The Securities and Exchange Commission has proposed that firms beef up their disclosure of cash sweep policies.  The proposal, part of a little-noticed package of rules floated by the SEC this month, would require broker-dealers to provide a quarterly notice to customers telling them that they can opt out of a default sweep option and choose another vehicle for their cash.

Sweeping customer cash into low-paying bank accounts — a growing industry practice — has caused concern among regulators.

The SEC also wants clients to get a 30-day notice before their sweep option is changed, and it wants new customers to agree beforehand that a firm can switch their cash investment options.

“There may be consequences to changing sweep options, and we believe that customers should have a sufficient opportunity to make an informed decision,” the SEC’s proposal stated.  Two years ago, the New York Stock Exchange recommended that firms improve disclosure of cash sweep options. The NYSE didn’t call specifically for notice of an opt-out option.

Firms Disclose Now
The SEC’s proposed rules may formalize some industry practices adopted in the wake of the NYSE’s recommendations.

“Where NYSE guidelines are in effect, industry firms should be in compliance,” said Travis Larson, spokesman for the Securities Industry and Financial Markets Association of New York and Washington.

The trade group will file a comment letter on the proposal, he said.

“We’ve always disclosed that clients can opt out by calling their financial adviser and having them put it in a money market,” said Smith Barney spokesman Alexander Samuelson.

Smith Barney, the brokerage unit of New York-based Citigroup Inc., changed to a tiered bank deposit sweep program in September. Prior to that, it had been paying money market rates on its deposit accounts, regardless of client size.

Most large firms require at least $100,000 in assets before a customer begins to earn a higher rate on bank deposits.

Merrill Lynch & Co. Inc. of New York requires $250,000. The firm was recently paying a starting rate of about 1.4% on its deposit account, versus nearly 5% on a money fund.

Firms say that clients can always check rates online.

A Merrill broker, who asked not to be identified, said that the firm’s account-opening forms require brokers to indicate whether they have discussed money market options with clients.

The NYSE said in its 2005 notice that registered reps “would be expected ... to determine the appropriate money market choices.”

Mr. Samuelson said Smith Barney makes it clear to clients that its bank deposit sweep is more profitable for the firm.

Requiring disclosure of an opt-out option might encourage more clients to use money funds, the Merrill broker said.

“It might start that conversation,” he added.

Some brokers said they already use higher-yielding money funds, especially if a client keeps significant cash holdings for extended periods.

The drawback is that in most cases, if a customer opts out of the default sweep, brokers must manually move cash into a money fund.

Important Business
Using lower-yielding bank deposits for customer cash boosts profits at brokerage firms’ affiliated banking operations.

Charles Schwab & Co. Inc. in San Francisco, Morgan Stanley of New York and Wachovia Securities LLC of Richmond, Va., also use bank deposit programs with tiered rates.

Merrill has been the most successful in directing assets into its bank accounts. It reported $84 billion in deposits at the end of last year.

The practice of sweeping client cash into lower-paying accounts has also attracted the attention of plaintiff’s attorneys.

In January, a class action was filed against Citigroup, Merrill, Morgan Stanley and Schwab. The suit, filed in the U.S. District Court for the Southern District of New York, alleged that the firms’ sweep programs weren’t adequately disclosed to customers under state law.

The trip to the bank to deposit customer checks is a timeworn ritual for many small-business owners. But for some, it’s becoming a thing of the past. They’re depositing their checks over the Internet.

TS Adams Studio, Architects Inc. began depositing checks remotely when it switched banks two years ago. Remote deposit “immediately appealed to me because I’m the one that makes all the deposits,” says Kelli Adams, the accounting manager at the eight-employee family business in Atlanta. The service came free with the account, she says.

“You can bank virtually anytime you want; you’re not tied to the banking hours of nine to five,” says Ms. Adams, who used to drive to the bank almost every day to make deposits. “It’s a more efficient way to run a business. I don’t have to leave the office to do my banking, I can do everything from my desk. That is huge.”

All a business needs to make remote deposits is a personal computer, an Internet connection and a scanner. Most systems require a specialized scanner, although newer systems need only a multiuse scanner and for some a camera phone will do. Companies that receive any volume of checks will want a specialized scanner, since processing checks with a typical office scanner will quickly become tedious.

The service isn’t usually free, although it might be discounted if it’s bundled with a business-banking package. Prices vary widely, depending in part on the number of checks deposited monthly, but many banks charge between $25 and $80 a month to accept remote deposits; most also charge for a scanner. In general, though, prices are coming down and are expected to continue to fall as competition among providers heats up.

A 2008 survey of about 300 U.S. businesses with less than $10 million in annual revenue found that 16% were using remote deposit, according to Aite Group LLC, a Boston financial-services research and consulting firm. It predicts 25% of businesses of that size will be making remote deposits by the end of this year.

