As of July 1, Reg CC will provide a new indemnity designed to protect financial institutions (FIs) that receive malicious duplicate presentment of paper items previously deposited at another bank or credit union via remote deposit capture (RDC). If your FI is the initial recipient of an item deposited via traditional commercial RDC or consumer mobile RDC (mRDC), should that same paper item later be presented for deposit at another FI, and should that FI sustain a loss due to the item already being paid, you must make the other FI whole, including reimbursement of reasonable expenses for collection.
Fortunately, this indemnity goes away if, at the time the other FI accepts the item, it is already endorsed in a manner inconsistent with its presentment as a paper item. In other words, if the other FI accepts the paper item for deposit at their teller line, but the item is endorsed with “For Mobile Deposit Only,” you’re off the hook.
RemoteDepositCapture.com’s 2017 mRDC Industry Study indicates malicious duplicate deposit losses are relatively low, but this new indemnity still has many bankers agitated. To eliminate the risk associated with the new indemnity, some auditors are pushing digital services teams to implement a solution that guaranties items are appropriately endorsed. While this approach could eliminate the risk, there are operational and customer experience implications banks and credit unions need to consider.
Considerations for Traditional Commercial RDC
Most FIs are focused on how the new indemnity will impact consumer mobile solutions, and rightly so—preventing losses from malicious duplicates is substantially more difficult for mRDC than for traditional corporate RDC. Corporate RDC services are governed by a separate contract between the FI and the business. (If yours aren’t, they should be!) Since the business is in control of paper items during the entire RDC life cycle, FIs can use this contract to hold the business liable for losses due to negligent or fraudulent behavior by its employees. If your contract is written correctly, and if you actively verify your depositors’ compliance through RDC reviews, you should be adequately protected from the risk introduced by the new Reg CC indemnity. Accordingly, banks and credit unions should review their commercial RDC agreements to confirm they have appropriate language in place.
In addition, banks and credit unions can opt to require commercial RDC users to physically endorse every deposited item, but there are customer experience implications. Many FIs leverage virtual endorsements, which apply an image of an endorsement to the image of the back of the check. Unfortunately, because virtual endorsement is applied only to the check image, not the paper item, it does not protect the FI against subsequent redeposits of scanned items.
Banks and credit unions that want to guarantee actual endorsement of RDC items generally require businesses to do one of the following:
- Endorse items by hand.
- Endorse items using a customized stamp.
- Use a scanner that applies an ink jet endorsement.
The negative customer experience implications of the first two options should be self-evident. Manually endorsing checks is cumbersome, and stamps and ink pads introduce their own difficulties. With these solutions, depositors’ frustrations are likely to rise in proportion to their deposit volumes.
Scanners that apply ink jet endorsements may seem like a hands-off alternative, but that’s misleading. Installing, maintaining, and repairing scanners is the number-one headache for every RDC support team. Because there are more moving parts, scanners with ink jet endorsement are more likely to break than scanners without it, leading to more service calls from frustrated users, which is bad news for both the client and the FI’s support teams. And ink jet modules can fail for a variety of reasons. Some enterprising businesses may even figure out how to disable them. Malicious users, intent on committing fraud, can find ways to circumvent ink jet endorsement. All this leads us back to the need for clear liability wording in FI contracts as a “must have” – even for FIs who require ink jet endorsements.
Considerations for Consumer and Microbusiness Mobile RDC
The consumer environment is a different story. The protection provided by consumer mRDC disclosures falls far short of the legal coverage provided by commercial contracts. Since the majority of RDC fraud comes from mRDC, it makes sense to require consumers to physically endorse every deposited item. And, because consumers deposit far fewer checks, they are more willing to do so. But getting consumers to correctly endorse mRDC items can be a challenge. Many mobile banking vendors now embed FI-defined endorsement instructions in their mobile apps. Still, users often misunderstand or simply ignore these instructions. Accordingly, many FIs are enabling automated endorsement validation for mRDC deposits. Most mRDC vendors offer such functionality, and, if done right, it increases an FI’s protection against claims based on the new Reg CC indemnity.
But even this approach has user experience implications. Automated systems continue to improve their ability to read handwriting, but the number of exceptions is almost sure to rise once this functionality is enabled. Users won’t respond well to posting delays or rejected items, and they may have real problems depositing failed mRDC items at the teller line with “for mobile deposit only” scrawled on the back. It can also negatively impact support teams, since they must review, analyze, and decision items automated systems can’t confirm. (These same staffers are also likely to get calls from frustrated consumers when endorsements fail.) Before implementing automated endorsement validation, FIs need to evaluate options like monetary thresholds to potentially reduce the number of items their teams need to review. FIs should also prepare effective materials to explain the new process so they can wage a proactive campaign prior to enabling automated validation and help irritated consumers understand why their deposit was delayed or denied once validation is deployed.
Even with all this, don’t get so caught up in endorsement issues that you neglect other types of risk. Most RDC systems provide mitigation tools that help analyze the overall fraud potential for each deposit. By relying on layered mitigation methods and intelligently dealing with endorsements, banks and credit unions should be able to sustain RDC programs with minimal loss and, perhaps more importantly, minimal disruption for their RDC and mRDC users.