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November 21, 2011
Remote deposit capture: If you expand it, will fraud come?
It has been nearly two years since Portals and Rails focused on remote deposit capture (RDC). In just this short period, the RDC market has grown significantly and changed rapidly. This growth and change has led to approximately 13 percent of checks being deposited as images at the bank of first deposit, according to the 2010 Federal Reserve Payments Study. In addition, financial institutions and banks, which initially offered RDC capabilities primarily to their commercial customers, are now broadening these services to include their retail customers. Even the hardware used for RDC is evolving from desktop scanners to mobile phones. Despite this growth and evolution, RDC fraud has been minimal, much as my colleague, Cindy Merritt, discussed in an April 2009 post.
According to a new Celent report, the commercial RDC market is nearing maturity, with an estimated 75 percent of U.S. banks and 50 percent of U.S. financial institutions offering at least one RDC service. Given this mature commercial market, any future growth of RDC services should be expected via retail consumers. This growth will come from the adoption of retail RDC services by banks and financial institutions as well as the expansion of the service into new payment products—most notably, prepaid cards. As RDC usage expands to more retail consumers and additional payment products, we have to wonder if fraud associated with it will rise or continue to be held under control.
Current risk assessment
According to the 2011 Payments Fraud and Control Survey from the Association of Financial Professionals, only 1 percent of surveyed organizations responded that someone had used their electronic check conversion service to commit fraud. This figure is unchanged from the 2009 survey.
A similar assessment of RDC fraud recently emerged from the Financial Crimes Enforcement Network (FinCEN). FinCEN analysts identified 1,017 Suspicious Activity Report (SAR) filings related to RDC that banks and credit unions filed between January 1, 2005, and July 31, 2011. More than half of these reports were filed after the start of 2010. These 1,017 RDC-related SARs account for only about 0.1 percent of all bank-filed, check-fraud-related SARs. FinCEN found no real differences between the RDC channel and more traditional check depositing channels when it came to fraud schemes (for example, check kiting and counterfeit or altered checks).
Will the low level of fraud be sustainable as the service grows?
To date, banks and other financial institutions have successfully managed risks for commercial RDC services. Whether by restricting the use of the service to only its most vetted commercial clients or limiting the value of allowable remote deposits, banks have implemented risk controls to effectively minimize their risk and fraud exposure associated with RDC.
Banks and financial institutions are now beginning to cast the RDC net into their retail channels. Ally Bank offers its retail customers RDC through the traditional scanner and computer model, while USAA, J.P. Morgan Chase, PNC Bank, and U.S. Bank all now offer mobile RDC for retail consumers. Bank of America is targeting a second-quarter 2012 launch for its retail mobile RDC service. With banks and financial institutions expanding this service to a retail customer base that often undergoes less stringent due diligence than do their commercial customers, is the potential for fraud increasing?
The general-purpose reloadable (GPR) prepaid card market offers a significant growth opportunity for mobile RDC. With this service, GPR prepaid cardholders—many of whom are unbanked—would be able to load funds directly onto their prepaid cards without having to walk into a store, in the same way the service now allows banking customers to deposit checks into their direct deposit accounts.
According to a recent paybefore.com article, several third-party service providers have the risk-management software to enable mobile RDC for the prepaid industry. Interestingly, these third-party software providers will accept the risk of the mobile RDC transactions, taking the responsibility from the prepaid program manager or issuer. However, the inherent dearth of information about GRP prepaid users compared to retail and, especially, commercial banking customers makes RDC services more vulnerable to fraud with this group. In fact, prepaid card users may be unbanked because they have a poor, or no, credit history or they lack appropriate identification and credentials to open a banking account.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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