Image Exchange 2008 Payments Conference y 08 Payments Fraud: - - PowerPoint PPT Presentation

Image Exchange

2008 Payments Conference

08

y Payments Fraud: Perception vs. Reality

6, 20

Federal Reserve Bank of Chicago

June

D id W lk David Walker dwalker@eccho.org

I d t T d Industry Trends

Checks & Image Exchange

Avg # of Images Rec / Day

42

y

36 39 42

ns

42.1/day

42.1 million Images/Day

30 33 36

llion

Annualized = 10.6 billion Images/Yr

21 24 27

n Mil

= 45% of all transit checks

15 18 21

ms in

6 9 12

# Item

3 6

#

3

Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

# of Image Based Trans.

1 200

7

1 000 1,100 1,200

ns

ing 1,177

Grew 89%

800 900 1,000

illion

arch Total

Grew 89% from 3/07 & 3/08

600 700 800

n Mi

ays in Ma

3/07 & 3/08

400 500 600

ms i

21 da

Transactions Originated as Images for Collection

200 300 400

# Item

as Images for Collection Totals 60% of Transit Items

100

#

Substitute Checks

4

Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

# of Receiving Institutions

12 000 13,000 14,000

R/Ts

ng R/Ts

Represents 9,784 Receiving

10,000 11,000 12,000

ng R

5 Receivin

9,784 Receiving Institutions

7 000 8,000 9,000

eivin

13,345

Or Approximately 60% of all U.S.

5,000 6,000 7,000

Rece

60% of all U.S. Institutions

2 000 3,000 4,000 ,

# of

1,000 2,000

#

5

Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

Transaction $ Amounts

8

$1 200 $1,400

ng $1,458

$1,000 $1,200

ns

rch totalin

March ’08 A li d $17 5 T illi

$800 $ ,

illion

ys in Mar

Annualized = $17.5 Trillion

$600

in B

21 day

$200 $400

$

$0 $200

6

Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

Total Check Values

$41.7

$42.0

6

$41.1

$41.5

3 2006

Check payment

$41.0

2003 2

• ns

system is more

$39.8

$40 0 $40.5

2 Trillio

valuable in 2006 than in

$39.5 $40.0

000 T

2000!

$39.0

20

7

$38.5

Data Source: Federal Reserve Payments Studies for 2004 and 2007

Average Check Value

ck

$1,366

$1,400

6 Chec

$950 $1,104

$1,200 $1,400

3 2006

Average check

vg C

$950

$1,000

00 2003 2

check payment is more

er Av

$600 $800

200 2

more valuable in 2006 than in

$ pe

$400 $600

2006 than in 2000!

$

$200 $

8

$0

Data Source: Federal Reserve Payments Studies for 2004 and 2007

Fraud Risk Image Exchange

Check Image Fraud

• Traditional Authorization Issues and

Fraud Sources Continue Fraud Sources Continue

– Typically, these involve parties outside of the Typically, these involve parties outside of the banking collection and return processes – Those same parties continue to participate in the process at the same process points; for example

• If a fraudulent signature is placed on a check or

if the amount is changed, it will appear on the g , pp image as deposited with the bank

10

• If a kite is initiated via paper checks and those

checks are imaged, the kiting continues

Check Image Fraud

• Traditional Authorization Issues and

Fraud Sources Continue Fraud Sources Continue

Th f d t ll d i th t diti l – These frauds are controlled in the traditional ways by the paying bank and its customer

• For check images and for substitute checks

11

Complicating Factors

• New, More Complicated Environment

– Possible confusion by financial institutions, their customers and vendors

• Was the payment authorized?

Was the truncation authorized?

• Was the truncation authorized?
• What is it legally? A check or a non-check?
• Is it properly payable?
• Which payment is the duplicate?
• What is the return deadline?

12

• What do you return and to whom?

Complicating Factors

• If It Looks Like a Check, Is It a Check?

– Electronically initiated payments that are formatted to look like checks to look like checks N d t k h t ti th i – Need to know how customers are creating their electronic deposits – Need to have agreements in place to allocate appropriate liabilities between all the parties appropriate liabilities between all the parties

• No law to cover check image exchange

13

No law to cover check image exchange

Complicating Factors

• If It Looks Like a Check, Is It a Check?

Moo, Moo

14

Complicating Factors

• Duplicate Images & Substitute Checks

– Need enhanced controls to:

• Prevent the creation/acceptance of duplicates
• Testing for duplicates

A t t – Across payments systems – Across multiple days – Without a more efficient adjustment system it takes too long to unwind interbank accounting

15

too long to unwind interbank-accounting

Complicating Factors

• Non-Conforming Images (NCIs)

– Intended to protect paying institutions from receiving poor quality images receiving poor quality images Current image quality assessment (IQA) – Current image quality assessment (IQA) applications are inadequate

• High percentage of NCIs would not impact posting (if

presented) verification of signature, customer service, etc.

• Primary impacts are delays in collection of the items and

increases in the cost of the collection

16

Complicating Factors

• Non-Conforming Substitute Checks

– Mostly conforms except for technical deviations

???

• A Shakespearian dilemma:

– To post or not to post?

???

• Another Dilemma:

– To keep or not to keep? p p

• Risk of subsequent entry into the payment

17

stream creating duplicates

Loss of Controls

• Loss of Traditional Controls

– Look and feel of the original paper – Special security features

18

New Controls

• Speed of Collection and Return

– On-demand electronic payments are faster than on- demand paper payments – Later exchange windows for electronics

• More Sophisticated Prevention,

Detection and Resolution of Duplicates p

• More Sophistication in Pay / No Pay

More Sophistication in Pay / No Pay Decisions

19

– New analysis, new detections

New Controls

• Enhanced Adjustment Processes

– To shorten windows of opportunities for would be fraudsters fraudsters

• Image S r i able Sec rit

Feat res

• Image Survivable Security Features

– Replaces some of the paper-based features

20

New Controls

• Duplicate Detection & Prevention

– Looking for dups at new places in the process; e.g. BOFD and at the paying bank BOFD and at the paying bank Comparisons must be across multiple days and – Comparisons must be across multiple days and multiple payment channels

• Complication

– There are some legitimate duplicates

21

Cl i C t Closing Comments

Closing Comments

• Check Payment System is Growing in

Value and Therefore in Importance p

• Check Image & Substitute Check Fraud

Check Image & Substitute Check Fraud

– Same as for paper

• New Processes and Changes in Party

Participation Create New Complications Participation Create New Complications

– Creates opportunities that could be exploited

• New and Different Controls are

Emerging

23

– Should reduce the opportunity for losses generally – And reduce opportunity for fraud

I E h Image Exchange

8

Thank You

6, 2008

David Walker

June 6

David Walker dwalker@eccho.org

J