogue on CommercialDeposit Automation

1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 10 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 10 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 10 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 10 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 10 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0

ParticipantsModerator

Michael GrazerVice PresidentUnion Bank of California

Steven SchumerVice PresidentM&T Bank

Chuck WelchVice PresidentUMB Financial Corp.

Andy WiedExecutive Vice PresidentFrost Bank

Denton LeeGroup Vice PresidentFirst Citizens Bank & Trust Co.

Jeanne CapachinResearch DirectorFinancial Insights

A Supplement to American Banker • Produced by Source Media’s Custom Publishing Group

One of the opportunities with the advent of Check 21 isthe ability of banks to accept corporate deposits any placein the country, without investing in branches. With remotedeposit, banks can now provide their corporate clients withhardware and software which allows those clients to scantheir check deposits, transmit an electronic file of thosecheck images to the bank, and then clear those items faster,either electronically or by creating paper substitute checksfrom the scanned images.

Remote deposit capture is a bandwagon that banks of all sizes are jumping on, but very few banks have fullyimplemented their solutions yet. Although banks are moving quickly, there are lots of questions about this newproduct. For instance, banks are concerned about new typesof risk this can introduce into the bank-client relationshipand how to manage those risks. Banks are also thinkingabout what it means to provide hardware and software totheir clients, and the responsibility the bank incurs to trouble shoot and maintain that equipment. Lastly, there'sthe chicken-and-egg question - does it make sense to offer

remote deposit capture before my bank is ready to participate in image exchange? For many banks, the answeris yes, simply because time to market may be so critical forthis product.

Many banks see remote deposit capture as a must-havecapability, regardless of the challenges they see. This is particularly true of those banks with a strong commercialaccount base which they want to grow. With this capability banks can offer a new, valuable service to theirexisting clients. Clients now no longer have to bear the burden of transporting check deposits to their bank, andthere is the promise of better availability by eliminatingtransportation delays. Banks also must offer the servicedefensively. Without geographic barriers to entering newmarkets, banks from around the country can compete forcheck deposit business, and incumbents are making surethey can counter the offers of interloping banks by offeringthe same capabilities. It is about protecting market share,even if revenues and profit margins may not increase in theshort term.

Remote Deposit Capture

1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 01 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0

Why do you see CommercialDeposit Automation as such a hot opportunity?

Chuck: I think one of the opportunitiesis the fact that it is going to eliminate geographic boundaries. Most of the bankshere on the panel are regional banks andwe peak in our regional market place. Oneway to gain entry into new markets is togo to retailers or other commercial-based

customers and start taking their depositsbecause you can with this platform. If wehave a retail deposit product, we have theability to protect the retail business wecurrently have.

Denton: It’s one of the first win-win products for customers and banks that we’veseen in a long time. The customer can self-serve. They can extend their businessday and they don’t have to rush for somebanking deadline. They can consolidateaccounts. It will also eliminate work for thebank. Our largest teller time is spent handling larger business customer accounts.We're getting to a format that’s easy for usto deal with in an image world. I think itwill eventually be a commodity in ourworld. It also helps in those markets whereyou have a limited presence. You can take

deposits where you may have difficulty getting to with a branch. And therein liesone of the big advantages.

Michael: The other thing is that finallywe are at a point where technology is ata peak and we can actually take this in andhandle it. Customers are becoming morecomfortable with a paperless environment,or they are comfortable with images. So I think we are at that point where

this can work. It is very exciting.

Andy: Check 21 has been a big splash.You’ve all heard customers use differentwords to refer to this type of technology,but they all get that something is going on.Now this doesn’t happen very often, so Ithink that’s partly why it’s hot. The timingis right.

Whenever we make an investmentlike this, there’s a risk. So whathas to happen at your bank andin the industry for this to be asuccessful bet?

