Tech Firms See Opportunity As Remote Capture Leads to Rising Problem of Bad Check Images

For the past decade, image exchange has been one of the undisputed success stories of electronic payments—so much so, in fact, that nearly all banking and retail executives take it for granted that paper checks will clear as images and funds will likely settle the same or next day.

But while just about all banks now participate in image exchange, executives can’t quite take it for granted that image clearing will always run without a hitch. In fact, banks of first deposit receive enough problematic images that technology vendors are starting to see an opportunity in software that can help rid the items of the smudges, smears, faintness, and general fuzziness that could stop them from being settled.

These so-called critical image errors affect as many as one in 1,000 checks and cost banks anywhere from $15 to $25 per item, estimates Digital Check Corp. The Northbrook, Ill.-based company on Tuesday launched a software product called Clear that lets users sitting at a PC bring legibility to smudged or faint images. Most problematic are remittance checks, money orders, and cashier’s checks, say officials with the company. And, they say, checks written with gel pens present a constant challenge.

“Across the industry, image quality is very good, but it’s not 100%,” Jeff Hempker, vice president of marketing and North American sales, tells Digital Transactions News. “What we’ve seen in the past 18 months is a gap [in quality]. If you add it up, it’s a significant drain on overall operating expenses [for banks].” The costs of rejected items vary. They include transportation costs to get original items, higher cash-letter or per-item fees for substitute checks, delays in clearing, and even write-offs if the amounts are small.

One big trend contributing to the problem is remote capture, a process that pushes check imaging out of the hands of experienced operators and places it in the control of businessmen and consumers. “There’s no doubt check volume isn’t growing, but banks are losing control over the quality of the image,” says Hempker.

Businesses and individuals receiving paper checks can use anything from flat-bed scanners to mobile phones to create images. “What you see in the industry is pushing that item out as far as possible in the receivables life cycle of the item,” says John Leekley, chief executive of RemoteDepositCapture.com, an Atlanta-based consulting firm.

The urge to image is especially strong among small businesses looking to speed up clearing time by as much as four days compared to depositing paper checks. “The result can be accelerated cash flow,” Leekley says. “That [four days] can be hundreds of millions of dollars in accelerated cash flow for just one corporate [entity].”

Indeed, the problem of fuzzy images has already attracted technology companies sensing an opportunity. San Diego-based Mitek Systems Inc., for example, in July introduced a product called MiSnap Mobile Auto Capture that indicates to smart-phone users when a legible image is detected and then automatically snaps the picture.

Digital Check won’t go into detail about pricing for Clear, but licensing fees are such that a bank processing between 500 and 600 items daily will see a payback in six months, it says. “The minimum investment is less than six figures for a bank to get into it,” says Hempker. “Clear is a niche application, a very economical way to reduce costs.”

So far, the company has one very large bank client in production, running 1,500 to 2,500 checks monthly through it. Two other institutions are using the product in a test environment.