NEEDHAM, Mass. – The major technology providers to credit unions – their core processors – are increasingly taking up the fight against check fraud, a silent crime that costs financial institutions far more than bandits with guns. But while financial institutions spend more and more to prevent check fraud, the losses continue to mount, according to a new report from TowerGroup analyst David Medeiros. "Check fraud is a perfect example of a problem area in which offensive versus defensive technology – the use of technology to perpetrate a crime and the use of technology to detect and prevent it – are locked in an ongoing battle for predominance," the financial services analyst writes in a report titled "Trends in Detecting and Preventing Check Fraud at U.S. Banks: Technologies Improve, But Losses Still Mount." Medeiros says check fraud – including kiting, identity fraud, NSF and closed accounts and forgeries – are expected to cost U.S. commercial banks about $853 million in 2003, up from $512 million in 1997. That's despite spending of about $280 million in that sector this year to prevent such losses. The great bulk of that spending is at institutions of $5 billion in assets or more, whose exposure to such fraud is large enough to justify the investment in prevention technologies, Medeiros says. Meanwhile, spending on such efforts at smaller financial institutions is stagnant, Medeiros says. "The majority spend little, less than $40,000 annually, or nothing to detect and prevent check fraud," he says. For their money, the big banks are getting some sophisticated software that has helped, Medeiros says. "Automated solutions, such as image-enabled positive pay and rules-based automated systems for verifying both paying and deposited items, have been adopted widely in the past several years, and have been instrumental in containing check fraud," Medeiros says. "The combination of better identification and verification technologies and lower check-writing volume should start to ease the losses," he adds. Chris Braccia, Orlando-based director of product marketing at Harland Financial Solutions' Financial Intelligence Division, agrees there's a fraud problem but says his company's credit union clients are hardly seeing a drop in check volume. In fact, it's growing and shows no sign of slowing down. "People have been predicting the death of checks and the death of branches for a long time," he says. "It's actually going in the opposite direction." In fact, HFS recently acquired what is now EZ Teller Products group to help incorporate that firm's expertise at the front lines into HFS' solutions mix. A first step is to focus on helping credit unions identify who's at the teller window, a problem that gets more pronounced as institutions grow. "Besides high staff turnover, we find that banks and credit unions tend to lose their focus a bit in terms of knowing their customers once they get past the three-office mark," says John Meyer, software operations director with EZ Teller Products Group. In addition to systems that capture digitized photos and signatures, EZ Teller offers a host-based alert system that allows tellers and managers to notify each other of situations, such as a customer leaving a checkbook at a teller window. The company also is working on a new automated positive payment system that could appeal to credit unions which serve SEGs. In this case, an employer who issues a large number of checks can share that item list with the credit union, which can then digitally match those issuances as the presentations are made at the branches. "We're hearing a lot of interest in this idea," Meyer says. USERS Inc. also is working on the problem. "For example, like most core processors, USERS has offered a kiting module for years; this solution looks for patterns of frequent deposits followed by frequent withdrawals of the same or similar amounts," says John Schooler, senior vice president and chief technology officer for the Fiserv subsidiary in Valley Forge, Pa. "We're also in discussion with a third-party company that specializes in providing logic-based software to identify patterns of activity that are characteristic of fraud, with a goal of integrating a solution of this type with our core DataSafe system," he says. "The largest banks already use techniques like these," Schooler says. "Now they're making their way into the credit union industry." Like Meyer, Schooler says he thinks growing asset and membership size will make the job more challenging for credit unions. "It's increasingly difficult to know all of your members personally when you're merging with other credit unions, opening more branches and operating shared branches," he says. "For these reasons, I fully expect we'll see fraud detection and prevention technologies widely used in the credit union industry within the next four to five years,' Schooler says. "In fact, in addition to our existing kiting module, USERS expects to roll out an interface to a checking and deposit fraud monitoring solution next year, as well as provide support for driver's license scanning and display," he says. Another emerging method also holds promise, says Medeiros of TowerGroup. "It is the use of centralized archives of check images," he says. "Such solutions offer considerable potential for controlling check fraud by providing access to check images on the part of any bank at any point in the forward presentment cycle," he says. Also helping should be the changing behavior of consumers themselves and of the institutions that handle their money, Medeiros says. "As current industry developments such as accounts receivable conversion and impending legislation such as the Check Truncation Act both decrease the number of checks cleared and settled and also accelerate check presentment time, and as electronic check presentment continues to be adopted, check fraud categories based on presentment timing, such as kiting and closed account and insufficient funds fraud, should decrease," Medeiros says. But, he concludes, improving techniques by check forgers and counterfeiters will continue to help that kind of loss outstrip losses from such payment methods as high-value electronic funds transfers, which "represent a far greater portion of the total payment mix." Schooler shares that concern. "I recently read an article about a new fraud technique called `check washing,' which involves washing a canceled check with a solvent that erases the handwriting and enables you to rewrite it for a different amount and to a different payee," the USERS executive says. "It's also entirely possible to use a desktop laser printer with a MICR ink cartridge to print fraudulent checks," he says. "The bottom line is that those who want to commit fraud are constantly coming up with new ways to do so, which means credit unions are going to be continually challenged to stay one step ahead." -

[email protected]