Andy: I think you have to be proactivewith your customers, protect your marketshare and your customer. And, you have tobe aggressive with it. All of us, as we said,

are regional banks and we have to protectwhat we have out there right now and really expand on it.

Chuck: Our challenge is going to be that we are not going to be fully imageexchange-enabled. We are going to beenabled, but we are not going to be participating from day one. We will be taking image deposits and then printingsubstitute checks. So we are going to

actually inherit additional costs. We see whatthe benefit long term is going to be whenwe go into exchange and when we can sendimages straight into processing, there aregoing to be huge benefits. Getting to market now outweighs some of the additional expense.

Steven: I think it is an investment. It’s partof our relationship with that customer toretain that customer. It’s almost a ‘musthave’ in our original market or we are goingto be susceptible to losing customers. It probably won’t be priced so that it’s profitable right now, and that’s going to bea tough thing.

Michael: I think corporate capture is akind of philosophy. It’s putting it out there,and I think it’s going to push more

A Dialogue on CommercialDeposit Automation

“Michael Grazer, Vice President, Union Bank of California

“Customers are becoming more comfortable with a paperlessenvironment, or they are comfortable with images. So I think weare at that point where this can work. It is very exciting.”

“I think the way we set up the platform to rebalance deposits asthey come in is important. You can still have control over the balancing of that deposit. That's a positive.”

Andy Wied,

financial institutions to get behind imageexchange and adapt to it quicker becauseyou have this.

How are each of you positioningACH conversion vs. check truncation? Do you offer bothproducts? Do you see them ascomplimentary? Where do yousee the future?

Steven: We see them as different basicallybecause of the rules surrounding ACH conversion. We, on purpose, segregate thetwo. And we are leaning specifically towardsCheck 21 (check truncation).

Chuck: You are probably going to seeremote capture where the big niche isretailers. It’s going to be your drug stores,

your Wal-Mart’s, your Walgreen’s, thosetypes of companies making good, clean image capture process. One of the reasons is there are a lot of problemswith ACH conversion at point of salebecause customers didn't understand why they were getting a check back. The other issue is if they hand the checkback, they weren’t imaging it. And so ifthere was a return item, they didn’t havea source document and that created a lotof problems.

Probably what you are hearing us say iswe are going to do all of them. Sometimesthey may be complimentary. More often than not, they will be competingproducts. You have to find out which one is going to benefit your customer the best.

Michael: We are having a line that is for remote check capture and we are having another line for ACH. But we arealso partnering. I’m partnering with my ACH partner because we do see the worlds will come very close. We are building requirements and working withNCR and other products to bring thatdecisioning to it.

Denton: I think it’s going to be the battle over the next two to three years as towhat is the medium, ACH or check truncation. Currently, we are focusing ourremote capture technology totally on thecheck. Our commercial customers will becapturing these items so we are headingdown the path of using check technology,be that image exchange at the end or IRDstemporarily. I think the value proposition

for us is we already have ACH. I don’t haveto make a big investment there. The biginvestment we have to make is in checktechnology. That’s a different world that wehad prior to Check 21. So that’s where weare focusing our investment.

Steven: One of the challenges with ACHis that you can only convert consumer-based checks. There is a big push to convert corporate checks as well. When that happens, that’s actually going to benefit us long term. Short term, we are stillgoing to have discussions on which product fits which niche.

Andy: I think it varies pretty heavily frombusiness customers because most banks havenot caught up to dealing with the checksin the electronic world. I bet you we could

look at most bank statements today and thechecks that are converted through POP orARC are still in the descriptive section ofthe statement, not in the check section of the statement. For commercial customers,it’s going to be very important that the check can be displayed and dealt withas a check.

Let’s talk about the impact onoperations. What are some of thechallenges that you expect to seeand how do you expect toaddress them?

Andy: I think the way we set up the platform to rebalance deposits as they comein is important. You can still have controlover the balancing of that deposit. That’s apositive. It’s going to be a little more

challenging than the conventional checkenvironment. Just as with any new product you are going to have challenges,but you just have to get creative with it.

