I think it helps to look at the “traditional” process of depositing and clearing paper checks, compare that to the process of RDC and Image-based clearing, then take a closer look at RDC to see how we can “optimize” the system.
Fake checks were a problem even before RDC came about. Authentic checks with poor or no MICR were (and still are) prevalent. Very few banks actually refused to accept checks that looked suspicious. So… in the “traditional” way of check clearing (Pre-RDC), the vast majority of items were accepted and forwarded for clearing. If the item was fraudulent, it would eventually be returned. If it was a legitimate check but had no MICR, it would be “corrected” and actually clear. This timeframe typically took anywhere from 1 to several days (rarely, in some cases, weeks or months). To the point made by the previous poster, I agree that MICR detection can be a bit of a “Red Herring”.
However… If your bank has the policies and procedures in place to deal with suspicious checks or checks with no MICR, then you may be on to something with the importance of MICR in Risk Management. Unfortunately, I know of no banks who actually decline to accept a check without MICR. Some banks may actually reject it from being captured via RDC, but the customer is then asked to simply mail the check in, or bring it into a branch to be deposited. –And don’t forget… the client could simply just go to a deposit-enabled ATM to deposit the items as well. Either way, the bank still accepts the item and attempts to clear it. But this time, instead of clearing / starting via RDC, there is more work to do by the FI in order to get the item cleared.
RDC has actually made dealing with these issues less “risky” in many ways…
- By simply using RDC, the item gets into the clearing stream faster. The faster the item gets into the clearing stream, the faster you’ll become aware of returned items.
- The OCR capabilities in RDC systems continue to improve. Accurate data compared against R/T and Account # databases upfront can help to identify fraudulent items (or potentially fraudulent) and the bank can then place a hold on funds availability for that item.
- RDC Systems are increasingly able to not just detect, but also “read” endorsements and payee lines on checks. In the near future, systems will be able to verify that the item being deposited is actually made payable to the depositor (or not), as well as verifying an appropriate restrictive endorsement. Already, there are solutions which can verify the rear endorsement, and take appropriate action in the event of no endorsement.
- Unlike the “traditional” deposit process, most banks are now placing limits, thresholds, and monitoring deposits made via RDC in a manner most never employed in the traditional process. This, in and of itself, makes RDC a safer way to accept check deposits.
Last but not least, the FFIEC guidance on RDC Risk Management has helped make the industry aware that they should only be making funds available after the checks have cleared (at the earliest) or else they need to underwrite the exposure of providing availability before items are cleared. Many banks are also requiring minimum balances and taking other steps to deal with the “what if” situations.
So, what if a fraudulent item with no MICR comes in via RDC? If funds availability is delayed for two days (provisional credit is posted, but funds are not available for withdrawl), there is a good chance that item will be returned before the customer has a chance to withdraw the funds. If the “MICR” line is compared to a database and found to likely be suspicious, holds can be placed on the item. If the item goes above the deposit limit, holds can be placed, etc.
Long story short, actual magnetic MICR rarely plays a real role in the traditional deposit process, and can only play a role in protecting a bank if that bank can ensure they do not accept the item in any other channel (branch, mail, ATM, etc.), or the bank can ensure they can place a hold on the account / item, delay availability, or ensure they are not at risk by some other means.