Remote Deposit Fraud Risk:
Perception or Reality?
American Banker | Tuesday, May 27, 2008
By David Breitkopf
Perception or Reality?
American Banker | Tuesday, May 27, 2008
By David Breitkopf
Remote deposit capture has been touted as a way for community banks to gain commercial customers outside their traditional branch footprint, and to compete with larger banks. But when they first roll it out, most community banks play it safe. Some say too safe.
The banks' main concern is getting burned by check fraud. To forestall that risk, the first customers a community bank typically offers the deposit scanners to are those that have had long-term relationships with the bank.
Though this approach can be effective in retaining valuable customers, it is not going to win much new market share, said Bob Meara, a senior analyst at Celent LLC, a Boston financial research arm of Marsh & McLennan Cos.
"A great deal of banks are inherently defensive in their use of remote deposit," he said. "But there are huge lost opportunities in being so passive in today's environment."
Mr. Meara said that some community banks that have been aggressive have been able to double or triple their deposits since beginning to accept deposits remotely.
Banks' customer screening process includes pulling credit reports and evaluating potential customers as if they were borrowers. It can include using the merchant services guidelines of Visa and MasterCard to decide the types of companies appropriate for remote deposit, and also studying the customer's offices for other potential risks.
Bankers say that the rollout of remote deposit follows the deliberate rollout patterns for bank technologies, like Internet banking, debit cards, and automated teller machines, that took time to ramp up in the past.
A report by Celent said that banks with less than $1 billion of assets trail larger banks in deploying the technology to small businesses. A survey of banks with assets of more than $50 billion found that nearly 60% have deployed remote-deposit scanners to small businesses. This proportion drops a few percentage points for banks with assets of $1 billion to $50 billion and to 45% for banks with less than $1 billion of assets.
The $120 million-asset Tuttle Bancshares Inc. in Oklahoma is typical of community banks in its approach to remote deposit capture. The holding company for Sooner State Bank has targeted five to 10 customers with large deposit accounts, and loans from the bank.
"They're very good customers, and everyone that we give the remote product to goes through our loan committee like any other risk assessment that we do," said Gregg Vandaveer, the president and chief executive officer of the holding company and bank. "We know more about them than a regular customer."
Mr. Vandaveer said the bank's caution is over fraud. "They have the check, and they scan it, and they still have the check," he said. "They could scan the check to my bank and take it and deposit it in another bank. We're just erring on the side of caution."
For the most part banks are not seeing much fraud involving remote-deposit customers, and technology companies also have developed systems and procedures that can protect banks from fraud.
Still, caution prevails.
The $338 million-asset Coastal Bankshares Inc. in Savannah, Ga., has about 25 customers using remote deposit. Thomas Wiley, the president and CEO, said the company evaluates customers it is considering signing up to do remote deposits as if they were applying for a loan.
"We'll establish the parameters based on what that underwriting result provides us," Mr. Wiley said. "We want to know our customers just like we would if we were lending them money because, essentially, that's what you're doing."
Daniel Blanton, the president and CEO of Southeastern Bank Financial Corp. in Augusta, Ga., said that 20 to 25 of its 31 remote-deposit customers are ones with which it has had relationships. The $1.2 billion-asset company is just beginning to make a greater effort to sign up customers with which it has had no prior relationship, but that is proceeding slowly.
"We're not looking to sign up a hundred this week. We'd be very nervous if we did," Mr. Blanton said.
He said the bank has a dedicated employee who visits every customer's store to demonstrate the scanner.
"By doing that, we get to see and talk with who would be handling the system and how they would store the checks," he said. "And we basically make a judgment call as to whether or not they understand the severity of their side of the responsibility."
Celent's Mr. Meara said that on-site training may work locally but that, when clients are well outside a bank's region, it can be too expensive to fly out a bank employee to train check handlers. Instead banks that have been aggressive about gaining customers use telephone tutorials, Webinars, or vendors to train new customers.