Denton: We actually made the decision asto the vendor approach that we took basedon the concern over operational issues. All the back-end functions that you have todeal with are a lot more important than the front-end. We saw a lot of vendorapproaches to it. Everyone was focusing onthe front-end. But the back end is whereit’s all about because if you have to rebal-ance that transaction, you better have theworkflow to bring those images in andunderstand how to deal with them. Wedidn’t want three different workflows. Thatwould be the advantage for us of marryingup this front-end with the NCR

£

“”

a paperlessSo I think weng.”

o rebalance deposits ast ll have control over the ive.”ed, Executive Vice President, Frost Bank

“We see the benefit long term is going to be when we go intoexchange and when we can send images straight into processing,there are going to be huge benefits. Getting to market now outweighssome of the additional expense.”

ImageMark system on the back-end. Allthree platforms can actually come inthrough the same process. So to us, that wasthe driving force. There are just so manyoperational issues because we’ve got non-operational people for the first timeactually handling our deposits. When we geta thousand customers doing this and managing that process, it’s going to beexpensive unless you have invested appropriately in thinking about the back-end of this whole process.

Michael: I think one of the things wehaven’t really touched on is that we are alsoputting a piece of hardware in our customers’sites. Regardless of who owns that hardware,whether the customer owns it directly orwe’ve given it or sold it the customer, evenif you put a big fat sticker on there that says

for support call this 800 number and it’sNCR, they are going to call the bank first.And we are not tech support people. So howare we going to address those issues? Who’sgoing to support it and how are we going towork that support of the hardware? Many ofthe banks that are in the bankcard industryknow some of those issues. You are puttinga bankcard reader out there and you have tosupport it.

Andy: I totally agree. If the scanner goesdown, how are you going to get anotherscanner out to that site? But the other thingis ease of upgrade of that software. You haveto have that thought process in place beforeyou get to that point.

Steven: A chief concern for us is operational, but it’s also legal. What do you

with the original checks and how do youinstruct your customer to make sure theirprocedures are appropriate to protect thecustomer and the bank from things likedouble cashing or fraud for that matter? Acouple of customers that we’ve been talking to are a little nervous about takingon more responsibility. When you explainto them that they are also assuming somerisk, and at some point down the road youare going to ask them to sign documentsthat commit them to that risk, there aresome customers who are skittish about that.And it all stems from the operation aspectsof what we are talking here. I very muchlike the idea of trying a pilot mode toaddress these issues.

That brings up a good point - tointroduce some tools and

processes so that we make surethat our customers continue tohave good relationships. What are you doing to makeensure this process doesn’t getout of control?

Steven: I can speak about the hardware. Ithink we are going to have to basically giveour customers three options. Option 1, wewill just sell them the hardware. This is thepiece of hardware we recommend, here yougo, here’s the price. We’ll sell it to you, andwe will have some type of support structureset up. Option 2 is we are going to have customers who are going to want to own thispiece of machinery or already have this imaging device. And as long as it’s certifiedwith the software we are using, it is acceptable. I think we are going to have some

mom and pop shops that really want to dothis but they don’t want to spend $800 to$2000 on one of these image machines.Option 3 is to partner with a hardwareprovider or NCR or somebody else to provide it to that customer. They don’t ownit. They just spend $50 or $10 a month. Sofrom a hardware perspective, that’s what we are going to do—set up those three different options for the customers.

Michael: I think there’s an educationprocess that has to take place. We are going to leverage what we have today. Wehave people who have spent their careersunderstanding how MICR works and howthe scanning process works. I have to support everything said here about the backoffice. It’s so important. What is going on,what the customer is capturing, what the

quality is, and also duplicate texture, whichis a huge issue that we are just comingacross with substitute checks today. So it’sfront and back office that we are going tohave to support.

