The Latest in Banking: Remote Deposit Capture

On October 28, 2004, the Check Clearing for the 21st Century Act, or Check 21, took effect. Passed in large part due to the closing of U.S. airspace after the terrorist attacks of September 11, 2001, the goal of Check 21 legislation was to speed up the check clearing process and reduce its dependency on physical transportation.

Background. Under Check 21, financial institutions are able to truncate, or electronically process, checks at any point in the clearing process. Institutions can create a digital image of a check to be transmitted electronically to other institutions in the clearing process or reprinted as an Image Replacement Document (IRD), a legal substitute for the physical check. While financial institutions are not required to use this new technology, it is intended to foster innovation in the check clearing industry and enhance overall efficiency.

The first tangible service that has developed as a result of Check 21 is Remote Deposit Capture. With Remote Deposit Capture, public finance officials are able to make daily deposits from their offices. Images of checks are scanned using a desktop scanner, uploaded into bank application software or onto a bank Internet site, and then transmitted to the bank through a secure connection for deposit into the government’s account(s). (See Exhibit 1.) By using Remote Deposit Capture, governmental entities are afforded a greater level of flexibility and security in their banking options.

Exhibit 1: How Remote Deposit Capture Works

Remote Check Deposit—Process

Scan deposit ticket or select an account number Declare deposit total Load checks in scanner and begin scanning process Deposit is confirmed against the declared amount and readied for transmission Transmission initiated and user is presented with confirmation of receipt by the bank Clearing via Substitute Check (IRD), Image Exchange, or ACH

Implications. Banking relationships can be consolidated with one institution, offering added efficiencies and savings on fees. The risk and cost associated with transporting checks is eliminated because the checks have to go no further than the desktop scanner.

Governmental entities will also realize enhanced cash flow management, improved fund availability and an increased likelihood of detecting fraud due to the accelerated check clearing process. The faster a check is cleared, the faster funds are made available to the depositing unit and the quicker fraudulent checks can be detected and the authorities alerted.

Savings of both time and money will be realized as employees no longer need to travel back and forth between the office and the bank. Oftentimes, especially with smaller governments, doing the daily deposit means closing the office for a period of time in order to meet afternoon deposit cut-off times. Now, not only will governments not have to close the office, but most banking institutions using Remote Deposit Capture offer extended same-day deposit cut-off times, making the process even easier and more customer-focused. Those that do not see a large quantity of incoming checks and do not make daily deposits will see even more benefit from Remote Deposit Capture. They will now be able to deposit checks daily from their desks and have quicker access to those funds.

There are tangible cost savings that can be calculated to offset any initial fees that may be charged. Example: Employee X is paid $14/hour and spends 30 minutes per day taking the deposit to the bank. Annually, Employee X is paid $1,750 (assuming 250 days worked) simply to travel to the bank, stand in line, make the deposit, and travel back to the office. With Remote Deposit Capture, the employee would spend only 10 minutes per day depositing that day’s checks, resulting in a potential annual savings of $1,400 previously spent on banking (i.e., a reduction in staff costs or re-allocation to more valuable tasks).

Future of Remote Deposit Capture. A few questions remain and are currently being investigated. Remote Deposit Capture will make it harder to place a stop payment on a check due to its quick entry into the clearing process. The possibility also exists for checks to be processed twice—once from the digital image and then again from the IRD or by having the IRD printed more than once. Currently, this problem is small and the industry is working on developing systems specifically designed to address this issue.

As an increased number of transactions are now being conducted electronically, the area of Remote Deposit Capture will continue to grow. According to the Federal Reserve Board, paper checks have accounted for less than half of non-cash payments in the U.S. over the past several years, quickly being replaced by direct debit, Automated Clearing House (ACH), and credit/debit card payments. The industry and its customers seem intent on heading toward a more automated check clearing process with earlier check truncation and faster processing.

As this trend gains even more momentum, additional innovations will continue to emerge, resulting in faster, more accurate banking procedures. Inquire about Remote Deposit Capture to learn about the potential benefits if may offer to your government and implementation issues. You may find a way to reduce internal cash management costs, expedited cash flow, and improved security, all with one step.

Updated Investment Resources on GFOA Web Site

GFOA has published on its Web site updated guidelines for investment managers. These include a sample investment policy for short-term portfolios and collateral agreements (short- and long-form versions) to protect bank deposits. These documents were developed and updated by the GFOA Committee on Cash Management.

In addition, GFOA has added investment policy checklists for defined benefit plans and deferred compensation plans. These checklists can be used to compare against a government’s existing policies to determine if it needs to update those policies or to develop new policies. These documents were created by the GFOA Committee on Retirement and Benefits Administration.

