Taking a Bite Out of Check Fraud

By Patti Murphy
Friday, March 29, 2013

New Tools Help Ferret Out Duplicates

Check fraud is an ever-present threat to banks and their customers. But the threat has been diminishing. Yes, it’s true. And rapid adoption of remote deposit capture is helping banks win the war on check fraud.

“Check losses have been trending down really since 2006,” said Jane Yao, Vice President of the benchmarking and survey group at the American Bankers Association (ABA).

In 2008 the ABA calculated a total of $1.02 billion in losses from fraud instances against DDAs; by 2010 the total had fallen to $893 million. Most of the losses involved over the counter deposits (62%) and ATMs (24%); the remaining 14% were deposited by other means, such as mail and RDC.

Fraud involving electronic payments against DDAs like debit card fraud, on the other hand, are now far more common than check fraud, Yao said.

Reviewing the ABA’s fraud data, it’s clear that financial institutions are getting better at spotting bad checks before they become losses. Had every fraudulent check attempt in 2010 gone undetected, for example, losses to financial institutions would have exceeded $11 billion; in 2006 the ABA reported that check fraud attempts against banks totaled $12.2 billion.

Luke Huys, Senior Vice President, Wells Fargo Bank, credits advances in check technologies with helping bankers get better at catching fraudulent transactions. “Image exchange accelerated the speed of settlement, reducing float and opportunities for fraud,” he said.

ECCHO President David Walker agrees. He points to the fact that check losses are dropping at a far more rapid pace than check clearing volumes. “So we know that the reduction in check fraud is not strictly related to falling check volumes,” Walker said.

Walker’s comments were made during a panel discussion on check fraud earlier this month at the BAI Payments Connect conference. Huys, Yao and Julius Eccell, Executive Vice President, Frost Bank, were on the panel as well; all three agreed check fraud isn’t as big a threat to banks today as it once was.

“We’re getting so much better at catching fraudulent checks,” Eccell told the group. “It’s the information. We just have so much better information than we ever did before,” added Huys.

Warnings Early On

So if float has been pretty much wrung out of the check clearing system, limiting the potential for opportunistic fraud like check kiting, where is the risk today? Duplicate checks; for example, making remote deposits of the same check to multiple bank accounts.

While attending the BAI Payments Connect show, sat down with Lou Anne Alexander, Senior Vice President at Early Warning Services (EWS), which has rolled out a service developed specifically to combat duplicate deposit fraud. EWS, previously known as Primary Payment Systems (PPS), is a shared national data base that takes daily feeds of information from banks regarding customer checking account and other information, and makes that available immediately to banks, check-cashers and other clients.

EWS’s owners – Bank of America, BB&T, Capital One, JPMorgan Chase and Wells Fargo – account for about two-thirds of all DDAs in the country. By adding transaction information contributed by at least 800 other financial institutions that use EWS, plus daily feeds of banks’ all-items files, EWS enables access to information on at least 95% of DDA transactions that clear between banks each day.

“We see all the checks and all the ACH items that clear, as well as those that are returned,” Alexander said.

The duplicate ID service developed by EWS takes aim at the risk of duplicates associated with mobile check deposits. It does this by cross-checking mobile deposits against transactions made through other channels (such as branches, ATMs and lockboxes) at participating financial institutions.
“We’re looking across all banks to detect duplicates” and other frauds, Alexander said.

An estimated 64% of the top banks in the country now offer customers the ability to deposit checks using smart phone and similar mobile devices. Concerned about the potential for fraud this new functionality creates, many banks have adopted restrictions, like daily limits on remote deposits. Early Warning’sDeposit Chek Service was developed specifically to address these concerns, Alexander said. It also provides advance notifications of potentially high-risk deposits.

Six of the country’s top banks are now testing the Deposit Chek Service, according to an announcement by EWS. “This will be followed by a broader launch in which the enhancements will be made available to all financial institutions,” the announcement stated.

EWS is not alone in its work on duplicate check detection. CONIX, the payment processing software company, offers a suite called Detective, and in February announced Risk Detective™, to enable FIs to score individual client risk, in real time, based on both historical and same-day activity across payment channels.

CONIX President and CEO Mike Charles described Risk Detective as offering FIs “an opportunity both to ‘Know Your Customer’ and, for some products, to ‘Select Your Customer,’ through sophisticated analysis.”

From what we saw and heard at BAI Payments Connect products like these will go a long way toward helping banks thwart fraudsters.