Denton: We are taking a little bit different approach in that we are actuallygoing to buy the scanners, and send thema scanner(s) and a CD that will load theprogram on to their PC . And therein liesa huge issue when you start putting software on a customer’s PC. How do youupgrade it? Our long-term model is obviously going to be some type of pushdown from our website so that the customer actually does their depositthrough our business online banking product. When they sign on, we canupdate what’s on their PC. There are some

”t long term is going to be when we go into

n we can send images straight into processing,b huge benefits. Getting to market now outweighsnal expense.”

Chuck Welch, Vice President, UMB Financial Corp.

pieces of this that will require the client’ssoftware to drive that scanner. I don’t knowif there is anyway you can get around thatand be totally web-based. We are going tohopefully cover the cost of the scanner inthe monthly fee that the customer pays.The scanner goes down, you send thatone to us and we will send you a new one,you plug it in to the right port. That’s whatyou have to deal with. This is a brand newworld and everybody is learning.

So a lot of this depends on thecustomers and what they are willing to do. So, who do youthink are the customers who aregoing to choose this kind of service? Who is coming to youand how are you deciding who isa good candidate for this?

Andy: Our customers came forward saying we want to do this. They were wholesale food distributors and a beer distributor, one of our larger customers. Itwasn’t exactly what we were expecting. Wewere surprised how these customers weresimilar and they have been excellent testcases for us. They wanted to do it, were veryaggressive, and open for us to go out anddo the training with them. You have toknow who your good customers are.

Steven: I think it’s obvious that retailersare certainly a huge opportunity, but we’vefound so far, although you have an idea whoyou think your mixed market is going tobe, it’s not going to turn out to be that. Theretailers we have approached want to do it,but they move a little bit slower. Propertymanagers in apartment complexes are

certainly a good opportunity. Of the roughly ten customers who have approachedus, all but one of them fits the niche. Theother nine are similar to what Andy said,distributors and wholesalers, so it’s beenvery interesting.

Denton: I think it’s everybody. I don’tthink there’s any particular niche out therethat has expressed an interest more thananother. The value proposition is in theones that we talked about: medical professionals, wholesale distributors. Thosekinds of folks who have high dollar checksand relatively low volume. I think retailwould be the very last place where youcould go. Retail has the same problem wehave and that is scanning individual transactions is not very productive. Wethink it applies more for that high dollar,

but I don’t see any reason that small momand pops will not want to do this if it’s economical. And that’s what it’s going to beabout. It is about eliminating that trip tothe bank, being able to make deposits latein the day, to maybe gain a day or two ona return item. That’s very important towholesalers and distributors who areinterested in how quickly can they knowthat they have good funds. Those are thetargets to me that we should go afterbecause those are the ones that pay. Theywould pay for that additional day of clearing time that might save them a dayon the return cycle on the back end.

Michael: What’s interesting is this transitionfrom traditional banking relationships tomore of a partnership where we are actuallygoing out and understanding what their

needs are. And now we have these productsthat we come up with to say this actually fitsyou better. I think this is kind of jolting ourrelationship with our customers a bit.

So back to the customer, just toelaborate some more. Do you seethis as something you would offerto the new customer who camethrough the door?

Steven: We would definitely try to attractnew customers with this and offer it to newcustomers. But it’s just one of a whole rangeof products that we want to be able to offer.We have customers who do business withus and have their own locations pay forovernight mail so they can deposit every day.The procedure would be a logical place forthose. But the surprising places are the

customer across the street from a branch.One customer told me he’s 12 blocks fromour branch, and he says it’s an hour choreto go to the bank and they wait until theyhave $40,000 in the office before they makea run to the bank. That’s pretty interesting.We may be pleasantly surprised.

So what do you see as thefuture? If you have to guess, fiveyears down the road, three yearsdown the road, what do you thinkthis means for your bank, the wayyou process payments and alsothe type of services that you are offering?

