Risk Reduction in Check Deposits for Financial Institutions – PaymentsJournal | Region & Cash

With the unprecedented increase in fraudulent activity experienced by financial institutions and their customers, the pressure to mitigate risk, reduce losses and protect FI brands across all payment channels is extreme. Fraudsters are more sophisticated and determined than ever, with new tools and technologies challenging the banking system every day.

One type of payment fraud, check fraud, has been constantly evolving. As check deposit behavior shifts from in-branch to remote channels, it is critical for financial institutions to protect themselves and their customers from fraudulent activity.

To learn more about the challenges financial institutions face today as they continue to look for ways to mitigate risk, PaymentsJournal met with Bev Nichols, Product Director of Deposit Solutions at Fiserv, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory, spoken group.

payment journal

De-risking check deposits for financial institutions

payment journal De-risking check deposits for financial institutions

Check the challenges

Check fraud schemes have evolved and adapted to the greater adoption of digital deposits, which have often been the only deposit method available during the pandemic. “[Mobile deposit] has basically become a standard now,” Nichols said, “but like us [made that transition]we encountered risk challenges.” The AFP report showed that 66% of respondents believe checks are one of the most vulnerable methods of payment fraud.

“We often forget how often we write checks,” adds Grotta. “FIs are investing in their digital transformation, but not necessarily enough has been invested in controls support activities.” Consumers and businesses still write billions of trillions of dollars worth of checks annually. Banks, credit unions and their customers and members need fraud prevention that goes beyond the manual efforts of overwhelmed FI staff.

How financial institutions can protect account holders (and themselves) from fraudsters

Marketplace anti-fraud solutions must meet modern expectations of speed, convenience and ease of use. “What the industry is working toward are ways to not only identify the problems associated with fraud, but also ways to handle the resolution of these potential fraud transactions in a real-time and automated manner,” said Nichols.

We have worked with many clients to identify the types of check fraud they are subject to and a recent example we reviewed was checks being photocopied from a computer screen and their text boxes tampered with. “Automated tools with AI workflows help mitigate that risk,” Nichols points out. Minimizing manual effort and resources and increasing recognition speed are top priorities.

“Investing in check fraud detection systems is not necessarily the most attractive investment [FIs] could do,” Grotta suggested, “but at the same time, some of the automated systems can actually find fraudulent checks that humans just can’t see.” Risk mitigation technology not only helps combat check fraud, but also protects financial institutions’ reputations.

Combat check fraud with risk mitigation

Nichols identified four key risk mitigation strategies:

  1. Set deposit limits: Setting up smart deposit account deposit limits can reduce risk for your financial institution while rewarding good account holders with higher deposit limits. By using historical data from your account processing system to calculate risk scores for each account and determine automated deposit limits, FIs can achieve consistency for all depositors and offer higher limits to the most valuable account holders while managing risk and ensuring compliance.
  1. Perform image analysis: Employ risk analysis and assessment methods with software tools to identify and stop advanced check alteration, forgery, forgery, out-of-pattern transactions, and kiting activity. With automated workflows to capture suspicious items and the use of historical images, FIs can improve efficiency by reducing false positives and false positives across multiple transaction types and channels.
  1. Use Transactional Analysis: Detect check fraud activity with an analytics and forecasting engine that uses neural network algorithms to spot patterns of suspicious activity such as deposit fraud and check kiting. Through machine learning and using historical transaction data from your core banking system, a benchmark is created for each account type and used to identify suspicious activity.
  1. Analyze with data from multiple sources: Analyze deposited checks to stop fraudulent deposits before they reach the bottom line. With a robust database that includes account-level and item-level information from thousands of contributing financial institutions and years of historical data from consumers, processors, and third-party sources, financial institutions can make faster, more accurate decisions about whether to accept a deposited check or withhold the deposit.

These strategies could be particularly important for small and medium-sized businesses, for whom interrupted check payments can prove fatal. “A better system with higher throughput provides better protection not only for the financial institution but also for the small business itself,” Grotta noted. “Assisting in the approval of good checks and faster access to funds must be a great service to small businesses and their all-important cash flow.”

Best practices to mitigate deposit risk

At the end of the day, Nichols explained, FIs “need to take a good look at it [their] situation and [their] environment to understand where fraud is occurring and the magnitude of that fraud.” From there, FIs can create a strategic risk mitigation roadmap that aligns with actual events both within each individual financial institution and across the industry as a whole.

Although fraud is increasing in volume and sophistication, financial institutions also have access to more advanced technologies and processes to combat this trend. “Look for tools that capture fraudulent activity from multiple sources in your facility,” explains Nichols. “Don’t forget that there are two parties to every transaction.” Also ensure that historical data is available and provide a simple and efficient UX from a user perspective.

“Fiserv Deposit Solutions is a global leader in payments and payment processing,” concludes Nichols. “We have a number of these risk mitigation tools that would help any financial institution spot fraudulent check activity today.”

Leave a Comment