Beyond Deposits
Some banks offer software applications that not only allow companies to make remote deposits but also help them process checks internally. The Epilepsy Foundation, a nonprofit in Landover, Md., with about 70 employees, cut in half the time it spends processing checks when it started using software from TD Bank Financial Group’s TD Bank.

The foundation can receive 200 to 300 or more checks per month. It used to take an accounting assistant two full days each week to make copies of the checks and input the details of each check into the foundation’s accounting system. Another employee would run the checks to the bank. Now, the checks are deposited over the Internet, and when they are scanned their details are automatically entered into the accounting system. “We’re saving a lot of time and a lot of paper,” says Diane Rubinstein, the foundation’s controller.

The system took only a day to learn, says accounting assistant Nicole Ryan. “I thought it was going to be complicated and time consuming, but it’s a lot easier than our method was before.”

Jack Murphy, TD Bank’s senior director of business banking, says the bank’s remote-deposit service also can help users’ cash flow, as customers who make remote deposits by 9 p.m. have access to those funds the next day—a feature that isn’t offered by all banks.

Staying Protected
Not all small businesses will be eligible for remote deposit. They’ll need a healthy credit history and a good relationship with their financial institution, including no record of regular check bouncing. “Most every bank or credit union has some measure of qualification criteria,” says Bob Meara, a senior analyst at research firm Celent.

The risk of hackers breaking into a remote-deposit program is about the same as that associated with any online banking activity, says Michael Kaiser, executive director of the National Cyber Security Alliance, a nonprofit based in Washington, D.C.

In addition to taking the usual security measures of using regularly updated antivirus and antispyware software and a firewall, as well as the latest versions of computer operating systems and Internet browsers, it’s a good idea to have a password that is unique to the deposit program, he says. The organization also encourages small-business owners to ask their banks whether additional levels of protection are available, such as a token that generates a new access code at fixed intervals.

Another risk is that a check will be scanned more than once, but most systems are set up to detect such mistakes, says TD Bank’s Mr. Murphy. Most systems also alert users to checks with a mismatch between the dollar amount written as a number and the amount spelled out in words, a common check-writing error.

Population Action International, a Washington-based nonprofit that promotes family planning and reproductive health, has been using remote deposit for about three years with only one glitch. It receives about 15 to 75 checks a month, and scans all but one—from the same monthly donor. “Her checks don’t go through, and we don’t know why,” says Rachael Murray Rakestraw, vice president of finance and administration at the nonprofit. An employee takes the check to the bank with the cash that donors sometimes mail in.

The glitch isn’t a common one, says Lauren McClintock, a spokeswoman for TD Bank, where Population Action banks. It’s likely caused by faulty printing of the numbered coding at the bottom of the checks, she says.

When Atlanta's Piedmont Bank made the jump into image deposit capture more than a year ago, the small business bank expected to nab some additional activity from remote clients.

What they didn't expect to capture was a remote suitor.

When its annual deposit processing volume from small corporate customers exploded from $500,000 to $40 million, and interest-bearing net deposit activity grew 30 percent, Piedmont caught the eye of Chicago-based PrivateBankcorp. After some short talks, the two companies closed in December on a $47 million merger agreement that will turn Piedmont into The Private Bank of Atlanta, the new Southeast hub of the $4 billion wealth management specialist. The deal also unofficially made the former Piedmont team the coaching staff for remote deposit capture deployment for the rest of The PrivateBank's six other branches.

"They see Remote Deposit Capture [RDC] just like we did 18 months ago, as the wave of the future," says The PrivateBank Atlanta president and CEO Brian Schmitt, whose teams were recently dispatched to sister branches in Chicago and St. Louis for remote capture Q&As. "They're looking to us and our expertise to help them be successful."

In its short time frame on the banking scene, remote deposit capture has grown from novelty to near-necessity and engendered a host of secondary and supplementary outcomes-some good, others worrying-in areas of operations, risk and strategy. Like the ATM technology launch of the 1970s, bank pros are experiencing growing pains as well as surprise benefits in the transformative technology, as they cobble together a roadmap for best practices and standardization.

RDC is one of the most actively adopted technologies today in the industry. Dozens of new vendors have sprouted in that time, hundreds of banks have entered the fray, including two-thirds of the top 100 U.S. banks, and thousands of companies have gone live on capture "with increasing velocity," according to Celent.

Many banks are only now beginning to substantiate what RDC means for the institution. Central Bank of Georgia, a $250-million asset institution south of Atlanta, took on a hosted ProfitStars solution from Jack Henry & Associates to help recruit new DDA business outside its footprint. After a year, the bank solved that with $72 million in new deposits on its books. But what RDC also did was also kick start the bank into electronifying its entire item processing operations. By launching remote deposit capture, says Frank Lester, vp of IT, "that kind of pushed us along to implement Check 21. We didn't have any really justification for that before."

