An End to 'Empty Envelope' Fraud? Automated Deposits Reduce Losses and Enhance User Experiences
It's been nearly six years since the passage of Check 21, the Check Clearing for the 21st Century Act. Yet, the industry has not fully embraced all of the reform's benefits.

Check 21 is the federal law that, in part, gives electronic check images value that is legally equivalent to their original paper checks. It also speeds the delivery and exchange of check images, thus speeding the clearance process. Other advantages have been realized, too, such as the ability for merchants to remotely deposit check images, rather than physically having to transport paper checks to night depositories. ATMs have reaped benefits as well, where the advent of imaging has allowed institutions to get rid of deposit envelopes -- thus automating the process of check and cash acceptance.

Several institutions have quickly emerged as leaders in the automated, so-called "envelope-free" ATM movement. Wells Fargo is the most notable -- the first large institution to pilot a large-scale deployment of imaged ATMs.

But as Wesley Wilhelm, a senior analyst at Aite Group LLC, points out, the imaged ATM movement has remained somewhat isolated. While most of the top-tier institutions have completed or nearly completed their migrations to automated ATM deposits, a significant percentage of mid-sized institutions and the majority of small banks and credit unions have made few strides. Wilhelm estimates that about 50 percent of the country's bank- and credit-union-owned ATMs still rely on envelopes, and that keeps the door open for fraud.

No More Empty Envelopes

Empty-envelope fraud is perpetrated by accountholders (or those posing as accountholders) who deposit envelopes that are either completely empty or hold deposits of cash or checks for amounts that are less than what they have keyed in at the ATM. Banks and credit unions don't catch the fraud until the envelopes are opened, often several days after the actual deposit has been made.

Imaged deposits eliminate empty-envelope fraud, since deposits are imaged and verified in real-time, as they are inserted into the ATM. If damaged or suspicious deposits are made, they are not accepted until the bank or credit union has time to give them a closer review.

"Empty-envelope obviously is a problem that can be eliminated," Wilhelm says. "But imaging could open some doors for fraud, too." Fraudsters could counterfeit checks and then image those checks at the ATM, in hopes of getting fast access to cash -- taking advantage of the ATM channel, since it does not involve human review of the check. But controls in the software could catch many counterfeit deposits, Wilhelm adds.

Deposit fraud continues to account for about 18 percent of all fraud perpetrated at the ATM. Skimming ranks among the highest of these crimes, followed by other, more common types of attacks, such as malware injection and the addition of cash-trapping devices.

While deposit fraud at the ATM has remained stable for the last three to four years, Wilhelm says the ability for fraudsters to commit these crimes is significantly reduced when ATMs move to imaged or automated-deposit platforms.

But imaging technology is expensive, and losses related to check fraud are not high enough for bankers to see an immediate need for upgrades, says Douglas Russell, director of the United Kingdom-based ATM fraud consultancy DFR Risk Management Ltd. "So long as the banks credit accounts before reconciling deposits, then the fraud will remain profitable," he says.

Because institutions are required to provide access to deposited funds within specified timeframes, some institutions would rather eat losses than invest in regular reconciliation, which remains a very manual process. "Last time I discussed the issue with a large U.S. bank, they claimed that the cost of regularly reconciling deposits was higher than the fraud losses," Russell says.

Doug Johnson, vice president of risk management and policy for the American Bankers Association, says institutions have to take all of the expenses related to envelope deposits into account, such as deposit reconciliation and the need for dual-control envelope opening, to justify the cost of upgrading. Dual-control envelope opening, which requires two employees to open deposited envelopes, is put in place to prevent a bank customer from claiming an employee stole a check or cash deposited at the ATM. It is a manual process with inherent expense.

"Moving to technology that eliminates the envelope can help mitigate this type of (empty-envelope) fraud," Johnson says, but some institutions are still trying to justify the expense.

Early Adopter

Tukwila, Wash.-based Boeing Employees' Credit Union has justified the expense, says Shirley Taylor, manager of BECU's virtual banking channel. Over the last four years, the $8.6 billion institution has moved more than half of its deposit-taking ATMs over to imaging. Deposit fraud has practically been eliminated at those automated ATMs, Taylor says.

"Empty envelope has been the biggest problem, and as we've moved our deposit ATMs to image, that kind of fraud has gone away," she says. Other types of deposit fraud, such as schemes that involve counterfeit or suspicious checks, also have been curbed. "We're not hand reviewing every ATM deposit, but with images, you discover things at a faster level," helping to mitigate risk, Taylor says.

Just more than 90 of BECU's 184 ATMs now accept imaged deposits. In addition to fraud mitigation, the automated terminals have seen increased deposit volume. Taylor says the credit union takes in about 300,000 deposits a month at its ATMs. "I think there are a number of benefits," she says. "Everyone is trying to make a business case for this ... but it's definitely the route to pursue."

Wilhelm agrees, saying simply, "When you've got the capital, pull the trigger. You can not only get a more secure environment; you can get more product differentiation for your customer base."


About the Author

Tracy Kitten

Tracy Kitten

Executive Editor, BankInfoSecurity & CUInfoSecurity

A veteran journalist with more than 18 years' experience, Kitten has covered the financial sector for the last 11 years. Before joining Information Security Media Group in 2010, where she now serves as the Executive Editor of BankInfoSecurity and CUInfoSecurity, she covered the financial self-service industry as the senior editor of ATMmarketplace, part of Networld Media. Kitten has been a regular speaker at domestic and international conferences, and was the keynote at ATMIA's U.S. and Canadian conferences in 2009. She has been quoted by CNN.com, ABC News, Bankrate.com and MSN Money.





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