Despite a steady decline in the annual number of checks written over the past few years, check fraud continues to be a major concern for banks, financial institutions, and retailers, regardless of size or location. It is estimated that retailers throughout the nation lose $12-$15 billion each year due to the acceptance of bad checks. To minimize the losses, check guarantee and check verification services have been implemented and are offered by independent companies. As useful and effective as these services are, they still only prevent about 20 percent of all losses due to bad checks. It is estimated that another 30 to 50 percent of losses are due to signature forgeries, which are not addressed by check guarantee and verification services. And it may take up to thirty days, or one account cycle, before an account holder realizes someone has improperly issued checks on his or her account. Solving this problem requires enhanced check verification services using available banking industry interoperability and technological solutions.
Image exchange and archive are Check 21-enabled benefits that offer more in the way of fraud prevention. However, the full benefits have not yet been exploited. Innovations in technology and business concepts drive business results in times of increased budgetary and resource pressures. It is possible to use image exchange and archive services to minimize losses from check stock and signature fraud in the same way shared services are used for check verification. We have found adoption and practice of Check 21-related applications has created an atmosphere of cooperation, interchange of ideas and sharing of systems among financial institutions to get the intended efficiencies. As systems and infrastructures for image exchange and shared archives are implemented, creating interoperability and exchange for other applications such as fraud prevention is the next frontier. Banks that capitalize on this capability in a more orchestrated way with other financial institutions stand to benefit tremendously.
Image exchange and archive offers many advantages, including cost reductions in storing and delivering check images versus physical documents. Additionally, float time is reduced, which results in improved availability of funds and, thereby, reduces the risk of lost items, and more importantly, the risk of fraud. When financial institutions use a common, shared image archive service or facility, fraud detection tools can be applied not only to "on-us" checks, but to all check images if the images are shared between participants under controlled access and common applications. This shared service or facility presents a multitude of additional opportunities to combat fraud. Banks can verify the authenticity of checks at the time of acceptance at the branch, and retailers can verify at the point-of-sale, both significantly reducing the time it takes to determine if a check is fraudulent, implement follow up procedures for suspects, or even be able to decline the acceptance of a check.
Fortunately, technological innovations and the business environment are evolving to enhance the fight against all forms of fraud as early in the check payment process as possible by combining proven external check verification systems with proven internal fraud prevention systems, such as signature verification and counterfeit check detection applications. When a check is received by a bank or retailer, technology is able to look up reference images in a centralized database to examine the authenticity of the check and prevent signature forgery or counterfeits in the same way check guarantee and check verification services look up information in their databases. Fraud prevention technologies can process the image of the check quickly and efficiently to identify suspicious items. For example, imaged-based fraud detection technology may analyze the check for suspect situations such as signature mismatch, check stock mismatch, disagreement between courtesy and legal amounts, whether the check is a preauthorized draft or alterations have been made to the check. Additionally, transactional-based fraud detection technology may analyze the item for suspect situations such as unusual check numbers, unusual velocity of transactions, or unusual check amounts.
Automatic systems for signature verification can successfully rely on a shared image archive and improve customer service and satisfaction by enabling banks and retailers to proactively inform customers of potential fraud. Similarly, check stock verification software can be used in a shared image archive environment to protect financial institutions against the fastest-growing source of fraudulent activity surrounding checks today, responsible for 28 percent of all check-related losses in banks - counterfeit checks.
Banks, financial institutions, and retailers, now more than ever, need to make use of all mechanisms available to stop fraud before it happens. By utilizing a common service, technology upgrades are easier and more economical, and guarantee that the latest fraud prevention tools are in place. Additionally, a shared service can offer a far more comprehensive database than any financial institution could acquire on its own. With the technology available, now is the time to utilize it.
Mike Fenton is vp of sales and operations for Parascript.
For more Perspectives columns, visit www.americanbanker.com/btn.