Good Funds as a Strategic Differentiator

While the check may be an antiquated, paper-based, “promise to pay” instrument, it remains a primary payment method for wages and institutional disbursements, and the leading payment method for person-to-person payments.Of the $26 trillion worth of checks written in the U.S. each year, checks payable to consumers account for almost $5 trillion in value, volume that exceeds total U.S. annual payment card transactions by nearly $1 trillion.

Though far more checks are cleared and settled electronically today than even five years ago, the consumer-facing aspect of check processing has not changed substantially in decades. Banks post partial and provisional deposits to customer accounts, manage check returns, pull back funds from accounts when checks don’t clear and then assess fees on the often innocent customers who deposited them in the first place. In a challenging macro-economic environment that continues to place cash flow strain on millions of consumers, an increasing number of people across the demographic spectrum seek fee-based services from alternative financial services (AFS) providers. According to the Financial Service Centers of America, Inc., a national trade association, in 2013, AFS providers serviced over $100B in financial transactions:

• Check cashing: $58.3 billion;
• Money orders: $17.6 billion;
• Payday advances: $13.2 billion;
• Wire remittance: $8.3 billion; and
• Prepaid: $5.4 billion

These figures do not include billions of dollars in transactions performed annually by retail merchants like Walmart that offer a host of transactional banking services to drive traffic into their stores.

It is the traditional, provisional check deposit that serves as the foundation for AFS growth. More than 34 million consumers receive wages in the form of paper checks. Of these consumers, 65 percent are not interested in direct deposit and 34 percent do not have access to direct deposit. The massive volume of peer-to-peer (p2p) checks, which are a critical source of income and cash flow for many consumers and small business owners, warrants instant fund accessibility. Further, the growing demand for mobile remote deposit capture, which according to Mitek will have 40 million users by the end of 2014, will increase the need for banks to address consumer cash flow challenges by providing instant and irreversible access to funds on checks – or good funds. For 80 million consumers facing these challenges on a daily basis, good funds services are simply a necessity. For 130 million mass banked consumers, good funds services constitute a powerful, new service offering that consumers value and for which they are willing to pay.

The Necessity of Guaranteed Good Funds

The culture of immediacy in the U.S. extends to financial services and consumers increasingly expect instant, irreversible access to their money. Importantly, an unprecedented percentage of Millennials are seeking services from AFS providers and the bank customers of the future are establishing financial behaviors and relationships with non-banks at an increasing rate. According to Packaged Facts’ “Unbanked and Underbanked Consumers in the U.S.,” 40 percent of adults age 18 and older in 2013 were personally unbanked. The growing demographic indicates a generational shift from traditional banking as newer forms of alternative banking emerge, such as non-bank funding accounts and reloadable prepaid cards.

The use of AFS providers for check cashing perpetuates cash spending and serves as a gateway to money order, bill payment and money transfer transactions that circumvent financial institutions and their digital payment platforms. For banks, good funds services can increase deposits to DDA or prepaid accounts to drive Debit or Prepaid card transactions and increase usage of ancillary fee-based money order, money transfer or wire services offered by financial institutions. These services can differentiate a bank from its competition by enabling its customers to make purchases and pay bills immediately and without concern that the funds will be delayed or reversed.

For financial institutions, instant funds accessibility offers:

• New sources of fee revenue: Provide a new source of non-interest fee income that can help banks transition from a declining overdraft fee-driven DDA revenue model to a consumer-preferred, highly transparent, fee-for-service model.
• Stronger customer loyalty: Support the cash flow needs of consumers and small business customers to help them meet their financial obligations more timely and accelerate the growth of their businesses.
• Increased deposits: Increase deposits from existing, low engagement customers and attract new customers with services that meet their needs.
• Increased interchange revenue: Capture billions of dollars in incremental digital payment transactions that today bypass banks as AFS-driven cash, money order and money transfer transactions.
• More potential for capital investments: Accelerate adoption and use of servicing and payment platform innovations like mobile banking, mobile wallets and prepaid payment platforms, all of which become more relevant and more powerful with good funds.

Overcome Barriers

In an era of seemingly endless regulation, litigation and balance sheet concerns for financial institutions, it is challenging for bank executives to develop new products and services. Those banks that have embraced good funds as a new service offering have successfully overcome three important barriers:

• Perception: The prevailing sentiment among many bankers is that providing guaranteed good funds is relevant only to consumers with exceptionally low income and who represent little revenue potential. In reality, these services are far more broadly appealing and even necessary to millions of existing bank customers who would prefer to access good funds through their bank, but instead frequent AFS providers or other banks, despite the cost and inconvenience. With the growth in mainstream adoption of prepaid cards, the need for good funds deposit solutions becomes all the more acute.

• Risk: Converting checks to cash and guaranteed good funds deposits is a difficult and risky business. Managing the risk requires scrutiny of the customer, the check and the check maker on every transaction, but financial institutions need not take on the risk management and compliance requirements alone. Specialized risk management platforms replete with identity verification, BSA/AML capabilities, consumer analytics, approval decisioning, check guarantee and end-to-end clearing, settlement and returns management can be used to deliver these services efficiently and to bank regulator standards.

• Resources: Resourcing new service delivery efforts is difficult and implementing new capabilities on legacy infrastructure is often complex, but banks can get started with solutions that provide a custom-branded software development kit (SDK) that can be integrated in a mobile banking application with remarkable ease. Broader integration into branch and ATM infrastructure can occur in parallel with teller automation efforts or ATM upgrades to extend the value of reengineering projects and deliver new revenue-generating services.

Transform Banking

Banks have invested billions of dollars in online banking platforms that have transformed the way many of their customers pay their bills, and they have enabled check deposits at ATMs. In addition, mobile technologies make the deposit transaction more convenient and meet evolving consumer transactional banking needs. The convergence of good funds deposit and money movement capabilities, mobile banking technologies and digital wallet platforms will transform banking for all consumers and reinvigorate the business models of the financial institutions that choose to embrace it.

Drew Edwards is founder and CEO of Roswell, Ga.-based Ingo Money, Inc. He can be reached at drew@ingomoney.com.