Another ProfitStars customer, Reliance Bank in St. Louis, discovered in only six months on remote deposit capture it could reconfigure RDC to serve in place of a full-blown lockbox operation for one of its medical billing clients. "They process in one part of their business 500 checks a day," says Dale Oberkfell, COO and president of Reliance. "They moved out of the lockbox environment and went to the [modified] remote deposit capture. We helped them achieve the same results as they had before for significantly less money."

Convincing a relatively high-volume check customer to take the wheel of a major cash management task has in turn persuaded Reliance to start thinking of taking on bigger customers it previously couldn't attract without full-service treasury ops. "The technology has shown us that we have ability to compete more aggressively," says Oberkfell.

It's not just the little guys making surprising leaps and bounds with the fast-maturing product. A report from Celent details how Pittsburgh's PNC Bank last fall linked remote deposit direct to its account receivable product for sending items directly to one of its wholesale lockbox operations and automating the remittance process.

But as quickly as banks discover and celebrate new uses and advantages, many others are heeding the caution flags on remote capture. Vendor solutions currently offer a wide mix of selection and choice involving varying hardware and deployment options-in-house or ASP, installed-desktop or Web-based options-which heighten bank fears of choosing the wrong horse before standards settle in. Fraud is a major worry, as is risk, marketing, pricing and those post-purchase conundrums like image quality issues.

An official with a California institution that went with remote capture says the institution had to maintain its cumbersome IRD infrastructure because all of the variables on bank check stocks- varying sizes on business checks, odd background colors, watermarks, payee field location, etc.-make it impossible to clear imaged items.

"I have heard a few difficulties with imaging, stories of people who have tried to process checks with fancy images, which poses a problem with transmission," says Kim Sutherland, director and COO of consulting firm Market Line Associates. "The technology may be overselling itself in terms of volumes and the number of problems...but I also have heard that it's getting better."

Some banks have experienced some disappointing return on expectations, particularly as a new business magnet for this greatly demanded commercial banking product. It's just not been "the hook to drag in new business," says Sutherland. "So it's less exciting to them than it would have been otherwise."

That doesn't speak for all banks: many have been reluctant to turn to RDC for attracting new customers because of the due diligence and know-your-customer requirements that an RDC client deployment entails. "You don't want to swing this product to every Tom, Dick and Harry," says The PrivateBank's Schmitt, whose institution adopted an ASP-based product from Goldleaf Financial Solutions. "In essence, we're extending credit to these people. We underwrite and risk rate these clients as if we're making a loan."

The types of clients RDC is geared for are affecting how the product is sold and marketed. Several banks say the sweet spot is falling within the low-volume, high-value-item businesses like medical and legal offices, title companies and auto dealers. There is also plenty of head-scratching on how, or if, to charge some clients for the service. Those that can get it free or a major discount are the ones saving the bank a ton of expenses on discontinued courier fees, or who build compensating account balances. Others might pay a monthly fee and a higher equipment lease charge if their volumes don't justify comps. "For a lot of customers, we don't charge anything, but others pay a $25 a month flat fee," says Central Bank of Georgia's Lester. "The per-item cost would kill us for somebody who had a large volume of items."

Banks must also trust a client will properly operate the equipment and follow the same security and anti-fraud standards the bank must adhere to. Without the check in hands themselves, banks offering RDC must ensure that clients are making legible scans with accurate remittance and then disposing checks just as the bank's back office would.

If there's one knee-knocking fear that The PrivateBank's Schmitt hears most from counterparts still weighing RDC, it's about that loss of partial process control. "The fraud aspect scares the living hell out of them," says Schmitt. "They can't imagine not having a check in hand."

A client's check-handling procedures are one of the questions that examiners are starting to raise about remote deposit services, according to Oberkfell. "We had an exam in August of last year and...we were the first bank [in the region] that actually had taken the time to share the process with them."

For banks that have invested heavily in CRM tools, it's hard to imagine the benefits of surrendering the cross-sell opportunities from lightened foot traffic from business customers in branches. Oberkfell, whose bank thrives on the relationship-centered arena of small-office/small-business clientele, sees some drawbacks in the otherwise astounding deposit volume shift that remote deposit has achieved. RDC outstrips the activity in seven of Reliance's 17 branches, and by next year will be the largest source of deposit volume among all branches. "That's probably the negative to the whole process, in finding those alternative cross-sell opportunities," says Oberkfell. New efforts will likely have to come during house calls to client back offices, as Reliance's cash management advisors make the rounds in making sure companies are following the right procedures for handling scanned checks and securing personal data.

Sutherland believes that as RDC matures, standards and market preferences will start to settle in and businesses will come to expect, and demand, the ability to skip their daily or weekly trip to the branch. And there will be continuing challenges for banks of all sizes. "If you are a bank attempting to be a business bank and that hasn't been a core market for you from the beginning, you will have more difficulty with this," says Sutherland. "But then, the business community expects them to be a little bit on the leading edge."