Image Exchange2008 Payments Conference08 yPayments Fraud: Perception vs.Reality 6

, 20

Federal Reserve Bank of ChicagoJune

D id W lkDavid Walkerdwalker@eccho.org

I d t T dIndustry TrendsChecks &

Image Exchange

Avg # of Images Rec / Day42 y

363942

ns

42.1

/day

42.1 million Images/Day

303336

llion Annualized =

10.6 billion Images/Yr

212427

n M

il = 45% of all transit checks

151821

ms

in

69

12

# Ite

m

036#

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

# of Image Based Trans.1 200 7

1 0001,1001,200

ns ing

1,17

7

Grew 89%

800900

1,000

illio

n

arch

Tot

alGrew 89%from

3/07 & 3/08

600700800

n M

i

ays

in M

a3/07 & 3/08

400500600

ms

i

21 d

a

Transactions Originated as Images for Collection

200300400

# Ite

m as Images for CollectionTotals 60% of Transit Items

0100

#

Substitute Checks

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

# of Receiving Institutions

12 00013,00014,000

R/T

s

ng R

/TsRepresents

9,784 Receiving

10,00011,00012,000

ng R

5 R

ecei

vin9,784 Receiving

Institutions

7 0008,0009,000

eivi

n

13,3

45

Or Approximately60% of all U.S.

5,0006,0007,000

Rec

e 60% of all U.S. Institutions

2 0003,0004,000,

# of

01,0002,000#

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

Transaction $ Amounts

8

$1 200

$1,400

ng $

1,45

8

$1,000

$1,200

ns rch

tota

lin

March ’08A li d $17 5 T illi

$800

$ ,

illio

n

ys in

MarAnnualized = $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

ons system is

more $39.8

$40 0

$40.5 2

Trill

io valuable in 2006 than in

$39.5

$40.0

000T 2000!

$39.0

20

7$38.5

Data Source: Federal Reserve Payments Studies for 2004 and 2007

Average Check Valueck

$1,366$1,400 6

Che

c

$950$1,104

$1,200

$1,400

3 2006 Average

check

vg C $950

$1,00000 20

03 2 check payment is

more

er A

v

$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 RiskImage Exchange

Check Image Fraud• Traditional Authorization Issues and

Fraud Sources ContinueFraud Sources Continue

– Typically, these involve parties outside of theTypically, 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 , ppimage 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 ContinueFraud 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 checksto 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 partiesappropriate 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 duplicatesA 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 imagesreceiving 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 Duplicatesp

• More Sophistication in Pay / No PayMore Sophistication in Pay / No Pay Decisions

19

– New analysis, new detections

New Controls• Enhanced Adjustment Processes

– To shorten windows of opportunities for would be fraudstersfraudsters

• 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 bankBOFD 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 tClosing Comments

Closing Comments• Check Payment System is Growing in

Value and Therefore in Importancep

• Check Image & Substitute Check FraudCheck Image & Substitute Check Fraud– Same as for paper

• New Processes and Changes in Party Participation Create New ComplicationsParticipation Create New Complications– Creates opportunities that could be exploited

• New and Different Controls are Emerging

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

I E hImage Exchange

8

Thank You

6, 2

008

David WalkerJune

6

David Walkerdwalker@eccho.org

J