Mitek Systems: A Surging Smart Phone Play

Dec.28.10 | About: Mitek Systems (MITK)

“Mitek Systems is the leading innovator of advanced Image Analytics and Optical Character Recognition ("OCR") software that captures and reads data from any scanned document. A pioneer in intelligent recognition technology since 1985, Mitek Systems' software is used by the top 5 financial institutions in the United States and is used to process over 10 billion checks per year, monitor elections in the U.K. and mange container shipments in Singapore.“

Mitek has been leveraging its OCR capabilities to provide solutions for the booming smart phone market. Two of the company's products which excite me are the following:
  • Mobile Deposit – Enables users to deposit their check by taking a picture of check using their smart phone. Available for iPhone, Android, Blackberry and Windows Phones
  • Mobile Photo Bill Pay – Enables users with smart phone to snap a picture of their bill and pay them. Available for iPhone currently, soon for other platforms.
Mobile Deposit
Digital Check Processing Background (Check 21 Act)
    • A side effect of the law is that it is legal for anyone to use a computer scanner to capture images of checks and deposit them electronically, a process known as remote deposit.

    • Paper checks continue to transition to electronic images at an extraordinary rate with almost 70% of all institutions now receiving images.

    • The process of removing the paper check from its processing flow is called truncation. In truncation, both sides of the paper check are scanned to produce digital images.

    • Once a check is truncated, businesses and banks can work with either the digital image or a print reproduction of it. Images can be exchanged between member banks, savings and loans, credit unions, servicers, clearinghouses, and the Federal Reserve Bank.

    • Check 21 has also spawned a new bank treasury management product known as remote deposit. This process allows depositing customers the ability to capture front and rear images of checks along with their respective MICR data for those being deposited. This data is then uploaded to their depositing institution, and the customer's account is then credited. Remote deposit therefore precludes the need for merchants and other large depositers to travel to the bank (or branch) to physically make a deposit.

    • Not all banks have the ability to receive image files, so there are companies who offer the service

  • The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, Pub.L. 108-100, enacted into law October 28, 2003 by the 108th Congress. It took effect one year later, on October 28, 2004. The law allows the recipient of the original paper check to create a digital version of the original check—called a "substitute check," thereby eliminating the need for further handling of the physical document.
Source: Wikipedia
Banks have recently started to offer remote deposit to their clients though smart phones. Mitek is a leader in this space. Mitek’s technology cleans the image of the check taken with the smart phone to “Check 21” compliant quality. It also extracts the payment data from the check for the banks to process them.
Big banks that develop their own applications can buy this technology directly from Mitek. Mitek has also partnered with leading bank technology and payment processing providers to make this technology available to smaller banks.
Mitek has signed distribution agreements with the following technology providers.
  • NetDeposit
  • NCR
  • FIS
  • Fiserv
  • ClairMail
  • RDM Corporation
  • J&B Software
  • Secure Payment Systems
  • Skyline’s DirectFED Payment Solutions
  • Wausau Financial Systems
Recent Deals for Mitek’s Mobile Deposit
Mitek has stuck a some deals with small banks in 2010
But the game changers I believe are Paypal, Chase Bank deals and the patent which Mitek was granted for the Mobile Deposit Application.
With a major bank like Chase introducing check deposit via smart phones, I expect this feature to become standard pretty soon. I expect all major banks to adopt this feature going forward. Mitek, with its leadership and patent, should benefit greatly from this move. Chase Bank and Paypal's use of Mitek’s technology add immense credibility.
Other banks which have announced this feature include:
USAA Bank – One of the earliest to introduce in 2009
State Farm Bank in Aug 2010
Lubbock National Bank in Dec 2010
US Bank in Aug 2010
Bank of America (NYSE:BAC) currently working on this feature
Note: The above mentioned banks may not use Mitek’s technology. I have put the names to illustrate the adoption of this feature by the industry.
Mobile Photo Bill Pay
Mobile Photo Bill Pay is another of Mitek’s exciting solutions. My view is this solution will be bigger than Mobile Deposit. Bezard predicts mobile payments will account for $214 billion in gross dollar volume by 2015, up 68 percent from 2010. Mitek has applied to the U.S. Patent and Trademark Office for a patent on image-related processes performed by Mobile Photo Bill Pay.
This feature (like mobile deposit) will be integrated with a bank’s smart phone application. Users just need to take a picture of the bills they intend to pay with their smart phone and Mitek’s technology will do the rest to help the banks process it.
Though it is still early days for this application, it is a natural continuation to the Mobile Deposit application. I expect banks to introduce mobile photo bill payments very soon. You can find more details on Mobile Photo Bill Pay here.

Mitek is a leader in a niche space (optical recognition) of the exciting Mobile Banking and smart phone applications market. It has run up a lot recently, but is worth adding to your “BUY ON DIP” list.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MITK.OB over the next 72 hours.