Reaching Out to Small Businesses Remotely One Way to Boost Non-Interest Income

SAN DIMAS, Calif. -- As credit unions continue to work through and around squeezed margins, reaching out to small businesses may be one way to generate non-interest income.

For busy business owners, physical visits to the branch are often time wasters and cut into productivity. To accommodate them, some in the financial services industry are touting remote deposit capture as the next big thing.

In its most simple terms, RDC is a service that allows a user to scan checks and transmit the scanned images and/or ACH-data to a credit union or bank for posting and clearing. The basic requirements for an RDC service currently include a personal computer, an Internet connection, a check scanner and a service provider such as a credit union or bank. Checks received by a financial institution can be scanned to create a digital deposit. This digital deposit is then transmitted, usually over an encrypted Internet connection, to a RDC financial institution or service provider that then accepts the deposit, posts the deposit to the account and assigns availability based upon the availability schedule.

The $29 billion WesCorp, which serves more than 1,000 credit unions, believes RDC could be one of the forerunners to woo small businesses, said Dave Albo, Wescorp product manager.

"It can stand alone as an entry for credit unions to small biz. It can be a competitive tool with banks and it can fit into a larger business," Albo said. "It's a very important change in the industry [because] you're now adding a lot of efficiency at very little cost but the timing of the deposit is instantaneous."

Still, according to a 2006 study from Aite Group, despite all the hype, most banks to date have taken a "wait and see" approach. As a result, less than 100 banks in the United States have deployed remote deposit technologies, but by 2008, the number will increase to over 500, according to the study. The mid-size banks that have held back on deployments thus far may also enter the space and benefit from broader geographic footprints and the ability to better compete with large banks. RDC is expected to take off over the next few years as image exchanges better communicate, concerns about fraud are mitigated and greater adoption rates are achieved, Aite said.

Meanwhile, Albo said the new solution might not be as expensive as some might perceive. For WesCorp, the infrastructure is connected on the corporate side so a credit union would not have to make an investment here. The revenue stream is very tangible, he added.

"I recently saw a quarterly report that showed three out of four [providers] are reporting gains," Albo said. "It's quickly becoming a part of their lineup of services."

The risks involved with RDC start out on the merchant side, Albo said, adding that more responsibility has been placed here to ensure that protections are in place. Merchants are being pushed to protect checks as original images and with Check 21, there are warranties and liabilities involving "converting" banks and the assurance those items will be cleared as images and won't be duplicated. So how are the risks mitigated?

"The short answer is you consider it an unsecured line of credit," Albo offered. "You better know your customers and you better know they will be there if something happens."

Sileshi Dereje, vice president of product development and management at WesCorp, emphasized that credit unions have to exercise due diligence.

"Credit unions have to do a lot of discretion with who they plan to offer [RDC] to," Dereje said.

But the timing could not be better for credit unions especially as another entry to reach the unbanked and other more traditional groups served by credit unions.

"Check 21 is paving the way for remote capture," Dereje said. "So far, it's concentrated on a credit union's back-office needs but also realizes that it could easily extend out to SEGs and vendors."

In keeping with the goal of serving more small businesses, Dereje said solutions that have been around in the industry for some time such as ACH origination can help drive non-interest income. It can "easily" deploy to a SEG through payroll accounting and it gives credit unions more control in terms of risk management, automation and review, he added. Visa card programs are another mainstay where credit unions can earn interchange income. Dereje said WesCorp is looking at a payroll card for small businesses as a means to serve the unbanked.

Be it RDC or other solutions, Albo said small businesses are typically going to banks because some credit unions don't offer a full lineup of services that fit their needs.

"Typically, small businesses want sweep accounts and online cash management," Albo said. "I want to be able to go online at 3:30 in the morning and move money around. If you go online to Wells Fargo, you'll see the things credit unions need to offer."

Albo makes it clear that WesCorp is not competing with the likes of Citibank or Bank of America when it comes to small businesses that need SBA loans and entry-level services--"That's where credit unions can clean up."

Credit union returns and margins have been squeezed for some time and when the yield curve inverts like it has, priorities shift, Albo said. For some, if they didn't charge non-sufficient fund fees, "they would go out of business," he added.

"Retail growth has been very limited but even if [credit unions] get 5% of retail, they can live off the crumbs and do very well," Albo said.

--msamaad@cutimes.com