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This Fraud-Spotter Checkmates Bad Checks

Banks take advantage of high-tech programs that are much better than humans at detecting forgeries and overdraftsIn late September, when someone tried to slip a bad check for $84,000 past Bank Leumi, the scammers probably thought the odds were on their side. After all, the New York City-based financial institution, which has $56 billion in assets, processes some 130,000 checks a month. How much attention could it possibly give to one check? But the bank had an ace in the hole: check-fraud detection software from SQN Banking Systems in Rancocas.

“We haven’t suffered any significant loss since we installed the SQN fraud-prevention software last year,” says Ron Ciborowski, a senior vice president at the bank. He adds that the software lets Bank Leumi evaluate more checks in less time and “greatly decreases” the bank’s exposure to fraudulent checks.

Bad checks are a big problem, according to the American Bankers Association, a Washington, D.C.-based trade organization that tracks the trend with an every-other-year survey. Depending on the individual circumstances, banks may have to make good on any bad checks that slip past them.

And the stakes are increasing. In 2003, the last year for which ABA has figures, there were 616,469 attempts at check fraud—including fake signatures and overdrawn accounts—representing $5.5 billion of potential losses. While the number of bum checks had only increased by 3% from 598,514 cases in 2001, the potential losses had skyrocketed by almost 28% from $4.3 billion.

Actual losses, though, dipped a bit to $677 million in 2003 from $698 million in 2001. The ABA credits check-fraud prevention systems like SQN’s for the decrease.

“When SQN started in 1983, it was primarily a check-verification company,” says Joseph Uhland, SQN’s president. Back then his father, who launched the business, worked out of his home in Cherry Hill. “Around late 1996 we expanded to other kinds of fraud detection.”

Uhland says the 35-employee company develops most of its own software though it also sells products created by other companies. It rang up about $4.6 million in sales in 2004, and expects to reach $5 million this year. The company gets from $10,000 to $30,000 per system, and offers optional maintenance for an annual fee that’s equal to from 16% to 17% of the cost of the program itself.

SQN is not the only firm plying these waters. Carreker, a Dallas-based company, does about $119 million a year in sales. But Uhland must be doing something right. Bank Leumi’s Ciborowski says he looked at a number of firms before deciding that SQN offered the best mix of price and features.

While SQN’s original software compared the signature on a check with a verified signature on file, later products go after other parameters. The software can look for out-of-range or duplicate check numbers, invalid routing and transit numbers, and check amounts that seem out of line with a customer’s previous spending profile. It can also measure the physical dimensions of paper checks and compare them with measurements stored in its database. When the software spots something suspicious, it generates an exception report to alert a banker.

“Our products watch for patterns and develop customer profiles,” says Uhland. “It also looks to see if a number of checks have been written for the exact same amount, or if they’re all even or odd. The programs are also flexible enough to let financial institutions modify the underlying rules to fit their own situation.”

SQN counts large institutions, like Bank of America and Wells Fargo, as customers. But Uhland says that small banks are also propelling his business.

“Check fraud can hit just about any size bank, but community banks are our biggest source of growth since they don’t have a large information technology budget,” he says. The ABA’s numbers support that, with the survey noting that although regional banks saw a moderate increase in check fraud from 2001 to 2003, community banks took a significantly higher hit.

Even though there’s plenty of business for SQN right now, its main market—paper-based checks—is actually declining thanks to factors including increased online shopping and a piece of federal legislation called Check 21 that became effective October 28, 2004.

Aimed at moving the banking industry’s check-clearing processes away from paper and into an electronic format, Check 21 encourages banks that accept a check to capture and transmit its image to the originating bank—rather than shipping the actual paper documents to the institution.

Driven by these developments, and by an increase in the use of credit cards, online banking and other paperless transactions, the Federal Reserve concluded that in 2003, for the first time, the number of electronic payments, 44.5 billion transactions, exceeded the volume of check payments, which totaled 36.7 billion exchanges. In a statement released December 6, 2004, the Fed indicated it expects the trend to continue.

But Uhland’s says he’s not worried about that. “If there are fewer paper-based checks, it means that it’s tougher for bankers to manually find a forgery,” he says. “The old standards, like watermarks, ink color and even the feel of the paper, are all disappearing.”

For institutions like Bank Leumi, SQN’s products are an added layer of security.

“We still use the manual routines we previously developed,” says Ciborowski. “But some signals, like out-of-sequence or duplicate check numbers, might not be caught by the human eye.” He says that’s what caught the attention of the SQN software in the case of the fake $84,000 check.

“Fraud is still on the increase,” adds Uhland. “And our business is not tied to paper checks.”

E-mail to mdaks@njbiz.com


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