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Portals and Rails, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Portals and Rails and look forward to collaborating with you.

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January 22, 2013


Parallel Paths or Course to Collision? Technology's Effects in the Payments Industry

I don't believe anyone would challenge the statement that the pace of technological change is faster than ever and is likely to increase its velocity going forward. I remember a conversation with my grandfather in the mid-1970s about the biggest changes he'd experienced in his lifetime, which spanned the first two-thirds of the 20th century. Those changes centered on the automobile and airplane (his lifelong vocation was a railroad machinist/mechanic), electricity for the masses, medicine, and radio and television. Today, we can look back just 10 years and see the exponential level of changes in technology that have impacted our everyday lives in these same areas—transportation, energy, medical care, and communications.

Many of these technological changes have affected the banking world, sometimes in ways that create conflicts among various service channels. Recent changes in the way that U.S. banking customers deposit funds, for example, have the potential to create such conflict across channels.

The all-time teller gets a new face
Since the widespread introduction of the full-service ATM in the United States in the early 1970s, this automated delivery channel has seen little change in functionality. Sure, there have been major technology changes that have improved the channel but not fundamentally changed it. Such improvements include the migration from offline to online transaction authorizations, the ATM's ability to dispense multiple denominations of currency instead of a fixed amount, improved display graphics and component reliability, and the sharing of ATMs through the emergence of regional, national, and international interchange networks. Past efforts in the U.S. to add additional functions and migrate the ATM more to a self-service kiosk have not met with great success. There appears to be another attempt to introducing such functions as remittances, bill payment, money orders, postage stamps and ticketing as ATM volume stagnates.

Deposits made through ATMs seldom represent more than 10 percent of total banking transaction volume, and are more often in the 5–8 percent range. Research has consistently shown that consumers are apprehensive about placing checks and currency in ATMs since ATMs do not verify the deposit envelope contents, as tellers do. Truth be told, banks generally didn't actively promote deposits through ATMs for economic reasons. Because deposit envelopes can be deposited empty, most banks required them to be processed under dual control. As a result, until relatively recently, the cost of handling a single ATM deposit was about $1.50 to $2.

A big breakthrough in ATM deposits was seen in 2006–07, when several of the largest U.S. banks began testing ATMs that could accept envelope-free deposits of checks and currency. This method offered consumers images of their checks or detailed listings of the deposited currency before the transaction was final. Because consumers had this opportunity to verify their deposits, they had a much higher level of comfort. Additionally, consumers could now make their deposits much later in the day and still have them included in that day's processing. These banks soon began widespread implementation of such functionality in a vast majority of their locations, and other top-tier banks followed suit. The reassurance of the deposit verification and the increased convenience has led to a sharp increase in deposit transactions through the ATMs equipped with this feature. Furthermore, studies show that the cost of a deposit transaction dropped below 50 cents.

It appeared like a win-win-win outcome. ATM channel managers and manufacturers both were pleased with the new functionality. And bank customers were obviously pleased, as evidenced by the increased deposit transaction volume through the ATM.

Meanwhile, in a parallel universe...
At the same time that ATMs were getting new functionality, the remote deposit capture product was being developed. This product was first offered to commercial bank customers that received moderate volumes of checks. Company employees scanned the checks on dedicated equipment and then transmitted the captured images to the bank. This product was made possible under the provisions of Check 21. Then the banks expanded the service to include low-volume check businesses using generic scanners that the business likely already possessed. And most recently, a number of banks have begun offering remote deposit capture to both consumer and commercial customers as part of their mobile banking service with the camera feature on a smartphone.

In our ever-changing technology environment, the role of product and channel management has never been more difficult. Products that are technology-dependent can have an extremely short lifecycle and face competition from other sources. Will the proliferation of the remote deposit mobile application dampen the demand for envelope-free deposit accepting ATMs, especially at the smaller banks? Will these technologies collide, or will they continue to move down parallel paths? How will this technology and others come to impact the future of the ATM? We would like to hear your perspective.

David LottBy David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

January 22, 2013 in emerging payments, innovation, mobile banking | Permalink

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Comments

Banks and Financial institutions invest heavily in improving customer convenience and customer experience. Envelope free ATMs are one such facility that has gained significance off-late. In emerging markets like India, ATMs function well as a self-servicing kiosk. Many ATMs in India support P2P transfers and even opening of "fixed deposit" accounts. Pilots are underway to provide options to open Mutual Fund accounts. Obviously these services attract more customers to the ATM outlets.

On the other hand, remote deposit captures have gained significant acceptance in the market recently. With the smartphones volumes increasingly eating into the feature phone’s market share, “remote deposit capture” is set to gain more popularity, given its sheer convenience to the customer.

At the same time, one has to bear in mind the preferences of Gen Y. Today, customers want everything “on the move”. The advent of mobile technology only accelerates this process. With more innovations coming up in mobile based micro payments, the usage of cash will decrease gradually. It may even reach a negligible size down the years. Paper based checks are already on the decline and will meet its natural death soon – Regulatory bodies in some European countries had mandated the stoppage of check payments long back. With papers based payments going down, the demand for remote deposit capture will also decline.

So when we compare envelope free ATMs with remote deposit captures, my take is that both will meet their natural death soon – may be in a few years. However, in the current scenario, given the nature of Gen Y, remote deposit capture will stand to gain over envelope free ATMs.

Posted by: Pari | January 29, 2013 at 09:33 AM

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