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

Image Exchange 2008 Payments Conference y 08 Payments Fraud: Perception vs. 6, 20 Reality June Federal Reserve Bank of Chicago D David Walker id W lk dwalker@eccho.org

Industry Trends Image Exchange d Checks & T t I d

Avg # of Images Rec / Day 42.1/day y 42 42 39 42.1 million Images/Day ns 36 36 llion Annualized = 33 10.6 billion Images/Yr 30 n Mil 27 = 45% of all transit 24 checks ms in 21 21 18 15 # Item 12 9 6 6 # 3 0 3 Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

# of Image Based Trans. 1 200 1,200 7 ing 1,177 1,100 ns Grew 89% Grew 89% illion 1,000 1 000 arch Total from 900 3/07 & 3/08 3/07 & 3/08 800 800 n Mi ays in Ma 700 600 600 21 da ms i 500 Transactions Originated # Item as Images for Collection as Images for Collection 400 400 Totals 60% of Transit 300 Items 200 # Substitute Checks 100 0 4 Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

# of Receiving Institutions 14,000 ng R/Ts Represents R/Ts 13,000 9,784 Receiving 9,784 Receiving 12 000 12,000 5 Receivin ng R Institutions 11,000 10,000 eivin 13,345 9,000 Or Approximately 8,000 60% of all U.S. 60% of all U.S. Rece 7,000 7 000 Institutions 6,000 5,000 , # of 4,000 3,000 # 2,000 2 000 1,000 0 5 Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

Transaction $ Amounts ng $1,458 8 $1,400 rch totalin $1,200 $1 200 ns March ’08 illion $1,000 $ , Annualized = $17.5 Trillion A li d $17 5 T illi ys in Mar $800 21 day in B $600 $ $400 $200 $200 $0 6 Source: Federal Reserve, PaymentsNation, SVPCO and local / regional exchanges

Total Check Values $41.7 $42.0 6 2006 $41.1 Check $41.5 payment 2003 3 2 ons system is $41.0 more Trillio 2 $40.5 valuable in $39.8 2006 than in $40 0 $40.0 T 2000! 000 $39.5 20 $39.0 $38.5 7 Data Source: Federal Reserve Payments Studies for 2004 and 2007

Average Check Value $1,366 ck Chec $1,400 $1,400 6 2006 $1,104 Average $1,200 $950 $950 check check vg C 2 2003 3 payment is $1,000 00 more more er Av 200 2 $800 valuable in 2006 than in 2006 than in $ pe $600 $600 2000! $ $ $400 $200 $0 8 Data Source: Federal Reserve Payments Studies for 2004 and 2007

Image Exchange Fraud Risk

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 • If a kite is initiated via paper checks and those checks are imaged, the kiting continues 10

Check Image Fraud • Traditional Authorization Issues and Fraud Sources Continue Fraud Sources Continue – These frauds are controlled in the traditional ways Th f d t ll d i th t diti l 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? • What do you return and to whom? 12

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 – Need to know how customers are creating their N d t k h t ti th i 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 No law to cover check image exchange 13

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 – Across payments systems A t t – Across multiple days – Without a more efficient adjustment system it takes too long to unwind interbank accounting too long to unwind interbank-accounting 15

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 stream creating duplicates 17

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 – New analysis, new detections 19

New Controls • Enhanced Adjustment Processes – To shorten windows of opportunities for would be fraudsters fraudsters • • Image S r i able Sec rit Image Survivable Security Features Feat res – 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

Closing Comments t C i Cl

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 – Should reduce the opportunity for losses generally – And reduce opportunity for fraud 23

David Walker David Walker dwalker@eccho.org Image Exchange h Thank You E I 8 6, 2008 June 6 J