Addressing Issues Raised in FFIEC's Risk Management of Remote Deposit Capture

By Bruce Rennecker, VP, Product Management, Digital Check

In order to help financial institutions mitigate the risks of remote deposit capture, the Federal Financial Institution Examination Council released guidelines in January to highlight possible problem areas that need to be addressed.Although a number of areas of potential risk-ranging from access to sensitive personal information to inadequate training for customer users-are included in the FFIEC's "Risk Management of Remote Deposit Capture," some key issues to focus on include poor image quality, fraud and document control.

The guidelines illustrate the following example of the correlation between established controls and check settlement: "If a financial institution accepts a deposit of check images from a customer through the RDC system, legal risk exposures may be related to the controls over the process used for image capture or image exchange and the institution's arrangements and contracts for clearing and settling checks" (FFIEC, 2009).

In other words, the more controls the financial institution management team can establish in the RDC process, including actions such as a physical endorsement and audit trail on the check, the lower the risk of potential fraud or customer mistakes.

The ability to create audit trails to mitigate the potential risk of fraud is of utmost importance. Check scanners should use magnetic ink character recognition (MICR) readers coupled with optical character recognition (OCR) to ensure checks are read correctly. The API flags any non-MICR items for the application to screen further.

A rear ink jet printer can be used to print on the back of the physical check as being electronically deposited to a specific bank and to uniquely identify each check with a date and transaction number. These measures provide item-level control, help reduce the resubmission of checks associated with operator error, and reduce headaches when identifying exception checks. Unlike a franking stamp that can stop working or be mechanically defeated, the presence of the ink jet data can be verified automatically via image processing (OCR) in the API or RDC solution.

Tight control over the scanning process occurs by linking a scanner to a specific RDC customer via the unique scanner serial number. Additionally, the check image can also be tracked back to the scanner via the same serial number embedded in the image record. Ensuring the image is original can be accomplished via the use of a checksum at the time of capture via the scanner API.

In addition to having proper procedures and access controls in place, financial institution executives must also address the physical use of scanners and the handling of paper checks. Poor image quality can lead to delays in processing checks as well as having checks rejected by the paying bank-a problem that exposes the bank of first deposit to potential loses. In order to reduce or prevent this risk, look for scanners that offer unique thresholding and exception image processing in their interfaces via a check's MICR data. Captured and thresholded images are immediately tested for quality against the Financial Services Technology Consortium's image quality standards and other parameters to eliminate problems later on.

The trend in newer check scanners in the market is to make them "foolproof." Scanners can detect and rotate checks scanned upside-down to decrease operator interactions and potential errors. It also reduces the need for replacement documents since items with torn edges can be read upside-down instead of having to use a carrier or replacement document.

The report states that image quality can affect risk within the system, as well as faulty equipment due to a flawed design, regular "wear and tear" or intentional tampering. Banks can avoid these issues by having a tight link between the check scanner, API and software application since these relationships cannot be easily tampered with or hacked. Remote device monitoring can also mitigate risks caused by wear and intentional tampering.

Financial institutions must take a proactive stance to mitigate risk in all its forms in the remote deposit capture process. Arming yourself and your small business customers with scanners that address all of the attributes discussed in the FFEIC's guidelines is the best hedge against problems in the future.

Bruce Rennecker is VP, product management for Northfield, Ill.-based Digital Check, a manufacturer and distributor of electronic check scanners.