ZIFFPAGE TITLEBeyond Branch BankingBy Tom Steinert-Threlkeld | Posted 09-07-2005
UPS Delivers Real Presence for Virtual Bank
Chris Erice works for a medical services company in downtown Honolulu. He's surrounded by banks. The nearest teller machine is located less than 100 feet from the lobby of the office building in which he works.
So when he wants to make a deposit to his savings account, he walks a block away.
To the UPS store.
No, United Parcel Service has not suddenly morphed into a savings and loan. Nor has it become a bank. It remains a package delivery company.
Erice instead is a customer of a bank that exists only online. His bank, called NetBank, is based in Atlantalike UPS.
NetBank is using the retail staff of its crosstown corporate cousin to act as its own nationwide set of deposit-takers. It operates no branches.
Instead, UPS' 3,800 stores instantly solve the most vexing problem facing a bank without walls: how to take in checks from customers when there is no one to hand them to and essentially no machines for sucking them in. And do it speedily.
"We have time-starved customers," says Sonja Kennedy, NetBank's director of operations. "We have to fulfill any needs they have"without being able to talk to them, face to face.
Until this year, NetBank relied on conventional approaches to taking deposits. More than half 53%of deposits were payroll checks, expense reimbursements or other items that could be processed electronically and automatically, from a transmitting account to its receiving center in Alpharetta, Ga., an Atlanta suburb.
The other 47% were handled by mail. The mechanism? A postage-paid business reply envelope.
The problem? Time.
For Chris Erice, it could be seven business days before a deposit wound its way through the postal system to Alpharetta.
"We wanted to shrink that time for our customers and make it look like they walked into their own branch" of NetBank, Kennedy says.
With only two teller machines able to take deposits for this Internet-based bank, NetBank had to get creative.
And it had to do it in short order. Ten years old, NetBank may have "risen to the top of the Web-only banking heap," as business chronicler Hoovers.com puts it, but its bottom line still left much to be desired.
Losing money in 2002, the company had earned a record $50.5 million in 2003, then watched all but $4.2 million disappear in 2004. Revenue fell from $435.8 million to $346.9 million. The culprit? Its attempt to be a "financial intermediary," a.k.a. mortgage broker. That business went into a tailspin in 2004, as interest rates rose.
Pretax income in the company's "financial intermediary segment" dropped from $158.1 million in 2003 to $23.2 million in 2004, according to company filings with the Securities and Exchange Commission.
NetBank set out to firm up its footing, getting equal parts of its revenue and profits from brokering financial transactions, processing transactions for itself and other institutions, and online banking.
The UPS deal would help the company balance on two of those three feet.
Talking to UPS about how the banking business could really be an extension of its package delivery business fell to Mickey Ross, chief of strategic initiatives at NetBank.
The pitch? That taking deposits would be a new way of getting more people to come into its stores. UPS had spent $200 million in 2001 to acquire Mail Boxes Etc. That gave it a nationwide set of nearly 4,000 storefronts to deal, in person, with Americans of all stripes. Rival fast delivery service FedEx followed suit, and then some, spending $2.4 billion last year to acquire the 1,200-outlet Kinko's chain.
ZIFFPAGE TITLEChecking for the 21st
Checking for the 21st Century
The NetBank-UPS talks began in early 2004, months before new federal banking legislation known as the Check Clearing for the 21st Century Act would take effect. The law was designed to greatly speed up the rate at which banks process checks.
No longer would banks have to use paper checks to record deposits. Instead, they could take electronic images of checks, transfer those images, record them and process them as legally as they had in the past dealt with paper.
In fact, in the next two years, teller machines will start popping up across America that take in checks, immediately convert them into images and ship them wherever they need to be processed and posted. The paper in the bottom of the bin will be superfluous, kept for a couple of weeks in case of dispute and then shredded.
Over four months, though, it became clear that UPS was not interested in putting teller machines in all of its stores. The equipment was expensive (about $25,000 each). And that would have to be borne by the franchisees.
Besides, who needed the machines when you had a store that had staff who already knew what to do with envelopes?
What NetBank and UPS worked out instead was a simple process for taking deposits. Any NetBank customer could walk into any UPS store, drop off a check and have it sent to the Alpharetta processing center. At no charge.
UPS, for its part, would drop any and all deposits picked up during the day at any of its stores into a single envelope for overnight delivery. As deposits multiplied, NetBank would save money over having each deposit sent in separately by business reply envelope.
And the time savings to customers like Erice would be dramatic. Deposits brought into a UPS store before noon on any given day would be in Alpharetta the next. The customer would see the amount posted no later than the next day.
A week of waiting would be pared to one or two daysalmost the same as with an automated teller machine around the corner. "It's funny how I am so far away from NetBank's facilities, yet can conduct my bank activities as if there were a branch locally," Erice notes.
From NetBank's view, the rollout has been successful. Begun in March, the UPS service now accounts for 30% of mailed-in deposits.
