Primary Payment Systems Inc., which provides database software designed to spot fraudulent checks a day after deposit, plans to begin marketing a real-time product that it says could help deal with the problems associated with faster clearing times.
Faster clearing of checks may increase the risks to banks, making a database an important tool, said Paul W. Finch, the chief executive officer and president of the Scottsdale, Ariz., database company, which is majority owned by First Data Corp.
“No individual institution can do an effective job” fighting fraud by itself, Mr. Finch said. “The payment world has an interesting capability, which has so far been untapped, to fight this fraud.”
Today, Primary Payment’s databases function largely as a “day two” product, flagging potentially fraudulent checks from the previous day’s deposits, said Larry Spooner, who retired as president of the company over the weekend.
Primary Payment wants “to move the opportunity right to the teller window, day zero if you will, or day one,” so that banks could screen out fraudulent checks before accepting them, Mr. Spooner said.
The version of its system now commercially available is not powerful enough for that role, Mr. Spooner said. He said two large banks, which he would not name, are now pilot testing a more powerful Primary Payment system meant to provide such screening. “What is being put in place is the infrastructure that will support it.”
For Primary Payment, a company born of the frustrations over bad checks that afflicted big California banking companies, including Wells Fargo & Co. and BankAmerica Corp., in the early 1990s, fraud has been a moving target.
The operation was set up in 1992 as a division of the regional electronic funds transfer network Star Systems Inc. to facilitate information sharing among California banks. It went nationwide and was launched as a separate company in early 1995.
At the time Primary Payment managed a set of shared databases representing 16 million checking accounts, largely from a handful of major California banks. Today the databases track 210 million accounts, and the contributors include 12 of the nation’s 15 largest banks and 31 of the top 40. The company provides information to banks on 1.2 billion transactions a year, and it screens nearly 32 million identities.
But changes in the industry are opening new opportunities for it, the executives said.
“The large banks have had a definite decline in their fraud losses, and they’ve had a large rise in the losses prevented,” Mr. Spooner said. “With check fraud activity migrating to smaller institutions, we feel a real need and an important opportunity for us and our contributors to take that product to the entire market.”
The American Bankers Association reported in November that banks’ losses to check fraud declined slightly in 2003 from the level found in its previous survey, in 2001. But criminals attempted to pass bad checks worth $5.5 billion, up 28%. The 2003 survey found some signs that fraudsters might be attempting to avoid the biggest banks, which have the most vigorous defenses, to target smaller ones instead.
Sophie Louvel, an analyst at the research firm Financial Insights Inc. of Framingham, Mass., said Primary Payment Systems faces a marketing challenge in extending its reach to smaller banks, thrifts, and credit unions.
“All the big banks I talk to adore PPS,” she said. “The smaller banks have been harder to convince. They haven’t been able to justify the cost.”
But the ABA check-fraud report provided a warning to midsize and community banks that their risks are growing, she added, “so we can expect them to leverage national exchanges like PPS.”
Mr. Finch acknowledged that smaller banks pose a marketing challenge. “They sense that they know their customers better than the big banks do, but that’s at risk.”
Mr. Spooner, who has been Primary Payment’s president since mid-1995, said the outreach to smaller banks is a natural evolution.
“Our focus has been on the big ones because they bring such a high percentage of accounts” for the industry as a whole, Mr. Spooner said last week. The company would like to attract more banks not only to access its databases but to contribute to them, he said.
Another emerging issue involves identity theft, including the growth of phishing scams, which involve e-mails that purport to be from a bank or other trusted business and are meant to harvest account numbers or other personal information.
“We have to be very diligent, working with our partners, to detect these new technologies or approaches to fraud,” Mr. Spooner said.
Current problems stem in part from the industry’s previous successes. Fraudsters these days rarely make up a fake name to open a deposit account, because identity screening has become more successful.
“To create a false financial persona is very difficult to do,” Mr. Spooner said. “It’s much easier to take over an existing identity.”
But the development of new systems, such as check-image exchange, also opens new ways for banks to fight back against the criminals.
“We’re on the threshold of taking what we’ve built, these very large databases, and building the next-generation tools,” Mr. Spooner said. As banks develop the ability to capture check images at the teller window, real-time screening could include images of fraudulent checks or of account holders’ signatures.
Mr. Spooner, who turned 65 early in December, said he looked forward to retirement but will miss the work. “In some ways it’s bittersweet to leave at this point,” he said. “It would be fun to be a part of bringing it home.”
