FINspeak

In November 2008, Federal Reserve announced that it would further expedite rationalization of check processing sites and by the end of 2009, Federal Reserve Bank of Cleveland will be the only paper check processing site. Effectively, Federal Reserve will reduce the physical check processing sites from 45 in 2003 to only one by the end of 2009. Even after considering a few other limited services sites being operated by Fed, this is a great success story, which also resulted in meeting the expectations of the 1980 Monetary Control Act, which requires Fed to recover the cost and earn profit in line with a private business firm.

Check 21, which is at the core of image-based check processing, has also enabled rapid growth of RDC service by financial institutions. As per Celent assessment, over 3,000 new implementations will result in an estimated 7,200 RDC-deploying financial institutions through 2008, resulting in an estimated 382,000 users/scanners by year-end 2008, a 72% year over year growth.

The success of image based check processing highlights some of the key characteristics of the market, which will shape the payment processing industry. First, payment processing is not only a service offering but also it can be a significant competitive tool for the financial institutions. RDC has become a core part of deposit capture strategy of the financial institutions. Second, market participants especially commercial market is open to redefine its interactions with financial institution if there is a justifiable business case. Though the jury is still out about the adoption of RDC for consumers, many significant players and ASPs are betting on it. Last, success of Federal Reserve corroborates a growing market perception that there are opportunities not only at the front-end e.g. mobile payment but also at the back end of the payment processing industry.  Should we look forward to coming changes and increased competition in the back end payment processing and network space?