Bankruptcy

Remote Deposit Capture (RDC) iPhone App

By Adam Levitin

One of the quieter revolutions going on in the payments world is Remote Deposit Capture (RDC), the process of depositing checks electronically without ever going to a bank branch.  The paper check is slowly going the way of the dodo--many banks now do electronic conversion of checks that customers have deposited.  RDC takes this one step further by eliminating the need to physically deposit paper checks in their banks. 

I've previously written a short piece (here) about RDC that covers it more detail, but until I read about USAA's RDC iPhone app, I don't think I appreciated degree to which RDC could shake up retail banking.  We're just at the beginning of RDC (which has been growing like mad), but it is going to rapidly antiquate the retail bank branch, create truly nation competition for deposits (beyond brokered deposits and CDs), and help even the competitive playing field between large and small banks.  

RDC has the potential to seriously shake up retail banking.  Most people have little physical interaction with their bank beyond deposit checks and withdrawing cash funds.  These are important banking activities, however, so most people and small businesses choose their banking relationship based on the availability of local branches and ATMs.  That means that in any particular market, there are only a limited number of competitors.  It also means that large banks benefit from a type of network effect--the more branches and ATM the bank has in an area, the more valuable it is to consumers.   And the national scope of some banks' operations (BoA, Chase, Citi, Wells, in particular) only increases their value for consumers.  Smaller banks, which already have trouble competing on costs because of economies of scale are further disadvantaged, and have to emphasize service, rather than cost. 

RDC, combined with ATM fees waivers and e-banking (for transfers and payments) has the potential to make physical branch banking largely irrelevant.  This won't happen immediately--there are plenty of Americans (especially older ones), who will not quickly transition to doing everything electronically, and the fraud risk issues will have to be better addressed.  And branches won't entirely disappear (not least because of CRA pressures).

But if the bank branch becomes an outdated and expensive method of deposit collection due to RDC, small banks with lower overhead and employee costs will have a leg up on the behemoths with thousands of branches.  This isn't to say that the behemoths won't have plenty of offsetting advantages, but RDC will start to level the competitive playing field.  It will also create a national market for deposits--this is good, both in terms of ensuring the best deployment of capital nationwide--and in encouraging more competition. 

So RDC means better bank competition for deposits, but also fewer bank branches, which means fewer teller jobs and a bunch of commercial RE vacancies down the road. RDC poses some major fraud risks, not least the risk of multiple presentment:  a check can be deposited multiple times electronically at different institutions and the physical check can also subsequently be deposited.  For this reason, banks have rolled out RDC cautiously, starting with trusted business customers with whom they have multi-service relationships (and ample opportunity for set-off).  (I wonder what the bank regulators say about the safety-and-soundness of RDC and what acceptable levels of fraud loss are with it...)

Banks have been very hesitant to use RDC for consumers.  To my knowledge, USAA FSB has been the only major financial institution that has done a major roll out of consumer RDC, but it's clearly popular (and why wouldn't it be?)--a quarter of their deposits are now done remotely.  And now the USAA RDC iPhone app.  This is a major step forward in RDC and m-commerce in general, and it's a glimpse of the future of banking:  money will be electronic.  In 50 years, will we still have cash?  And do we care? 

Full post as published by Credit Slips on August 07, 2009 (boomark / email).