Leton L. Harding, the executive vice president at the $937 million-asset First Bancorp Inc. in Lebanon, Va., said that his company uses Visa and MasterCard's merchant services criteria when screening business clients.
First Bancorp has been offering remote deposit for more than two years and now has nearly 450 customers using it, which for community banks is unusually high. But it remains vigilant. First Bancorp was to begin a continual random audit routine this month encompassing all its remote deposit customers to make sure they are following the rules properly, Mr. Harding said.
Mr. Meara said that, on average, small banks have only about two-dozen clients using remote deposit because they are being overly cautious. All new customers - whether in a bank's market area or not - are risks to some degree, he said, but he argued that offering them remote deposit actually minimizes, not increases, the chances for fraud.
The early capture of images and code-line information lets banks subject checks to fraud systems much faster than the next-day scans typical for teller-presented checks. Fraud suspects, therefore, can be identified and examined before banks must pay on the items, he said.
A customer could accidentally deposit an item more than once, but banks' back-office systems are designed to flag second deposits, he added.
A fraudster could scan a check into one deposit account and then deposit it in another account with another bank. But Mr. Meara said he doubted such a fraudster would have any long-lasting success because a bank would "know who you are, where you are, and when you made this deposit, and what account you made the deposit to. Of the many banks I've spoken to about this, I have not been aware of a single bank who can attribute fraud uniquely to remote deposit capture."
Perhaps a bigger problem than fraud is lax marketing. The Independent Community Bankers of America did a study late last year that found barely one-third of community banks even advertise remote deposit on their Web sites.
When community banks have been aggressive, they have been able to expand deposits rapidly. A case in point is Independence Bank in East Greenwich, R.I., which was established in 2003 and introduced remote deposit in 2005. After two years business deposits had grown 236% and business deposit profits by 367%, according to the $51 million-asset bank.
John Charette, the vice president of finance and business technology, said that though one-branch bank only has 25 remote deposit customers it has 75 scanner devices in 10 states. In fact, 25% to 35% of the bank's deposit base of $40 million comes from remote deposit, Mr. Charette said.
Independence, like other community banks, is cautious about the customers it equips with scanners, he added. It does due diligence and always visits at least a company's home office for a demonstration, but unlike many community banks it has used the product to acquire customers.
"Our competition seems to offer this product to the customer when they're at risk of losing the customer," he said. "We took this product as an offensive opportunity.
"We're selling this product to make money. A lot of banks are just giving it away to keep customers."
David Peterson, an executive vice president at Goldleaf Technologies, which offers remote deposit services to banks, said "the needle is moving too slowly" in regard to deploying scanners to customers.
"If they're that high a risk, then the risk is there whether they're scanning the checks at their location or walking into your teller line with a manual deposit," Mr. Peterson said. "Either you have a bad check or bad person, but scanning is a zero-risk issue."
Banks, he pointed out, can do due diligence, train the proper person at an office, then see that person leave the company or the scanner be sent to a distant site. This should not matter as long as checks are secured properly and destroyed about a month after the deposit. The technology's fraud detection capability also should override these risks, he said.
Mr. Peterson said many scanners are set up to conceal checks with red ink across their face so they cannot be resubmitted. He added that banks can also establish their own safeguards, such as initially capping the number of checks and the amounts that could be deposited by a new customer until the bank is comfortable with the customer.
First Bancorp's Mr. Harding did not disagree with many of these procedures. But, he said, as he learned during his days as a lobbyist, he "could have all the facts in the world on his side, but oftentimes perception was reality when it comes to the fear of fraud."
Southeastern's Mr. Blanton said that if banks "set up too many trip wires, you're going to get resistance to using" remote deposit capture. One of his customers, a lumber yard, does not get a lot of checks, but the ones it does get are large and he wants the company to be comfortable depositing checks remotely.
Then again, the lumber yard happens to be part-owned by Mr. Blanton's wife. Does the bank do due diligence on it? "No, we felt like we were OK there," he said.