Mobile Check Deposit May Carry High Fraud Risk

For consumers, snapping a smartphone photo of a paper check is a fast and convenient way to make a deposit. But it's also a common way to commit fraud.

That's according to a new report on check cashing by the Center for Financial Services Innovation. Fully 10% of people who used their cell phone to deposit a check had it returned to the originating institution due to fraud, the research found.

Moreover, returned check rates were more than twice as high for checks deposited using mobile phones as they were for other check-cashing methods, such as going to a store or using an ATM. One of the most common fraud schemes involved going to a check-cashing outlet almost immediately after depositing the same check using a mobile phone.

"Fraud is the major concern for providers in offering consumers immediate access to funds," the report states.

The research relied on an examination of the check-cashing behavior of 394,000 consumers, based on a sample of data provided by the bank technology firm FIS.

At an industry conference Thursday in Los Angeles, FIS vice president Aaron Calipari spoke about the vulnerability of banks that offer mobile check deposit to their customers.

"Absolutely the risk is very, very high," said Calipari, vice president of product management and retail payment solutions at FIS. "Even those known good customers, they have a tendency to misbehave in this channel."

His remarks came during a panel discussion at Emerge: The Forum for Financial Services Innovation, a conference co-sponsored by CFSI and American Banker.

Also speaking on the panel was Rodney Drake, vice president of consumer segment strategy at KeyBank (KEY). Drake said that he expects the fraud rates involving mobile check deposit to decrease over time, as banks begin to catch up with the fraudsters.

"I don't think it's symptomatic of the channel," he said, referring to the use of mobile phones to make a deposit. "It's symptomatic of new technology."

When the same check gets cashed twice, there can be confusion about which of the two affected businesses is on the hook, according to the CFSI report.

"For providers, it is unclear who should absorb the losses — the institution that processed the check first or the institution that possesses the physical check," the report states. "While regulation may favor the entity that possesses the physical check, obtaining reimbursement can be arduous."

Despite the fraud risks, the report is generally upbeat about the prospects for mobile check deposit. The authors call the technology "game-changing" and state that it can help financial institutions to "meet consumers' needs for speed and convenience."

Earlier research on the risks associated with mobile deposit capture suggested that banks had less cause for concern.

Research by Celent found that 89% of banks that offered mobile deposit capture in 2012 suffered zero losses that were attributed to the technology. And a more recent survey of 246 financial institutions found that 80% of them said no losses had occurred through the use of remote deposit.