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A common theme that crops up frequently in my conversations with bankers these days is the challenge of managing intense competition in an increasingly tough operating environment. Lower earnings, worsening credit quality, and a slowing economy are contributing to the difficult conditions that are pressuring banks to look for creative solutions to augment their bottom line. Community and large banks alike are struggling to increase their efficiency and reduce operating costs while meeting their customers' needs and expectations.
Technology has been an important tool that financial industry participants have turned to in the past to enhance their competitive edge. A number of Third District bankers have indicated that continuing to look for technology solutions gives them an advantage over their competitors and helps them to retain or increase their current market share. Currently, many of them are exploring or adopting remote deposit capture, a new technology that is catching on quickly among District banking organizations and the banking industry as a whole.
For those unfamiliar with it, remote deposit capture technology, or RDC, essentially allows a bank's branches or its corporate clients to electronically capture check deposits locally and transmit the images to another main location, such as a bank's head office, for deposit and clearing. There is also emerging interest in the consumer market for RDC. Currently, RDC may be extended to individual "noncorporate" customers through image-enabled ATMs and home scanning equipment. One vendor, Mitek Systems, Inc., has also recently announced plans to offer an RDC product for consumers using camera-equipped mobile phones to create digital images of checks.1
The advent of the Check Clearing for the 21st Century Act, or "Check 21," which became effective in late 2004, was the catalyst that introduced RDC technology more broadly to the industry. Additional advances in technology and the creative application of RDC within the banking industry helped further its rapid spread.
A surge in bank branch expansion may also have contributed to the popularity of RDC and similar technologies. Branch expansion has been increasing for well over a decade now, outpacing industry consolidation, and it is an integral component of some banking organizations' strategies for attracting customers and deposits.2 RDC allows a banking organization to capitalize on the visibility of maintaining numerous branches while minimizing certain aspects of the associated costs. For example, RDC eliminates the manual preparation of deposits, avoids keying errors, reduces the physical footprint at operations centers and branches, trims transportation costs, and provides other economies of scale.
Some adopters of RDC have also taken advantage of the technology's potential to increase their client base by reducing or eliminating geographic constraints, while others have boosted customer service through improved funds availability and the extension of deposit deadlines. RDC can also improve efficiency by consolidating customer deposits at the source, which may eliminate multiple accounts and simplify reconciliation. As a result, it's often a bank's corporate customers who are pushing to implement the technology and, thus, are playing a key role in fueling the trend.
Historically, however, any emerging or new technology like RDC brings with it increased potential for fraud and error, along with any prospective benefits. New technologies that affect how financial transactions are delivered or that extend such transactions beyond the control of the banking organization or its vendor, in particular, necessitate prudent risk management practices and thoughtful consideration as to how the technology fits into an organization's overall strategic plan.
New opportunities for fraud are a special concern. In addition to the known avenues of fraud, such as check alteration, counterfeit checks, identity theft, and the like, banking organizations that adopt RDC and similar technologies need to guard against the duplicate presentment of a check either in its physical form or its image. Bank branches and corporate customers that transmit check images to a main processing site should ensure that the transmissions occur over encrypted, secure lines and should follow appropriate policies and procedures to ensure that captured checks are disposed of properly. Prior to implementing RDC for a corporate customer, a banking organization should also be comfortable with the customer's management framework and financial status to minimize the possibility of fraud and misuse.
Banking organizations that are considering implementing RDC or a similar technology would do well to prepare a comprehensive risk assessment that considers the legal and compliance risks, relevant controls, as well as the need for robust employee training and a strong vendor selection and management framework. This list is not inclusive and does not constitute official regulatory guidance.
Banking organizations considering RDC are also advised to consult the FFIEC Information Technology Examination Handbook, which is available on the FFIEC's public website . The handbook provides guidance on IT topics of interest to banking organizations, such as the risks and risk management practices applicable to a financial institution's information technology activities, as well as guidance on IT outsourcing, including service provider selection, contract issues, and ongoing monitoring.
In addition, the FFIEC is currently preparing guidance on RDC and a related work program for bank supervisors, which are scheduled to be released by the end of the first quarter of 2008. In the interim, if you have questions about the regulatory implications of RDC or similar technologies, please contact Joe Krencicki at (215) 574-6251, Brian Hood at (215) 574-6054, or Bill Wisser at (215) 574-7267.
The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.