"For payments to insurance companies, many consumers prefer checks," says John Sarich, director of business development with TTS Consulting and formerly executive vice president of funds processing software provider RemitPro Inc. "Consumer advocates also are encouraging consumers to write checks for payment vs. being 'locked in' to automatic-withdrawal agreements that can be difficult to have stopped."

Fortunately, check processing is one area where the government actually has worked to make things more efficient and less paper bound. The problems created by the need to move paper checks physically between banks, clearinghouses, and Federal Reserve locations became clear in the wake of 9/11, when aircraft were grounded and check transportation was delayed.

In October 2004, the Check Clearing for the 21st Century Act, or "Check 21," became effective. Check 21 allows "image replacement documents" (IRDs) to be transmitted and substituted for checks.

The process created by Check 21 is not to be confused with check conversion, which is changing a paper check into a fully electronic automated clearing house (ACH) transaction either in the back office or at the point of transaction. Instead, Check 21 simply legislated an IRD was as good as a paper check and had to be accepted by all recipients in the clearing process. Once a check is imaged, the original, "truncated" check can be stored or destroyed.

The first deployments of Check 21 were in the banking industry for check clearing and interbank transfer. Banks quickly realized the benefit of extending check image capture to remote branches, a process branded as remote deposit capture (RDC).

"RDC is the biggest development that's hit banking in the last couple years," says Dana J. Gould, senior research analyst, payments, at Financial Insights. "A lot of technology providers have built their business around it, and it's moved downstream quickly from larger banks to smaller ones."

Additionally, it didn't take long for businesses outside banking to investigate the process-improvement benefits of "capturing" checks themselves at their headquarters or branch locations. Banks were quick to seize on this as a marketing opportunity to offer new service to corporate customers. Gould's research has led him to predict nearly 100 percent of banks will be offering RDC to business clients by 2011.

"This is by far the number-one solution corporations are implementing with their banks," says Susan Feinberg, senior research director in TowerGroup's whole-sale banking research service. "It is becoming very prevalent for middle market and larger corporations."

RDC presents many benefits to companies, the first of which is reduced transportation expense. "We no longer have to have someone drive to the bank. And at the end of the day, all the management reports we need for confirmation and reconciliation are available through the remote capture software or online at the bank Web site," says Wendy Schuler, vice president of finance at ACUITY.

The insurer began using RDC in January 2007. Since then, the company has migrated from a thick-client platform to a thin-client deployment where all scanned check images are held by its bank and available online rather than stored internally.

Likewise, Texas Farm Bureau Insurance was able to eliminate transportation fees incurred by its Waco headquarters through a two-pronged payment strategy. Previously, the company had processed all checks received at headquarters internally, then sent checks via courier to the bank.

In mid-2007, Texas Farm Bureau Insurance began using a payment processing outsourcer, according to Trey Schneider, the company's director of insurance finance. However, realizing a significant number of payments still would be sent by customers to the insurer's headquarters, rather than the processor's post office box, Texas Farm Bureau Insurance deployed a Web-based RDC solution in early 2008. Three scanners, provided by the insurer's bank and operated by payment clerks, are sufficient to handle the incoming check volume.

The second hard-dollar benefit for companies is the reduction in bank fees. "Companies now are starting to understand banks are eating them alive with fees," Sarich says. "The average fee for a lockbox is going up seven percent to 10 percent a year."

Furthermore, insurers still have to deal with exceptions in a lockbox arrangement, such as check errors and questions regarding how payments should be applied. "Banks will do the research on exceptions, but they're charging you by the hour," Sarich says, adding the per-check processing cost of imaged checks is less than with traditional check processes.

Companies also benefit from better, faster access to funds. "We have a greatly expanded deposit window with our bank by using remote capture," says G. Bruce Reed, finance treasury manager at Texas Farm Bureau Insurance. "Previously, we had until the branch closed at 5 p.m., which meant we had to have a pickup ready for the courier by 4:30." Now, the insurer has up until 9 p.m. to transmit images to the bank.

At ACUITY, RDC has reduced the time to get credit for deposit by as much as four days, Schuler says. That type of reduction can earn insurers a significant investment return.

