Calif. Clearing House Invests in Antifraud Firm

California Bankers Clearing House has invested $250,000 in Primary Payment Systems Inc., a fledgling company aimed at thwarting check fraud.

Primary Payment, a Scottsdale, Ariz., affiliate of the Star System automated teller machine network, is trying to establish electronic coverage of the nation's 200 million or so checking accounts.

The company manages a data base providing banks with current account information. Primary Payment officials said the more information that is made available, the more banks and merchants will be able to stem their fraud-related losses.

Executive director Gerard F. Milano said the California clearing house, based in San Bruno, became an equity owner to "actively work with (a) unique banking partnership to further develop loss avoidance technology.

"The approach they have taken allows banks of all sizes to participate," he said.

According to the Federal Reserve, the industry's losses to check fraud amounted to $615 million in 1995. But observers noted that when businesses and merchants are included, the losses are 10 times higher.

Primary Payment Systems software and services have helped avert as much as $60 million in attempted fraud this year, said spokeswoman Leslie Michelassi.

"Compared to the overall fraud picture, it's a drop in the bucket," she said. "Considering the company has only been in existence a little more than a year, it's not bad."

Primary Payment's central data base consists of information from 36 banks with 41 million accounts.

The push for a national data base is widely viewed as sensible, but the task is complex because of the confusing and decentralized structure of check clearing operations.

Plus, given the sheer volume of items, the regular transmission of account information has been a major obstacle, according to Lisa Wilhelm, senior vice president at Wells Fargo & Co.

The San Francisco-based bank processes nearly 20 million paper transactions a night across 13 states. Ferreting out fraudulent checks is like "finding a needle in a haystack," Ms. Wilhelm said.

San Diego-based Star System started Primary Payment last year. It grew out of Deposit Chek, data base software that Wells Fargo and BankAmerica Corp. helped Star develop in 1992.

Wells uses Deposit Chek along with its own proprietary software in managing demand deposit accounts. The bank's risk management procedures help it save upward of $14 in fraud losses for every $1 it spends on related technology, Ms. Wilhelm said.

Primary Payment's other shareholders are Star System and its fellow electronic banking networks Cash Station, CU Cooperative Systems Inc., and Pulse EFT Association, plus Southern National Corp., a $20 billion-asset banking company in Winston-Salem, N.C.. that committed $1 million in September.

Industry observers view the investments as major endorsements of Primary Payment, whose software and services are used to obtain early warnings of check returns.

The investments "demonstrate ongoing cooperation within the banking industry to try to help reduce the losses for both themselves and their customers," said Henry C. Farrar, senior vice president at the New York Clearing House Association.

Mr. Farrar's organization currently is establishing linkages between its account data base and Primary Payment Systems'.

A bank can contribute information in as little as 10 days with minimal effort, Ms. Michelassi said. Hardware and software installation costs, at $25,000, are borne by banks, but institutions can expect to reduce losses by $10 to $30 for every $1 they spend, Ms. Michelassi said.

California Bankers Clearing House clears an average of 6.3 million checks a day for more than 150 West Coast institutions.

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