But the relationship with UPS and its stores can do more for NetBank than simply speeding up deposits for its own customers. What the service can do, potentially, is feed the transaction processing part of NetBank's business as well.
Purposely, the envelopes and the service that take in NetBank deposits were not named after NetBank. Rather, they were named for what they constituteQuickPost. As in quicker than the Postal Service.
In effect, any check destined for any bank could be put into a single QuickPost envelope at any UPS store. The checks wouldn't have to be from NetBank customers. All NetBank would have to do, in Alpharetta, is process those checks. Other financial institutions would become customers of NetBank. Which only makes the overnight envelopes cheaper, per item.
Say NetBank signs up fast-growing Commerce Bank, now operating mainly in New Jersey and other Northeastern states, as a customer. Commerce Bank immediately becomes a national bank. Chris Erice in Honolulu or Brian Murphy in Plano, Texas, can make overnight deposits by stopping in at a UPS store. Even if the deposits sent in are for Commerce Bank, not NetBank, they will be processed by NetBank in Georgia and routed to the right check clearinghouse.
The QuickPost envelope can be agnostic to the entire mix of deposits or payments that get put inside it. And the UPS store agent has a simple task: Put each deposit in the same envelopeand while the person is in the store, sell something else before the door swings back open.
"There is very little for the store owner to do," says Sean O'Shaughnessy, UPS' vice president of marketing and sales.
The main glitch in the startup phase: clerks who either didn't get training in how QuickPost would work, or who forgot what they had learned. But NetBank used a series of mystery shoppersa telephone-calling crewwho would dial up each store and ask about QuickPost. If the person who answered the phone knew what to say and how the service worked, no further action was taken. If an inquiry brought a blank or faulty response, the store manager would be contacted and a new training session set up.
Eventually, NetBank could sign up insurance companies, brokerage houses and other companies that want to serve customers nationally and want a convenient, low-cost means of pulling in checks every day. The company has two patents pending on its deposit-forwarding service. And expectations are high.
The potential revenue for NetBank from processing transactions that are dropped off at UPS stores "could be unlimited at this point," Kennedy says. "It's so new."
UPS also wants to find "creative combinations" of its retail outlets and its express delivery services. For instance, owners of Toshiba laptop computers can drop off their ailing machines at a UPS store for repairs. They'll be sent to UPS' distribution center in Louisville, Ky., inspected and fixed by UPS at a repair facility there and shipped back.
ZIFFPAGE TITLEBeyond Branch Banking
Beyond Branch Banking
And QuickPost is economic "even if NetBank is the only bank that ever uses it," Ross says. The cost of setting up and maintaining the program, he asserts, is less than opening a single brick-and-glass bank branch.
Back on Main Street, NetBank customers may not notice the lack of brick, anyway. They still can get to their money. Even if only two teller machines in Atlanta take deposits for NetBank, the company operates a network of 8,000 cash-dispensing teller machines in convenience stores, groceries and other high-traffic locations.
It's also probably just a matter of time before those machines take deposits. In the Check21 era, deposit envelopes may disappear from teller machines. Customers will simply slide their checks into a receiving tray, which will capture an image of the check. The electronic version then becomes the official "check" and can be transmitted anywhere in the country for processing, according to Ross.
This approach should cut down on errors, by reducing the amount of times a piece of paper is interpreted and its contents typed by a bank clerk into a data-collection or transaction processing system. Alogent, a software company that is automating the process, estimates that errors surface in the handling of 3% of checks. If a bank is handling a million checks a day, "that adds up pretty quickly as a big, big expense," says Bob Izzo, Alogent's senior channel executive.
The mechanics of "truncating" checks and securely exchanging images instead are being worked out by a group of institutions known as the Financial Services Technology Consortium, which includes Citibank, Commerce Bank, JP Morgan Chase and Wells Fargo.
And make no mistake: Bank customers are particular about how their deposits get handled. Even a process as simple as the drop-off at a UPS store can leave Erice a bit unsettled.
As Erice puts it: "A tiny part of me is uneasy about handing over my deposits to a 20-something-year-old clerk and wondering if my QuickPost envelope is ever opened when I leave the store."
ZIFFPAGE TITLENetBank Base Case
NetBank Base CaseHeadquarters: 11475 Great Oaks Way, Alpharetta, GA 30022
Phone: (770) 343-6006
Businesses: Online consumer banking; mortgage intermediary; financial transaction processing.
Chief, Strategic Initiatives: William M. "Mickey" Ross
Financials in 2004: $346.9 million in revenue; $4.2 million in net income; net profit margin 1.2%.
Challenge: Find way to compete on convenience and speed with teller machines and bank branches, in taking checks and other paper deposits from customers.
- Cut transit time of getting check deposits to processing center in Georgia to two days, from five.
- Increase number of banking customers to 500,000, from 270,000, in no more than six years.
- Double the number of products sold to each customer to four, from two.