The Critical Importance of Physical Rear Endorsements
On March 4
th, Orbograph
announced a new service which (put simply) can detect and read the rear endorsements on deposited or cleared checks. This announcement might be a bigger deal than you think.
This type of a processing feature should be important to financial institutions and even businesses / corporations for many reasons, not the least of which is because a paying bank can return a non-endorsed check. But let’s take a closer look at an issue that the industry has faced for a long time, but is exacerbated by Remote Deposit Capture…
For decades, most financial institutions, and especially correspondent banks, have required (at least in their legal agreements) that all checks deposited be properly endorsed. This helps mitigate fraud, shift liability to the bank of first deposit and simply reduce return items.
A new wrinkle in the world of RDC is the following:
1. An RDC client scans the check for deposit but does not place a physical endorsement on the back.
2. That item is cleared and the client receives availability
3. The client then goes to deposit it at another financial institution or cashes it at a check cashing facility. Either way, the item is accepted and the client is paid (again).
4. The item presented the second time is returned by the paying bank, and (and I’ll coin the phrase) the “Bank of Second Deposit” is left with losses. (In the event of a check cashing facility, the bank of second deposit may return the check to them and debit their account).
The end result is the original client gets paid twice, someone has been defrauded and lost money, and the bank that originally converted / truncated that item may be vulnerable to a lawsuit or losses since they effectively provide an indemnification against that original item being presented ever again (implied by Check 21).
There can be many variations on this scenario where that un-endorsed item gets presented multiple times. Another potential scenario could be when the un-endorsed items are lost or stolen, then presented by another party. Either way, the basic results are the same: The Bank of First Deposit (the one who first cleared the item) may be at risk, and the “Bank of Second Deposit” (or their client) has incurred losses due to a returned item.
If the original depositor were required to place an accurate, restrictive endorsement on the back of the check (example: For Deposit Only to Account # 123456, Bank Name, Payee name), and the presence of this appropriate type of endorsement could be verified, the frequency of this type of fraud / risk / returned item could diminish significantly. A few likely implications:
1. It would be much more difficult for an already deposited item to be cashed at a check-cashing facility. – They’d see the restrictive endorsement!
2. The Bank of Second Deposit could identify an inappropriate endorsement (the endorsement would say for deposit only at a different FI) and take action much earlier in the clearing or deposit process.
3. The likelihood of previously deposited checks being stolen would decrease. If the truncated checks at a client location were lost or stolen, the restrictive endorsement would make it much more difficult for a criminal to do anything with the checks.
While ensuring an endorsement, and ideally the appropriate restrictive endorsement, may not be a foolproof solution, I believe that appropriate restrictive endorsements and the ability for financial institutions to recognize them as such (ideally in an automated, intelligent process) can provide a safer and less costly payments system.
Orbograph will be providing Demonstrations of their endorsement analysis capabilities at BAI Payments Connect, and I certainly plan to stop by to see them.