"If you're an insurance company doing a billion dollars in business, you will pick up millions of dollars just in the time value of money, and it also gives you negotiating leverage with your bank," Sarich says. "The ROI on a remote capture solution can be measured in hours."

"Faster clearing of items due to electronic workflow with banks also tends to reduce the risk an item will be returned for NSF [non-sufficient funds] and enables companies to deal with NSF checks more efficiently and quickly," Feinberg says. "There's a significant cost to processing returned items, redepositing checks, and collecting money."

Finally, companies benefit from improved control and compliance. Suffice it to say when a paper check is lost in processing and transit, policyholders are not happy. Imaging doesn't eliminate the potential for lost checks, but by putting capture closer to the point of receipt, it does reduce the risk.

RDC also impacts control and compliance. Like most document management platforms, RDC provides access control through role-based user authentication. It also creates a centralized repository of check images, complete with audit trails and the ability of easier multiuser access.

"A big advantage for us has been better information," Schuler says. "Those images are immediately available for viewing after capture via the Web site and can be accessed by whichever areas of the company that need to view such information." After a specified time period, images go into long-term archival storage.

Companies gain visibility into the check-handling process, as well. "Corporations can monitor the process to make sure people aren't sitting on checks," Feinberg says. "They can see what's been deposited and compare that with past trends and take action. In a non-RDC environment, they wouldn't be able to do that until much later."

Yet another benefit, off-site storage helps in disaster recovery. "The fact the bank now is the custodian and archive for those images helps with our business continuity planning," says Reed.

In addition, RDC has specific benefits to insurance. First, a single check from a customer often covers multiple policies or coverages. In a paper-bound process, it's common for insurers to make multiple photocopies of a check and send them to different business areas to split the payment.

"This is a real problem for companies that have legacy billing systems and multiple product silos," Sarich points out. "I've seen instances of insurers needing to take four weeks to process a payment." An RDC solution can provide a centralized system to view and allocate payment and report on those allocations.

Also, banking regulations may prohibit converting business checks as ACH or other electronic transactions. In contrast, RDC can be used on business checks, making it beneficial for carriers that write commercial lines insurance. "With remote capture, whether it is a personal check or a business check isn't an issue because you're just dealing with an image of the check," Schuler says.

Finally, RDC solutions can be deployed to field agents. "Particularly for direct writers, this is a technology that belongs on the agent desktop," Sarich says. "Those companies need to provide a payment gateway where agents can scan a check in the office and transmit it digitally right to the insurer's bank account."

This eliminates the need for agents to send checks physically to the home office, write a separate agency check for consolidated customer payments, or have the carrier make account sweeps.

"It's an ideal situation for insurers," Gould says. "You have an agency sitting remote from the home office, and it can capture payments and get in that day's work much faster."

Extending RDC to its field offices is a next step being evaluated by Texas Farm Bureau Insurance. The company has 261 offices throughout the state, most of which deliver checks personally to local branches of various banks to make deposits.

"To manage those deposits and those bank accounts as we expand is beginning to be onerous. It requires us to have a local bank presence at each of our county locations with a local bank and creates a real administrative headache for us. We're looking at using RDC in those offices, however we can do it," Schneider says.

The company's home-office deployment of RDC is a learning experience it will use for this field deployment.

"We'd also like to create an integration between the [RDC] system and our existing processing systems. Right now, [check processing staff] still have to go into a screen, enter payment information manually into our system, and then scan the check to make a deposit. It is a two-step process. By the time we deploy to our county offices, we'd like to streamline that process and create a single point of entry that automatically would populate the payments screen in order to reduce training and to make sure processes are consistent," Schneider says.

That type of integration is an ongoing initiative across all industries using RDC, says Feinberg. "The big challenge is how to integrate RDC with the customer's accounting system so that handling payments can be a straight-through process. It's easier for SMBs [small and medium businesses] because they're often dealing with off-the-shelf accounting software such as QuickBooks, but to market to larger companies such as insurers, you're dealing with tens if not hundreds of different accounting systems, including home-grown ones."

Despite the benefits of RDC, its adoption in other industries, and its proven successes at companies such as ACUITY and Texas Farm Bureau Insurance, RDC has been slow to catch on across the insurance industry as a whole. "It's not very prevalent yet," Sarich says. "Essentially, many insurers have turned the problem of handling checks over to their banks."

