An Old Threat Returns

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BROOKFIELD, Wis. — One of the oldest methods of fraud could give credit unions bigger problems this year if attention isn't paid, cautions Fiserv.

Check fraud is on the rise, said Erik Stein, VP product portfolio management for Fiserv's risk and compliance unit. "I think financial institutions may have taken their eye off the ball here and in doing so have given criminals the opportunity to compromise that channel even further," Stein said. "Cards get a lot of the focus because of their larger losses and due to the sophisticated systems that issuers have with respect to their card authorization system."

Still, check fraud accounted for over $1 billion in losses for the financial industry in 2008 and could move up, according to Stein, who obtained the loss data from the latest American Bankers Association (ABA) Deposit Account Fraud Survey, which looked at check fraud incidents between 2006 to 2008. In that time fraud losses at financial institutions rose 6%.

"The 6% rise is not a big number, especially compared with a previous ABA study that showed check fraud increased 43%," Stein said. "But that 6% rise is in a market in which check volume declined by 14%."

A Real Red Flag

What really concerns Stein is the drop in the aversion rate (times when fraud attempts are averted) and fraud attempts according to the latest ABA study. "There was a 1% drop in the aversion rate, which means financials were 1% less effective at stopping check fraud, and it's the first time this metric has dropped in the history of the study. Fraud attempts against financial institutions dropped by 8% from the prior survey period, as well."

So despite a drop in check volume and fewer fraud attempts, financial institutions were less successful at stopping check fraud. "What it means to me is that the check fraud solutions that institutions are using today are becoming less effective. The criminals are better at circumventing them even in a lower volume environment and with fewer attempts."

Stein surmised that institutions are not paying as close attention to check fraud as they have in the past-prevention solutions are becoming outdated and protocols are not being refreshed.

"To some degree there has been complacency around check fraud-it's almost looked at as a cost of doing business as long as losses don't swing out too widely within an institution. Also, I think organizations are spending more time on emerging fraud in the areas of mobile and remote deposit capture, for example."

Yet another reason, and one more unsettling, suggested Stein, is that check fraud is getting easier. "It's pretty simple, relatively speaking. Today you can buy blank check stock at the stationary store. It used to be that to commit check fraud you had to buy very expensive printing presses. The advent of the personal computer and laser printer has simplified check fraud immeasurably."

Stein said credit unions need to "take a hard look" at check fraud solutions they have in place and make sure they are maintaining the systems and that they are optimized, and then take a second look to determine if a new and better solution is required. "A lot of the check fraud solutions...may be dated or the financial institution may not have given it the appropriate care and feeding in terms of changing thresholds etc. "

Stein said systems effective today at battling check fraud use image-based analytics to validate check stock, combating counterfeit checks and automatically identifying signatures that don't match authorized signers. Fiserv's FraudGuard is one solution, offered Stein.

Besides systems that analyze checks, CUs need to have solutions that monitor member behavior, to identify patterns indicative of potential fraud.

"These solutions 'learn' normal behavior of an account or member, which can then be used to identify deviancy, ranging from normal to subtle and obvious. These changes from normal behavior can identify account takeovers, or other criminal compromises, or financial stressors to members that might be indicative of first-party fraud."

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