Checking In at the BAI Show: Fraud Statistics are Alarming

D uring a December afternoon at the Bank Administration Institute (BAI) Show in the Anaheim (Calif.) Convention Center, I learned a number of interesting things about check fraud. For example, the latest American Bankers Association survey, conducted last summer, showed that check fraud had increased 20% at community banks and 27% at regional banks since the previous survey two years earlier. Check fraud at large banks has doubled in the last two years!

Large bank losses are increasing 17% annually. Banks experienced an estimated 447,342 fraud cases, with an average gross loss of $1,518. The most common source of check fraud was checks written against consumer accounts. The most common type was forgery, followed by NSF and closed accounts. About a quarter to a third of fraud is linked to new accounts.

Visa Visa has two initiatives. One is called Smart Visa. Issuers mail a Visa card with a chip and then mail a card reader to the consumer. The consumer puts the card in the reader and downloads software to integrate the reader to the browser, and then when buying something the consumer has to fill in a password in a special box on the screen.

There are eight financial institutions enrolled and four pending (out of more than 20,000 financial institutions), and not all Visa cardholders are eligible. Further, it does not support Apple users and supports only certain browsers.

The second initiative is called "Verified by Visa." The consumer applies to his issuer and is given a password, which is entered or given for mail order/telephone order purchases. Again, not every card is eligible, and there are a total of 17 merchants registered (with 12 pending).

In short, these two initiatives have virtually no impact in the marketplace.

Visa also is showcasing its POS "Check Service," which it is marketing to its DPS clients. (Visa says that in 2000 consumers wrote 19 billion checks at POS, valued at $3.5 trillion, representing 51% of personal-consumption expenditures for the year.)

Visa gives the merchant a choice of routing an Electronic Check Conversion (ECC) transaction through VisaNet or through the ACH. Visa incents merchants to use VisaNet by paying them revenue for each check, whereas if they are using the ACH they are getting billed by their Originating Depository Financial Institution (ODFI).

Getting set up requires that the FI link the service through Visa DPS. Visa suggests that the FI hire a consultant called Paragon Applications Systems to develop interface software that formats POS check service transaction messages exchanged between the bank and Visa.

One bank said that using Paragon saved it six weeks of internal programming, so you can see what an effort this is and why banks will not be quick to adopt it. Currently, only one bank (BB&T) is using this service.

The Visa program offers the bank three products: conversion only (merchant retains the risk), verification with conversion (merchant retains the risk), and guarantee with conversion (bank accepts the risk and puts a hold on the funds). Finally, Visa has another program called Visa E-Pay, which allows the FI to bill consumers via their Visa debit card.

The appeal to a financial institution is that if it is a biller (i.e., it bills its own credit cards, installment loans, mortgages, car loans, leases, etc.) and it is getting paid by a "Check and List" arrangement, the staff has to manually review, sort and post items.

This may be 10 times as costly as standard lockbox processing and might introduce errors and delay crediting of funds. As far as I can tell, this would involve getting the consumer to agree to have a check converted to a debit card transaction.

MasterCard I asked about MasterCard efforts regarding its pilot for authentication for card-not-present purchases. Its representative said that 80 to 85% of credit card fraud occurs in card-not-present situations, with half because of "friendly fraud," (i.e., the person makes the call and subsequently denies it).

They said that MC is trying to shift liability for chargebacks in the MOTO world from the merchant to the issuing banks, but the banks are refusing to support this move (obviously).

Other news was that the pilot program to authenticate credit card transactions that was supposed to be a joint venture between MasterCard and Visa has been scrubbed because Visa withdrew from the program. This makes it unlikely that a true authentication program will be widespread because the consumer would have to register multiple times.

SafeCHECK This is an ECC product that FDIC-insured FIs are eligible to use. The FI connects via the SafeCHECK switch or through its current processor. The purpose is to create an "industry-owned" (as opposed to non-bank owned) ECC and verification service. It uses the existing ATM infrastructure.

Merchants are told that only a bank-owned service can actually look into the DDA on a real-time basis. It is sold as either a "guarantee" or "non-guarantee" solution. Presumably, when the drawee bank puts a hold on the funds, it can guarantee that the funds will be there.

SafeCHECK is owned by three major ATM networks (NYCE, Pulse and STAR) and 11 large FIs. It is a subsidiary of SVP Corp.

Primary Payments Systems PPS is designed for FIs but is available to retailers, credit card issuers and others. It consists of a common database of user-members, currently 160 million DDAs. FIs use it for teller inquiry, opening new accounts, deposit processing, fraud detection, check capture reject and repair operations. All they need is a Primary Payment Systems MICR reader and a phone line. It has 28 response codes, including account present, new account, closed for cause and NSF.

SQN Systems SQN is the largest provider of signature verification software and serves half of the largest banks in the U.S. Its software/hardware captures and stores signatures. All signatures can be immediately shared with all branches worldwide.

Tellers can review a check in three seconds and no longer need to look at checks or signature cards. The system also retrieves exception items and pairs them with appropriate signatures for electronic inspection at the rate of 900 checks per hour. It flags suspected stop payments, exceptions, etc.

Carreker-Antinori This company is basically a consultant on float management. However, it does have a check fraud prevention product. It is a parameter-based system that evaluates each check based on predefined parameters against an account history file.

It looks for duplicate check numbers, missing serial numbers, check numbers that are out of the range of what is currently being written by the account holder, and an amount that exceeds the previous highest amount of a check from that account, lack of account history, a low dollar check pull, lowest check number, and invalid routing and transfer numbers.

Carreker-Antinori has a similar product to catch deposit fraud (a crook deposits fake items and then withdraws the money before being caught). That product looks for deposits that exceed the account's average balance as well as invalid routing and transit numbers.

This system is designed to be sold exclusively to FIs.