For the most part, insurers are either still evaluating RDC or making limited deployments. Aetna, for instance, recently has begun using RDC in a "small pocket of business," according to a company spokesperson.

Part of the reason behind the slow uptake in insurance is, while insurers have made many investments in imaging technology, it can be difficult to leverage legacy imaging assets for RDC. Problems can include poor image quality that doesn't meet Check 21 or bank specifications or the inability to perform OCR or read the magnetic ink character recognition (MICR) line on checks without a hardware upgrade or new software.

"To image the checks themselves, companies really need specialized equipment in order to ensure they will have the lowest possible rate of rejects," says Feinberg.

"The existing scanning equipment we previously had was not up to the needs" of RDC, Schneider confirms.

Companies often can source scanning equipment from their bank, which may be eager to help solidify a customer relationship.

"Most companies do tend to start with their bank, which usually will offer a package of services including both software and scanners. Also, banks increasingly are specializing their RDC services by industry and integrating those services into their overall cash management portal, where users at the insurance company already are online transacting with the bank," Feinberg says.

"We are using hardware provided by our bank, but we wouldn't have to," Schuler says. "It simply had software and hardware providers it was familiar with [that the bank uses itself], and we saw what it offered was effective."

But other companies, particularly those with captive agencies or a network of branches, may benefit from a third-party RDC hardware and software solution.

"If you work with your bank to obtain the imaging solution, you know it's going to meet its requirements, but you have to be willing to use what it offers. For companies that want to make their own investment or for distributed companies that deal with multiple banks in differing regions, it might make sense to go to a dedicated RDC vendor. However, you then have to make sure the banks you deal with will accept what you send them and to work with a vendor that can manage multiple banking relationships," Sarich advises.

Carriers that do deal with multiple banks and then obtain a third-party RDC solution may find this course of action leads to consolidating their banking relationships. This also can work to the benefit of companies by increasing volume and leverage.

"Consolidation is a driver for us as we go forward," Schneider says. "Most of our offices are not in major metro areas, and it can be difficult to find branch offices of the main bank we use in rural locations." Extending remote capture to the field could make the issue of having local bank branches irrelevant.

Texas Farm Bureau Insurance also must solve the problem of how to keep 261 scanners maintained and whether its banking provider, an outsourcer, or its own internal resources would best handle that challenge. However, technology issues aren't the primary inhibitor to rapid adoption of RDC in the insurance space–business issues are.

By design, companies have different workflows for payments vs. other incoming documents, and check imaging equipment typically is separate from enterprise document management technology. This can lead to the debate of whether or not to make the investment in check-processing equipment.

"Because check capture is a back-office function, a lot of insurers have hesitated to invest in it and are pushing paper around," Sarich reports. "Also, some companies look at ROI in terms of reducing head count, and there's not a big savings in bodies with RDC. Carriers need to understand what they're gaining in terms of efficiency and faster access to funds."

There also is a potential new risk to manage with RDC, because in most cases the insurer, rather than the bank, assumes responsibility for making sure checks aren't processed as IRDs and then submitted again as original documents. This is a particular concern when extending remote capture to the field.

"There is very little fraud perpetrated with RDC, but it could be done," Gould says. "You have to have faith in the people who are doing the processing."

Analysts anticipate banks and RDC vendors will add more industry-vertical features to differentiate their product offerings and gain customers.

"I expect to see banks extend additional support to customers as they move away from paper checks, whether they're digitized paper checks or pure electronic payments, and as they support additional payment types," Feinberg says. "Banks, particularly those that already handle large volumes of checks for insurance companies, are evolving their payment solutions to meet industry requirements."

Moreover, even though check payments will be around for the foreseeable future, electronic payments–including credit and debit cards, ACH transactions, and electronic funds transfer (EFT)–are growing at a combined rate of 12.4 percent per year, reports the Federal Reserve. Therefore, it's important the RDC document management solution an insurer chooses fits into a consolidated payment technology framework.

"Insurance companies are getting payments of all types. They need a gateway that can process those payments according to the different rules for different types, that simultaneously can support field agents and customers, and that can get information seamlessly into their general ledger," Sarich says. "That's the next frontier."