Wanted: A few Good Fraudsters

OK, just kidding. But, there is an interesting irony related to RDC that I’d like to highlight. Risk concerns loom large among the majority of U.S. financial institutions that haven’t yet made RDC available to consumers and mobile banking users. Other banks are throttling small business RDC initiatives, in part, because of risk concerns. Clearly, risk isn’t the only reason banks aren’t rushing to radically improve the convenience and operational efficiency of deposit processing, but it may be the primary reason. So is the concern justified? I think so, but I also think it is hugely overstated. Here’s why. In two consecutive surveys of U.S. financial institutions (September 2011, n=218), fully 90% of surveyed institutions have suffered no monetary loss at the hands of RDC. The small minority that did suffer loss mostly had a single incident – after offering RDC for 4 or 5 years in some cases. Could 90% of credit card issuers make such a claim?

[caption id="attachment_2616" align="aligncenter" width="300" caption="90% of US FIs have suffered no losses through RDC"][/caption] And, the prevailing loss mechanism is straightforward; duplicate presentment. Financial institutions could be on the receiving end of a duplicate item whether they offer RDC or not. This has prompted most financial institutions to install enterprise wide duplicate detection capability. The most interesting scenario involves a fraudster depositing via RDC at one or more institutions and later depositing via the ATM or teller at a second or subsequent institution. Matters are made worse if there is a meaningful delay between the first and subsequent deposits because many banks only look for duplicate items over a narrow time period. Losses have been so low that banks appear unwilling to invest in additional fraud reduction mechanisms. If actual RDC related losses have been higher, then banks could more easily justify the business case to stem losses. One approach would be to extend duplicate detection across institutions. The Federal Reserve, SVPCO, Viewpointe and Early Warning Services (EWS) among others would be in a position to provide these services. With all the commotion about RDC risk, you’d think there would be several industry-wide solutions available by now. Not so. Last month, Mitek announced an initiative, MitekONE that is said to be available in 2012. MitekONE’s mechanism was developed to improve the ability of banks and partners to detect attempted duplicate deposits of checks, both within banks and across institutions. Mitek will be offering this capability through a strategic relationship with EWS. Here we have an innovative response to a pervasive systemic risk. But, absent a few good fraudsters, I wonder if banks will invest.