All documentation can be downloaded from GFOA's Web site at no cost.

GFOA Treasury Training Scheduled for Fall

GFOA has scheduled three courses for state and local government treasurers this fall. On October 17-18 in Fort Lauderdale, Florida, GFOA will offer the course Treasury Management and Cash Flow Forecasting to be immediately followed by Investing Public Funds on October 19-20. In the following month, GFOA will offer Banking Relations in Chicago, Illinois, on November 18. The latter course focuses on procurement and oversight of banking and depository services.

Instructors for the banking seminar include the two past chairmen of the GFOA Committee on Cash Management, Stan Helgerson, finance director, Village of Carol Stream, Illinois, and Joseph Casey, deputy county administrator, Hanover County, Virginia, as well as James Beasley, president of J.F. Beasley & Co., Inc.

Investing Public Funds will be taught by Ned Connolly, vice president of Chandler Asset Management, and Corinne Larson, vice president of MBIA Asset Management Group, both experienced GFOA instructors. Connolly will also lead the Treasury Management and Cash Flow Forecasting course.

Panel of Economists

When Will the Fed Stop?

The Federal Reserve Open Market Committee recently raised the Fed Funds rate for the 10th time. This month, Public Investor asked its panel of economists when and at what level the Fed will stop raising rates in the current tightening cycle. We also asked the panel if the Fed is near the point of raising rates too far and causing an economic slowdown.

Peter Kretzmer expects that the Fed will continue to raise the Fed Funds rate until it hits 4.5 percent at its meeting in February 2006. He predicts that a rate of 5.0 percent will cause the economy to start to slow.

John Silvia states that the Fed will stop raising rates when the inflation benchmark stays stable for three months. He expects that the Fed will stop at 4.75 percent in the spring of next year.

Carl Tannenbaum predicts that the Fed Funds rate will peak at 4.5 percent early next year. He does not think the Fed is in danger of tightening too far.

According to Lacy Hunt, Fed policy is far more restrictive than is generally recognized. He notes that the monetary and reserve aggregates and the shape of the yield curve indicate that monetary restraint is significant. For example, M2 has increased only 3.6 percent over the past twelve months, which is far below the 6.7 percent average since 1900. In addition, total reserves contracted by more than 6 percent in the last 12 months. Hunt points out that a contraction in monetary growth in the face of surging oil prices has often resulted in a depletion of savings and a weaker economy. In fact, the personal saving rate has dropped to zero.

Forecasters See Benign Inflation?

The most recent Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, predicts that real GDP will average 3.7 percent in 2005 and 3.4 percent in 2006. The consumer price index increased 0.5 percent in July, fueled mostly by rising energy prices. However, inflation forecasts suggest that the recent in-crease in inflation may be temporary. Looking forward, the Survey of Professional Forecasters predicts that CPI inflation will decline to 2.4 percent in 2006. The spread between the 10-year Treasury bond and the 10-year Treasury Inflation-Protected Securities (TIPS) is around 2.4 percent, suggesting that the financial markets expect inflation to average around 2.4 percent over the next 10 years.

RGM

Fed Funds Rate Approaching 4 Percent

At its most recent meeting on August 9, the Federal Reserve Open Market Committee decided to raise the Fed Funds rate by 25 basis points to 3.50 percent. Thus far, the Fed has raised the Fed Funds rate 250 basis points since it began tightening last year. In its policy statement, the Fed stated that core inflation has been “relatively low” and long-term inflation expectations remain “well contained.”

The most recent Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, predicts that the three-month Treasury bill will increase to an average rate of 3.9 percent by the fourth quarter of 2005, and 4.3 percent by the third quarter of 2006. The forecasters predict that the 10-year Treasury bond will increase to an average rate of 4.6 percent by the fourth quarter of 2005, and 5.0 percent by the third quarter of 2006.

RGM

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The Public Investor is published monthly by the Government Finance Officers Association (GFOA), 203 N. LaSalle Street, Suite 2700, Chicago, IL 60601. (312/977-9700; email: PublicInvestor@gfoa.org) Annual subscription rates are $55 for active GFOA members, $70 for associate GFOA members, and $85 for nonmembers. For reprint permission contact GFOA.

The information and opinions printed herein are from sources believed to be reliable, but GFOA makes no guarantee of accuracy. Opinions, forecasts and recommendations are offered by individuals and do not represent official GFOA policy positions. Nothing herein should be construed as a specific recommendation to buy or sell a financial security.