Chuck: I think you are going to continueto see a decline of checks, but it’s going tobe slow. You are going to see more of an

“Denton Lee, Group Vice President, First Citizens Bank & Trust Co.

“It’s one of the first win-win products for customers and banks that we’ve seen in a longtime. The customer can self-serve. They can extend their business day and they don’t haveto rush for some banking deadline. They can consolidate accounts. It will also eliminatework for the bank.”

“I think this is gaining momentum. When we start looking at all the positive benefits of imageexchange and IRDs and things of that nature, it makes sense for people to move forwardand you really can because everyone has invested so much time.”

exchange, again, it wasn’t a big bang theory,it did not happen over night and it won’t.It’s going to be five, ten years before you seeexchange really take hold. I think one thingthat we are underestimating is that we focusso much on consumer checking, but consumers using other methods of paymenteliminate those items. I don’t think businesses are ready to eliminate checks andI don’t think they will be anytime soon, soI think that’s one thing that the people arenot talking about in the industry today. Weare going to continue to see the paper andwe’ve got to work toward these types of solutions that help process those items asefficiently as possible.

Andy: I agree. Check writing is bread andbutter for banks. The core of small businessto middle market customers is still very

much dependent on that paper checkbook.I think we are creating a new channel toallow those customers to get those itemsinto the bank. We don’t see it as replacing.If we fast forward five years, we will havethis channel added on to support what we

do currently. We are still going to have customers giving us straight deposits and stillhave customers coming into the branches.Some of those customers will be doing both.

Denton: We have no choice right now.We’ve had banks in the payment franchiseof checks for a long time and if we are notcareful, we will lose it. We have to maintainand make that a faster, cheaper, better processin the check processing cycle and to me thatmeans moving the capture of that item, andtrying to get it electronically as quickly as possible. And this is one step in that direc-tion. Where is it going five years from now?The payment world is gaining fast and furious over the check world. If you thinkabout it, there’s no other payment mechanismthat carries as much information as a check.You can’t put that much information on any

other electronic medium. We can put a lotof information on a check. That’s why people like it as a payment mechanism. Andwe’ve made it efficient. So I still see the checkas being a very viable product five years nowbut moving capture closer to the point of

presentment in all arenas. We have to speedthat process up and make that a day one orday zero process to be able to clear that item.And if we go to electronic, and I’m clearingdirectly with Andy at Frost Bank, he can tellme it’s not good before the deposit even hits.And if you can do that with checks, withplastic and other means of electronic payment, then the check will be a very viablepayment for a long, long time.

Steven: I think 2010 we are still expecting 25 billion checks to still be incirculation. That’s a lot of checks. You aregoing to see all the big banks start exchanging. I guess agreements would haveto be worked with the exchangers. That’sall going to shake out eventually just likeit always does. I think this is gainingmomentum. When we start looking at all

the positive benefits of image exchangeand IRDs and things of that nature, itmakes sense for people to move forwardand you really can because everybody hasinvested so much time. You have to takethe step forward. n

About Financial Insights, an IDC CompanyFinancial Insights provides independent research, custom consulting, and detailed multiclient studies on the technology issuesand challenges facing the financial services industry. Our global research covers topics of strategic importance to corporateand retail banks, insurance carriers, asset management firms, securities and brokerage firms. Our local practices in Asia Pacific,Europe, Latin America and Canada add an in-depth regional viewpoint. Financial Insights, an IDC company, is headquarteredin Framingham, Massachusetts, USA. IDC is a subsidiary of IDG, the world's leading IT media, research, and exposition com-pany. Visit www.financial-insights.com for more information.

”and banks that we’ve seen in a long

their business day and they don’t haveolidate accounts. It will also eliminate

When we start looking at all the positive benefits of imagehat nature, it makes sense for people to move forwardne has invested so much time.”

Steven Schumer, Vice President, M&T Bank