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.
ÂWe havenÂt suffered any significant loss since we installed the SQN fraud-prevention software last year,Â 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 Âgreatly decreasesÂ the bankÂs 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 fraudÂincluding fake signatures and overdrawn accountsÂrepresenting $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 SQNÂs for the decrease.
ÂWhen SQN started in 1983, it was primarily a check-verification company,Â says Joseph Uhland, SQNÂs president. Back then his father, who launched the business, worked out of his home in Cherry Hill. ÂAround late 1996 we expanded to other kinds of fraud detection.Â
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 thatÂs 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 LeumiÂs Ciborowski says he looked at a number of firms before deciding that SQN offered the best mix of price and features.
While SQNÂs 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 customerÂs 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.
ÂOur products watch for patterns and develop customer profiles,Â says Uhland. ÂIt also looks to see if a number of checks have been written for the exact same amount, or if theyÂre all even or odd. The programs are also flexible enough to let financial institutions modify the underlying rules to fit their own situation.Â
SQN counts large institutions, like Bank of America and Wells Fargo, as customers. But Uhland says that small banks are also propelling his business.
ÂCheck fraud can hit just about any size bank, but community banks are our biggest source of growth since they donÂt have a large information technology budget,Â he says. The ABAÂs 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 thereÂs plenty of business for SQN right now, its main marketÂpaper-based checksÂis 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 industryÂs 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 bankÂrather 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 UhlandÂs says heÂs not worried about that. ÂIf there are fewer paper-based checks, it means that itÂs tougher for bankers to manually find a forgery,Â he says. ÂThe old standards, like watermarks, ink color and even the feel of the paper, are all disappearing.Â
For institutions like Bank Leumi, SQNÂs products are an added layer of security.
ÂWe still use the manual routines we previously developed,Â says Ciborowski. ÂBut some signals, like out-of-sequence or duplicate check numbers, might not be caught by the human eye.Â He says thatÂs what caught the attention of the SQN software in the case of the fake $84,000 check.
ÂFraud is still on the increase,Â adds Uhland. ÂAnd our business is not tied to paper checks.Â
E-mail to [email protected]
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