In 2007, when the deposit back office was considered the equivalent of the Atchafalaya swamp by many bankers (and to too many execs it still is!), an article about an obscure function found deep in that nowhere land was published right here in GonzoBanker (see “The Gnomes of Chargeback”.) Five years later there is still treasure to be found in that backwater out in the boondocks for those that recognize it. This treasure – significant incremental fee income – can be mined without adding a lot of additional expense. Operating costs are usually reduced, to boot.
Probably the most unglamorous location in an unglamorous setting is where we find those who process Returned Deposited Items, a.k.a. “chargebacks.” RDIs are checks deposited by merchants, which accepted them in payment of goods and services, that have been returned by the bank they were drawn on. Every banker knows what has happened to overdraft income in the last five years, but OD and non-sufficient funds items still exist – and it’s just as important to recover back office processing costs as it ever was, even in today’s tougher regulatory environment.
Chargebacks are “the other side” of the overdraft protection (ODP) equation, where a merchant that has deposited the check used to purchase something receives the check back for “Insufficient Funds.” The purchaser’s bank didn’t pay the NSF item, though you can bet it collected an NSF fee! (The depositing bank has no reason to care, and no regulatory exposure, regarding how that item was found to be NSF, whether transactions at that bank were posted in large to small amount sequence, in check number sequence, in the order received – whatever! The check has been returned and now must be dealt with in some fashion.) The merchant must collect the check (or retrieve the merchandise) from the buyer. Just as with ATM surcharges, another key source of fee income, there is revenue potential in these NSF transactions. The source of the income is not the depositing merchant – the bank’s customer – but the wayward purchaser, who in all likelihood is NOT a customer of the same bank. It’s a brutal world out there. As bankers,we have no obligation to subsidize costs that result from other banks’ customers that write hot checks.
Too many banks are still either managing the collection of RDI’s manually, or they are outsourcing this to a third party collection agency. This diverts staff from more profitable activities, an inefficiency banks can no longer afford. By simplifying the collection of insufficient checks, improved service to merchants and increased fee income for the bank is possible. The treasure in the backwater is the use of electronic check recovery (RCK) mechanisms, either by bank staff or via a commercial provider that will perform this function for the bank on a revenue-sharing basis.
An RCK transaction in the world of automated clearing house is an electronically re-presented returned check. The RCK transaction converts NSF and other unpaid checks into electronic items and re-sends them for collection via the ACH clearing network. (The National Automated Clearing House Association approved check re-presentment through the ACH network in 1998.) In additon to speed and simplicity, there are other benefits to RCK transactions: RCK re-presentments can be done twice, versus once for manual re-presentment. Re-presentment can be timed to coincide with common paydays, improving the chances that the item will be paid. Furthermore, when re-presented through the ACH network, funds may be collected faster, and RCK’s are sometimes processed ahead of “regular” imaged checks.
But, you say, what about the decline in paper checks? We know that check volumes are declining and this revenue source won’t be available forever. In the words of Monty Python’s Black Knight: “It’s not dead yet.” According to The 2010 Federal Reserve Payments Study: Noncash Payment Trends in the United States 2006-2009, updated in April 2011, 109 billion noncash transactions with a value of about $72.2 trillion were processed. Of those, checks were the second highest form of payment, 22 percent of transactions. (Debit cards were higher at 35 percent and credit cards lower at 20 percent.) But of that 22 percent (some $16.2 trillion) which were checks, $127 billion in value, were returned. Average amount? A surprising $1,001.00. These aren’t Starbucks transactions!
Once considered an obscure cash management function, electronic check item recovery helps both merchants and the bank’s bottom line by providing a valuable service to merchants while reducing manual processes. Merchants are sometimes able to collect 100 percent of the face value on recovered checks at no additional cost. Banks are able to earn non-interest income through cash management fees and, sometimes, revenue-sharing with service providers.
This treasure won’t be around forever. The same Federal Reserve payments study reveals that check writing has clearly seen better days: check volumes are declining at the rate of about 7 percent per year while ACH is increasing at the rate of over 9 percent, debit card usage is increasing at nearly 15 percent, and prepaid card usage is growing at more than 20 percent per year. But as a revenue source, opportunities still exist: in 2009, 127 million items were returned.
RCK processing, whether provided with internal (bank) staff or using an external service provider, allows banks to tap into the payment mechanism resulting in a greater number of recovered insufficient checks for their merchants as well as consistent fee income for the bank. With a low cost to market and a high return on investment, adoption of RCK is practically a no brainer, but many banks still do not avail themselves of this income source. WHY NOT?