Last month’s signing into law of The Small Business, Enterprise and Employment Bill will signal a radical change to the British retail banking landscape, as remote cheque deposit capture (RDC) systems legally become part of everyday banking.
Digitising this payment method will transform the way that cheque payments are handled for business owners, consumers and banks alike.
For businesses and consumers, the ability to deposit cheques by simply sending a photo or scanned image of a cheque to the bank vastly improves convenience and accelerates the payment clearing process. In addition, the use of faster payments schemes by financial institutions also provides efficiency benefits, as cheque payments made to trusted beneficiaries can be done in a matter of minutes, rather than days.
Hundreds of billions of pounds worth of cheques are processed in the UK each year, accounting for 10 per cent of all payments made by individuals in 2012, showing the scale of this landscape and the opportunity this presents for taking a step forward in digital banking.
We’re already seeing the value of this technology recognised by consumers in the US. According to the 2014 Fiserv Consumer Trends Survey, 65 per cent of households now own a smartphone and 48 per cent of customers use their smart phone to access mobile banking.
In addition, the number of financial institutions offering RDC continues to grow. In the US alone financial institutions offering RDC doubled from 1,000 in 2012 to 2,000 in 2013 and is expected to exceed 4,000 in 2016.
The increasing complexity of fraud
This digital imaging payment approach, while appealing to today’s technology-enabled consumers, it is also attracting the attention of fraudsters. According to a recent survey by the American Bankers Association, exposure to cheque fraud exceeds over $7 billion (£4.6 billion) annually.
As financial institutions (FIs) introduce alternative payment channels, such as RDC, they must keep on top of the security threats that emerge with each new channel.
Digitising payment methods not only makes the process faster and more efficient, but it also creates new entry points for fraudulent transactions. Banks must be able to quickly and accurately monitor both transaction and customer risk at these new points of entry to protect customers and combat fraud.
Risk in real time
A strong fraud defence strategy for RDC is underpinned by the use of real time fraud detection capabilities. Many current tools do not operate in real time, making fraud detection at the time of deposit extremely difficult.
Cheques are not traditionally associated with real time operation, but advancements in technology such as RDC mean processes are expected to operate in this way and risks can be identified before money goes out of the door.
RDC allows for banks to bring anti-fraud measures into play earlier than previously. Through real time capabilities that assess customer and transaction risk in real-time, FIs can score cheques and process them through the appropriate context of customer “normal” behaviour patterns.
This allows them to quickly flag possible issues, identify “out of pattern” events, and based on the treatment rules as defined by the FI, whether a cheque should be held for further review or is safe for deposit.
A layered approach to combatting fraud
RDC represents a true paradigm shift in cheque processing. and an opportunity for UK banks.
Early and broad deployment of RDC represents a "land grab" opportunity for new customers, but those new customers represent a unique risk to the bank. In order to capitalise on this once in a lifetime opportunity, banks need a layered fraud prevention approach, which starts with risk strategy.
FI’s need technology and analytics that enable them to achieve a customer and account-level view of “normal” behaviour. The ability to uniquely understand each customer based on their financial and non-financial events is a critical component of a robust fraud defence.
Leveraging transaction data with non-financial data, including data captured during the boarding process, can help to define what is expected to be normal for each individual customer. Historical information, such as average balances, number of non-sufficient fund events (NSF’s) and overdrafts over time and other customer attributes also builds a more robust profile and helps more accurately detect and assess unusual behaviour patterns.
Monitoring analytics are also an important part of a layered defence. Applying sophisticated mathematics and scoring transactions and other events to identify complex patterns of fraud that could not be defined in a set of rules improves fraud detection rates.
Monitoring analytics leverage customers’ behaviour profiles to identify risk at the customer, account and item level. Rules are used to determine what action to take based on risk scoring thresholds that are set as part of the organisation’s risk strategy.
Automatically monitoring customer and transaction risk in real-time and identifying out of tolerance events by leveraging dynamic transaction and customer profiles is the key to managing the fraud risk of RDC transactions.
This approach enables the financial institutions to flexibly grow and adapt their fraud mitigation strategy as their RDC experience deepens, product offerings mature, and risk strategy adapts.
Karen Taylor is product manager of Financial Crime Risk Management at Fiserv.