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The Green Sheet Online Edition

September 24, 2012 • Issue 12:09:02

Insider's report on payments
Check fraud is the problem, RDC is a solution

By Patti Murphy
ProScribes Inc.

Check fraud is a serious problem that has plagued financial institutions and their customers for almost as long as checks have existed. But remote deposit capture (RDC) can help temper the problem.

According to the American Bankers Association, 73 percent of U.S. banks reported check fraud losses that, combined, totaled $893 million in 2010. Attempts at fraud, had they been successful, would have amounted to $11 billion in losses, stated the www.factbrowser.com/facts/4284" target="_blank">2011 ABA Deposit Account Fraud Study.

The 2012 AFP Payments Fraud and Control Survey, published by the Association of Financial Professionals Inc., shows that checks remain the payment type used by corporations that is most vulnerable to fraud. Among companies surveyed,14 percent of victimized banks suffered financial losses as a consequence in 2011, according to the AFP.

But some of the most telling data came from an analysis using statistics from the Federal Reserve Payments Study undertaken by Rich Oliver, former Executive Vice President at the Federal Reserve Bank of Atlanta. Oliver's number crunching revealed the per-item cost of fraud doubled between 2004 and 2010, even as the aggregate number of checks written fell by 26 percent. The per-item cost of check fraud losses worked out to 18 cents in 2004; in 2010 the cost was 36 cents per item, without adjustments for inflation.

This got me to thinking about RDC and the Check Clearing for the 21st Century Act - the federal law that makes possible the exchange and processing of check images (or IRDs, for image replacement documents) in lieu of the paper. In theory, RDC should reduce opportunities for fraud since it shortens the clearing cycle, which makes it easier to identify fraudulent check deposits before fraudsters abscond with the funds. But the latest iteration of RDC relies on images captured by mobile devices, such as smart phones and tablets, and mobile financial services are a source of great consternation for many Americans.

According to Consumers and Mobile Financial Services, published in March 2012 by the Federal Reserve Board, the most common reason consumers give for shunning mobile payments is concerns they have about the security of mobile payments. Asked specifically about the security of personal financial information when using mobile banking applications, 36 percent said they believed it was either somewhat or very unsecure.

And these fears are not unfounded. Juniper Networks Inc., a Sunnyvale, Calif., firm that keeps tabs on mobile threats, reported a 155 percent increase in mobile malware incursions between 2010 and 2011. Google Inc.'s Android platforms are especially vulnerable: in the last seven months of 2011, malware targeting the Android platform jumped a whopping 3,325 percent, according to Juniper's 2011 Mobile Threats Report released in February.

The many faces of check fraud

Check fraud can come in many forms. Counterfeits and kiting are two of the most common. When RDC is added to the mix multiple presentments and money laundering are the attention grabbers. Kiting is less problematic in an RDC scenario because check clearing float is practically eliminated, and kiting is a fraud that takes advantage of float.

Multiple presentments aren't much of a problem for RDC either, said John Leekley, founder and Chief Executive Officer of RemoteDepositCapture.com, an online resource focused on RDC. Leekley posed a scenario in which an unscrupulous business owner enters into RDC relationships with multiple banks.

"Sure, they might take a check and run it through each bank's scanner," making multiple deposits of the same item, Leekley said. "But it would only happen once." As soon as the paying bank receives the second item they'll shut down the account, he added.

The truth is in the data. Bob Meara, a Senior Analyst at the consultancy Celent LLC who frequently surveys the RDC market, said recently that 90 percent of financial institutions that have implemented RDC report no fraud losses from remotely deposited checks. Meara said fraud can be discovered faster in an RDC environment than a branch, where checks can sit in piles for hours until they are sent for processing.

Even more telling, only 1 percent of the companies in the AFP's payments fraud survey reported that someone had used electronic check conversion services to defraud the company, and that percentage was unchanged from 2009.

Taking a bite out of check fraud

Bankers and vendors feel this is no coincidence. Federal regulators have put banks and credit unions on notice that they are looking closely at RDC programs during scheduled supervisory exams. The bank and credit union regulators also jointly issued detailed guidance on how best to manage RDC risks, including fraud risks.

"The most important consideration with RDC and with mobile, too, is having a comprehensive risk management plan," said Sam Golbach, Senior Vice President, Integrated Receivables Financials, at Wausau Financial Systems Inc. That includes keen attention to know-your-customer procedures. "Very few institutions are opening this up to everyone," he noted.

Additional steps include customer deposit limits, availability holds, velocity limits and ironclad hardware and user authentication. For example, check scanner manufacturers have developed techniques for identifying devices that have been surreptitiously moved. And software providers have added sophisticated risk analysis tools to their RDC offerings, including real-time, cross-channel monitoring of customer deposits.

But here's the big plus: because the checks and associated data that accompany remote deposits get digitized, stored in archives and can be shared in real time across multiple platforms, it's easier to identify suspect items and patterns of activity that point to money laundering.

Traveler's checks and money orders have always been favored instruments of money launderers and were an impetus for the earliest anti-money laundering laws. And according to a recent report by the U.S. Senate Permanent Subcommittee on Investigations, money launderers continue to use traveler's checks and money orders to skirt the law.

Check fraud, and especially money laundering, takes advantage of shortcomings in the way checks are written and processed. With millions of paper checks exchanging hands each day, identifying fraudulent items is like finding a needle in a haystack. With RDC, every item enters the clearing system as a digitized image and is analyzed in real time for fraud and other anomalies. That's why RDC is a winning strategy and just one more reason why checks are here to stay. end of article

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

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