Buying Guide: Remote Deposit Capture

In October 2004, the Check Clearing for the 21st Century Act, commonly called the Check 21 Act, took effect. The Check 21 legislation allows banks (and merchants) to convert paper checks into electronic images, and to process the electronic image as though it is the paper check.

Remote check deposit allows you and your business to scan copies of your checks into your computer and send them to the bank as an electronic file, and the digital checks will then be processed as though you'd handed them over the counter to a clerk.

If your company has received a check and you want to deposit it without standing in line at the bank, you have to look at Check 21 remote deposit capture services.

It's really a simple process.

If you'd like more technical information, the American Bankers Association developed a Check 21 Toolbox for association members. Comerica has republished this guide to the elements of a substitute check.

The check scanner uses Magnetic Ink Character Recognition to read the check information. The characters on each check are imprinted with magnetic ink to make it possible for the scanner to read them. If the numbers are clearly printed, and correctly imprinted with iron oxide, the misread rate is 1 in 100,000. The numbers are all printed on the same line, which is known as the "MICR line" (usually pronounced "micker," rather than spelled out.) 

If you conduct business with companies or customers in other countries, you may receive a check from an overseas bank. You should consult with your RDC provider about whether your reader can process non-US originated checks. More importantly, you should make sure that your financial institution can clear non-US originated checks which it receives electronically.

 

If you're looking for online information about check depositing, you're likely to see some discussion around ACH. The Automated Clearing House system connects banks and financial institutions, and is the means through wich payroll deposit and direct billing happen. It provides a structure for banks to exchange information, and to clear and settle Electronic Funds Transfers between banks. ACH enables you to easily make payments to other individuals and organizations. Some large retailers use ACH at the point of sale and hand the processed check back to the customer so that the store doesn't have to secure the check until it gets to the bank. 

 

The difference between ACH and Check 21 is that ACH provides pieces of data to the bank to use to facilitate the funds transfer, whereas Check 21 sends a digital legal copy of the check to the bank. With a typical check transaction, the bank may choose to create an ACH file from the check, or the legal copy of the check, but that is part of the banking system, not the remote deposit system.

 

There are, broadly speaking, two kinds of scanner: single feed, and multi-feed. The decision about which you need is a question of how many checks you process when you prepare your deposit, and how much time you have to get the file to the bank. If you process a few checks a week, a single feed scanner will probably be enough. If your business receives dozens of checks every day, you will probably be more interested in the multi-feed scanners.

 

Your RDC service provider can furnish you with the software and the hardware that you need. Some institutions use software that needs to be installed on your computer(s) from a disk, while other institutions have the software available online. It's important that you talk to your software provider about how it handle updates and upgrades, and whether that involves system downtime for your equipment.

Web-based software from an Application Service Provider may be convenient, since any updates will be carried out behind the scenes, but if you are going to process a high volume of checks, locally installed software may provide faster throughput and be more efficient for your business.

 

If you're in a heavily regulated industry such as healthcare, and have been subject to audits, you may want to ask the provider if they and/or their banking partner have undergone an audit of their compliance with FFIEC guidelines. You may also want to know whether the provider has a SAS-70 compliance certificate.

The Federal Financial Institutions Examination Council creates rules and guidelines for financial institutions, and agencies like the FDIC audit those institutions for compliance with rules around security, confidentiality, risk mitigation, hiring, training, penetration testing of third-party data centers, and a whole list of other things. 

SAS-70 (Statement on Auditing Standards) is a set of audit standards developed by the American Institue of Certified Public Accountants. These standards have been widely adopted because compliance demonstrates that an organization's control objectives and control activities have undergone an in-depth audit. 

Audits do not guarantee the financial institution's overall stability, being compliant with these guidelines does indicate that the institution is using industry best practices to securely process your transactions.

When it comes to hardware, your financial institution will usually provide your scanning equipment. Be sure of any fees associated with buying or leasing (and whether you are, in fact, paying to buy or to lease the equipment), and check out the maintenance program. If you have to send your scanner back to your provider for repairs, will they give you a temporary replacement while your scanner is in the shop?

Epson America produced a guide to evaluating desktop check scanners. It notes that if you have several machines to choose from, it may be tempting to pick the scanner with the fastest through-put. Fast machines with a high incidence of mis-reads will mean that you are going to be re-scanning or manually entering check data, which will slow your process down. Ask your provider for the mis-read rates of the scanners they are offering. 

It's estimated that by the year 2014, 40 percent of all cellphones in use in the United States will be smartphones. It's a fact that banks are eager to take advantage of this new technology, and many of them are developing applications to allow customers to deposit their checks using their BlackBerry or iPhone devices. Some providers like Chase Bank have already debuted their Chase QuickDeposit for consumers and small business. 

There some big advantages to remote check deposit.

Faster cash flow.

Talk to any potential provider and ask them to help you figure out the number of checks you'd have to process to make an RDC service cost effective for your business. What fees will be applicable to your business or your specific terms and conditions? Will you be paying for your RDC service by the seat/license/installation or by the account?

You should know what's important to you in a service provider. Do you want 24/7 customer support, easy software upgrades, the cheapest price, the widest range of deposit services? These will all play a part, and you should be prepared to ask potential vendors about how they'll meet your needs.

As with any other service that can have an impact on your finances, you should scrutinize your agreement with your financial institution very carefully. Make sure you know which party is responsible for returned checks, arranging maintenance on hardware and software, and what the liability limits are on both sides.

Starting with a remote deposit service is a fairly simple process:

The real question of cost is: how much does it cost you to drive to the bank and stand in line to deposit your checks every day? The math isn't complicated:

Why would you waste this much time?

 

There are other productivity issues, too. Employees who take the daily deposit to the bank on their lunch break open up a minefield of human resource issues in many states. It's not just a question of legal liability for the money, employees who combine lunch with "work errands" typically add on more time to their lunch break than the work errands take to complete. If you run a business with limited staffing, does it create other safety issues, or even customer service issues, if you only have one person holding the fort while another employee is at the bank?

Many banks will provide RDC services to small business customers for free, earning their money from the balances in your accounts and the likelihood of your business taking other services, such as loans or credit cards or insurance, in the future. If your bank offers you a fee schedule for RDC, ask if they can reduce those fees if you combine accounts or maintain a higher minimum balance in your business bank account.

Whether your business receives one or 100 checks each day will have a bearing on whether you want to invest in remote deposit capture for your business. 

The most obvious first stop will probably be your bank, but you might want to check our comparison of remote deposit capture providers.

Your relationship with your bank may afford you some negotiation room when it comes to talking about pricing. Of course, it's much more difficult to try to negotiate on price when the other side has access to your company's financial information, but the upside to that situation is the leverage a healthy bank balance can give you. Some banks may require that you move, consolidate, or change your account types in order to get the best price for remote deposit capture services.

If you choose to work with a vendor from our marketplace, you'll get similar offerings but without the account requirements that a bank may place on your business.

 

Related Articles: 

How Can I Reduce My Exposure to Check Fraud?