Paper Checks in the Digital Century

Paper Checks in the Digital Century

A Brief History:

Checks are believed to be one of the oldest forms of non-currency payment in human history. Ancient Romans used checks in the first century B.C, and there is evidence of usage in the Persian empire of financial instruments referred to as a ‘Chak’. In the US, checks reached their peak usage in the 1970’s, when an estimated 85% of all non-cash retail payments where completed using checks1. While decreasing in popularity with the expansion of plastic cards and ACH’s, checks still remain a commonplace item in the modern financial world.

A Move Towards Digitalization

The ability to deposit a check via a phone, dubbed ‘Remote Deposit’ or ‘Mobile Deposit’, was created as a part of the “Check-21” regulation in 2004 that allowed for banks to send electronic versions of a check. While the regulation was aimed at allowing banks to more cheaply process checks, this regulation also allowed customers to send the same ‘digital’ images of checks to banks (2004). Combined with improvements in mobile phone technology, the first such application was launched by USAA in 2009.

The Competitive Dynamics

Remote deposits emerged as a way for smaller banks or banks without national branch networks to compete. Banks such as USAA, Ally, and then ING-Direct (now Capital One 360) needed a way to better engage with customers. Before this, customers had to either send a check in the mail, or send an ACH through their main bank to get their money to the online bank. Since those two methods are time-consuming, remote deposits offered a more convenient option for customers that also cut out their reliance on major banks.

It also became a new way for the major banks to have more digital servicing for their customers and lower their costs associated with their national banking networks. Banks can reduce the need for staff to process low value check deposits, and can focus their time on performing more value-add services. Average teller transactions dropped from 25% from 2008 to 2013 – and are expected to decline even further in the near future.

Results: As of 2014, 11% of checks were deposited using Remote Deposit2

Should you add this feature to your banking habits?

Upsides: The whole operation takes around a minute to do. The user must take a picture of both sides of the check and type in the dollar amount.

  • Can save a trip to the bank or ATM
  • It’s free. Only 1 bank in the Pew report charged a fee 3,4

Downsides

 Banks have longer hold times on the money due to increased fraud risk

  • Most banks have a maximum value of check you can deposit via this method ($5K – $10K)
  • There are monthly limits on total checks deposited through Remote Deposit.
  • Doesn’t scale with multiple checks. If you have 10 checks, you have to take 20 pictures.

 So if you are customer who receives a couple of small checks every once-in-a-while (holiday, birthday), this is a great way to avoid the hassle of visiting a bank.

If you are customer with a large stream of checks, this service currently won’t help you much, unless you are nowhere near your current bank and don’t mind scanning check after check into your phone. Also, the slower funds availability time might not appeal to customers that need the money right away. As of now, you may need to continue to use your local bank or ATM to deposit checks.

What does the future likely hold?

What seems like a fantastic innovation a few years ago is now table steaks. Over 75% of financial institutions now offer this feature, and the point of differentiation has been erased. As banks become more comfortable with the fraud risk, we may see some incremental changes like removal of the current limits or a quicker experience taking photos. But don’t expect this feature to ever gain a dominant market position. This feature currently does not support small business users or customers with frequent check usage well – who will continue to use other means to deposit large quantities of checks. Maybe these customers will opt to use another system, say cash, ACH, or other electronic currency instead. In the meantime, using Remote Deposit for your one-off checks is a great time saver. Just remember one thing; after you’ve made the deposit, destroy the check.

Sources:

1)      http://blog.checkadvantage.com/the-colorful-history-of-checks/

2)      http://www.nytimes.com/2014/12/06/your-money/some-drawbacks-in-tapping-the-phone-to-deposit-a-check.html

3)      https://www.usbank.com/pdf/checking/EasyCheckingSnapshot.pdf

4)      http://www.pewtrusts.org/~/media/assets/2014/11/mobile-remote-deposit-capture-report–art-ready_6.pdf

5)      http://www.consumerreports.org/cro/magazine/2014/10/pros-and-cons-of-mobile-check-deposit/index.htm

6)      http://money.usnews.com/money/personal-finance/articles/2012/10/09/how-to-deposit-checks-with-your-smartphone

7)      http://www.remotedepositcapture.com/overview/rdc.bank.benefits.aspx

8)      http://www.aba.com/products/bankmarketing/documents/feature_1_cov_nov_14.pdf

9)      http://www.waff.com/story/26104190/digital-banking-creates-duplicate-deposit-risk

By: John Watts


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