In Fraudster's Sights, Small Banks Secure Systems

Chris Costanzo
April 5, 2005
American Banker

Following are excerpts taken from the April 5, 2005 edition of American Banker.

Community banks have become increasingly attractive targets for check fraudsters.

The trend, first detected at the end of 2002, was confirmed by an updated American Bankers Association's survey on check fraud released in November.

The good news is that largely by spending more on software, small banks have partly reversed the spikes in check fraud spotted in the 2002 survey.

Four hundred seventeen banks were surveyed for the 2004 report.

Crooks seem to have picked up on another reality exposed by the ABA survey: that small banks invest less than large ones in technology to thwart check fraud.

A wide variety of technologies can be used to fight these scams. Digital signatures can be stored in a database and called up and verified by tellers when customers cash checks. Rules-based systems, often deployed in the back office, compare checks against a prescribed set of attributes to find anomalies that could indicate fraud. For example, if a customer is writing checks numbered in the 2000 range, one with a 7,000-range number would be flagged.

Services are also available to ensure that customers are not faking their identities when opening accounts. Among other things, such flag inconsistencies between ZIP codes and area codes or between birth dates and Social Security numbers.

Though all of the largest banks in the ABA survey use rules-based systems in their back offices to identify suspicious checks, only 8% of the smallest banks do. Similarly, all of the largest but only 14% of the smallest use software to screen new-account applications for fraud.

"There's no good excuse" to accept forged signatures or have insufficient-funds fraud, said Avivah Litan, a vice president and research director at Gartner Inc. in Stamford, Conn. "The fact that it's still going on shows banks are not taking advantage of the latest systems."

That may be changing as small banks continue to feel the sting of a rise in fraud attempts.

The bank software vendor Carreker Corp. expected the ABA's 2002 report to trigger an influx of small-bank customers the next year, said Steven Schaeffer, the Dallas company's senior product manager of fraud solutions. "But it took an extra year of pain for smaller banks to start looking for solutions," he said.

Last year was Carreker's busiest year yet for sales of FraudLink, its rules-based fraud detection system, Mr. Schaeffer said - and most of the growth came from small banks.

The $950 million-asset North Dallas Bank, most of whose customers are small businesses, began using FraudLink in 2002. The next year the system detected and prevented $3 million worth of fraud, and last year it thwarted $3.5 million worth, said Greg Niemeyer, an executive vice president.