By Ray Birch
TAMPA, Fla.—Credit unions face a tough decision regarding the popular remote deposit capture–accept more fraud losses or make a policy change that could impact member service.
RDC, a service provided by many credit unions that provides extended reach, allowing them to compete more effectively against banks and their many locations, is being affected by a change to Regulation CC that takes effect July 1.
The new rule addresses the issue of individuals depositing a check twice, first via RDC and then a second time by cashing the paper check, typically at a check casher. The decision all FIs face under the new rule is whether to require a new check endorsement policy that will likely upset some consumers and add a level of frustration to what has become a very convenient service, or accept losses when a check is deposited twice.
“What has become a problem for the check-cashing industry is that when a financial institution receives a check deposited via RDC and receives settlement, and later the paper check is presented at a check cashing location, or any other financial institution other than the issuing bank, that second business gets the check returned and has no means of recovery for the loss,” said Lou Grilli, director of payments strategy at Trellance.
Shift in Liability
But on July 1, changes to Regulation CC shift the liability for double presentment to the financial institution that accepted the deposit via RDC. Under the revision, a credit union or bank that created the image of the front and back of a check is known as the truncating bank, and in so doing indemnifies any other depositary institution, which includes check cashing businesses, for losses incurred due to accepting a check that was previously deposited, Grilli explained.
Lou Grilli
“After July, if someone deposits a check into their credit union account—the truncating FI, and then goes to Norton’s Check Cashing Service to cash out, Norton’s Check Cashing Service can recover directly from the credit union the full amount of the check plus legal fees and other associated expenses,” said Grilli. “There is one exception to this shift: if the check has a ‘restrictive endorsement,’ for example, ‘For mobile deposit only at ABC Credit Union,’ and if a second institution accepts that check, it is not eligible for reimbursement from the truncating bank.”
Grilli summed up the new rule in simpler terms by saying that paper now trumps a check image in deciding who gets the funds, as long as the paper check and the digital image do not have a restrictive endorsement.
Two Drawbacks
Making it mandatory for members to add a restrictive endorsement eliminates the indemnification to any FI that later receives the original paper check for losses from paying the check. But it also brings two drawbacks, Grilli said.
“First, this is a point of confusion for some members, and creates a friction to a service that better image recognition has made fairly frictionless. The second drawback is that this must be enforced for all checks, meaning that the credit union must request their RDC vendor to enable optical scanning to look for the restrictive endorsement. Given all of the variabilities of handwriting, and the ability of the software to correctly scan, many more checks may be rejected as a result of this, causing member dissatisfaction.
“This is a decision credit unions will have to make,” continued Grilli about balancing member service against suffering more fraud losses.
But Grilli surmised that many credit unions, at first, may decide to keep their RDC process just as it is and accept more losses, simply because RDC is such a valuable service.
“I think a number of credit unions will keep their RDC policies the same, at least for a while,” he said. “When it comes to duplicate check fraud, we are not talking about a large number. Only 3.5 of every 10,000 checks deposited to banks and credit unions are duplicates, according to the 2017 Mobile Remote Deposit Capture Industry Report. And, while checks are not going away, their usage numbers decline every year.”
What May Force Policy Change
What may convince credit unions to make a policy change and require the restrictive endorsement is what check-cashers may begin to ask for in damages above the amount of the check.
“But leaving their RDC policies the same comes with some risk,” noted Grilli. “We have no way of knowing the extent of, or what damages will be claimed by the check-cashing companies when a check is deposited twice and they hold the paper that does not have a restrictive endorsement. With the new rule not having a cap on losses or even a definition of losses that can be claimed, this could balloon—maybe check-cashers ask for five times the amount of the check to cover their time and inconvenience.”
Grilli noted that criminals, too, may see this new rule as means to make money from FIs that don’t move to restrictive endorsements.
“Will fraudsters see this a loophole they can exploit? Will there be bad checking cashing companies that take advantage of this? I am not saying the sky is falling, but there is a lot that is unknown,” he said.