Banking Law

Last April, we commented on the increasing use by banks' business customers of "remote deposit capture" services, by which business scan and electronically transmit to their bank electronic images of checks that the customer would otherwise have to physically deposit via a bank branch, ATM, overnight deposit box or courier service. We discussed some of the issues, including one of primary concern to bank regulators: the possibility of fraud. We also highlighted a discussion of the requirements of Washington's Department of Financial Institutions with respect to RDC.

The DFI's main concern is that banks set strict requirements on the businesses using the technology. According to Mark Smith, who supervises DFI financial exams, department examiners make sure banks thoroughly investigate the creditworthiness of businesses using remote deposit. DFI examiners also encourage banks to "spot audit" the businesses, to make sure they are in compliance with the agreements.

Recently, we read an article (paid subscription required) that revealed that some banks are considering providing RDC services to consumers.

In a survey of 157 U.S. banks last month, [senior analyst Bob] Meara [of market reasearch firm Celent LLC] said, one in five had "specific plans to adopt consumer capture solutions," and another one-fifth said they were considering it.

Remote capture systems let people use a scanner to create a digital image of a paper check and transmit it to the bank for deposit electronically.

One banking company already has a consumer product available. USAA Federal Savings Bank has been offering it for just more than a year. The San Antonio bank serves military people and their families, who are often stationed far from its only branch.

Previously, the only way these customers could deposit checks was by mail, but using the Deposit@Home service it unveiled in December 2006, they can scan checks at a home computer and transmit files to the bank through a secure Internet connection.

USAA said last May that it had 200,000 users and another 10,000 customers were signing up every week. (The bank would not provide an executive to discuss the service's current use.)

[...]

Celent's Mr. Meara said that, as recently as two years ago, banks had almost no interest in remote capture for consumers but that businesses' enthusiasm for the systems prompted many financial companies to reconsider. And even if the technology does become a hit with consumers, however, "I don't think consumer capture is going to be adopted as broadly as remote deposit is among businesses," he said.

Apparently, improvements in mobile phone camera technology and software have made this product technologically feasible. However, the article makes no mention of the legal risks involved. If the regulators are having heartburn over the risk management issues involved with commercial customers using remote deposit capture, what are they going to do with respect to consumers?

It's an interesting concept, but I'm not holding my breath waiting for it to burst upon the scene. USAA's customer base of military personnel and their families is one thing. That customer base is well-disciplined and, if there's any "hanky panky," someone in authority generally knows where to find them (although they can always go AWOL, I suppose). However, I'd have to think long and hard about practical (as opposed to legal) risk mitigation tools before putting such a service at in the hands of consumers everywhere. Attorneys can draft all the wonderful indemnification and hold harmless language anyone could hope for, but inasmuch as the recent subprime mortgage debacle clearly demonstrates the uselessness of legal agreements that (1) consumers never read and, (2) consumers expect to be modified under government pressure in order to "bail them out" of a "bad deal" in any event, I wouldn't put much faith in contractual legal recourse as the ultimate protection. I think banks offering this service will have to carefully underwrite the consumers who are eligible to use it, keeping in mind that the banks can't discriminate on a prohibited basis. That ought to be an interesting exercise.