Will Image Exchange Have Some Banks Seeing Double?

Peter Lucas
January, 2006
Digital Transactions

Following are excerpts taken from the January, 2006, edition of of Digital Transactions.

Duplicate debits to a demand-deposit account have always been a problem associated with check processing, but banks have been able to minimize their mistakes in the paper check world.  Now they are facing a more daunting challenge as the industry prepares to make the leap into electronically exchanging check images.

The problem:  duplicates of image replacement documents (IRDs), the paper printouts made from check images and presented to paying banks for settlement.  Until recently, the primary source of the problem was lack of control by the collecting and paying banks and the Federal Reserve when it came to the presentment of images to be converted into IRDs.
                     
The intermediaries had no real controls in place to spot whether an IRD was routed through their network twice or if a duplicate went through an alternative network.  At the receiving end, paying banks also suffered from lack of controls by not having an exception queue for questionable IRDs and images. 

The near-term fix has been relatively easy.  The Fed now has tighter controls in place to track what images and IRDs pass through its network and receiving banks are setting up exception queues for questionable IRDs and images to be reviewed manually.  No one knows exactly how many duplicate IRDs are now floating around, but the general estimate is that the number is not what it once was.  Still, the onset of end-to-end image exchange could cause the problem to rear its head anew.

“More controls have certainly been put in place, but the system is not 100% accurate, and as more banks get on board with image exchange many of the problems experienced by the early adopters are apt to be repeated,” says Rod Springhetti, senior director, payments business development for Carreker Corp., a Dallas-based vendor of Check 21 software.

The two most common sources of duplicate IRDs are checks returned by the paying bank for insufficient funds and rebate checks using the same MICR (magnetic ink character recognition) lines.  In the case of the former, merchants will typically resubmit a returned check on the chance the customer has since properly funded their account.  Many times, customers write a check against anticipated float but get caught short when a payment clears ahead of a deposit.  Resubmitting a check is simpler than having to go back to customers and wrangle the money out of them or hire a collection agency to do it.  In the case of the latter, rebate checks typically use the same MICR lines, which means they all have the same embedded sequencing and account data.

Given  these problems, most banks have concluded they will have to deal with some duplicate IRDs, according to Springhetti.  “The key is to have controls in place across all channels in the clearing process to determine which duplicates are valid and which are not,” he says.

Carreker, like many check-imaging software companies, have developed an application to enable collecting banks and networks to spot duplicate transactions in real time.  In most cases, the transactions are pulled from the system and manually reviewed before they are processed.