Remote deposit capture has been driving significant efficiencies in check processing operations. RDC products also have caused consternation among financial institution legal teams troubled by the potential for losses from duplicate deposits and the associated legal wrangling. Upcoming regulatory changes provide a legal framework for dealing with duplicates, but the supporting technology framework remains a work in progress.
Duplicate deposits are a problem unique to RDC. Despite early suggestions to the contrary, however, financial institutions offering RDC have not been awash with duplicate deposits. In fact, the 2017 Mobile Remote Deposit Capture Industry Report found that just 3.5 of every 10,000 checks deposited to banks and credit unions are duplicates. Nonetheless, on those rare instances when a check accepted as an RDC item also gets deposited to another financial institution it creates operational and legal hassles that result in losses to FI, and often times FI customers.
In an effort to lift some of the uncertainty around duplicate deposits, the Federal Reserve Board last year announced an amendment to Regulation CC assigning responsibility for protecting against duplicate deposits to FIs accepting RDC items. Reg CC is the rule set governing check collections and FI funds availability policies. The change to Reg CC, which takes effect on July 1, requires that an FI receiving an RDC item indemnify any FI that subsequently receives the original (paper) check against losses because the item had already been paid and settled. The indemnity doesn’t hold, however, if the check carries a restrictive endorsement, such as “For Mobile Deposit Only to Bank XYZ.”
“Restrictive endorsements will protect financial institutions offering remote deposit capture,” explained John Leekley, Founder and CEO of RemoteDepositCapture.com. And the more specific the endorsement the better. “Appropriate restrictive endorsements require 2 minimum elements: the method of deposit, such as ‘for mobile deposit only’; and the intended depository institution,” Leekley explained.
Leekley’s comments came during a webinar earlier this week,
67 Days and Counting: Is Your Bank Ready for the July Reg CC Changes and Restrictive Endorsements? Joining Leekley, Joe Gregory, Vice President, Marketing, Orbograph, said Orbograph is working on technology enhancements to support intelligent recognition of restrictive endorsements. The upgraded technology won’t to be available by the July 1 effective date of the Reg CC amendment, however. “It will probably be ready for beta testing in the third quarter,” Gregory said.
Technology that can detect endorsements on the backs of checks to varying degrees has been around for some time, explained Gregory. But there are none proven to recognize endorsements with the specificity offered under the upcoming Reg CC change. “You have to go beyond looking at this from the perspective of OCR and ICR and look at it more from an artificial intelligence perspective,” he said.
Leveraging AI to support accurate automated recognition of restrictive endorsements isn’t something that can be done overnight. It takes time to build good AI models, because as Gregory explained, “the more samples you have the more accurate the process.” Further complicating the process is the lack of uniformity in how banks instruct RDC customers to endorse check deposits. “This could create technical challenges,” he said.
FIs Begin Updating Customer Agreements, Validation Processes
A recent survey conducted by RemoteDepositCapture.com suggests there is plenty of variation in FI endorsement policies. Among FIs participating in the survey, just 54% require that endorsements include specific wording, such as “for deposit only.” Among those that require restrictive endorsements, 52% require that endorsements contain the words “For Mobile/Remote Deposit Only,” 21% require “For Deposit Only,” and just 17% require “For Mobile/Remote Deposit Only to [FI name].”
The survey, which elicited responses from 54 banks and credit unions, also inquired about steps those FIs are taking to reflect the upcoming Reg CC amendment regarding duplicate deposits. By far the largest share (52%) said they are updating customer service agreements. Forty-four percent are implementing endorsement requirements, 28% are updating validation processes to confirm the presence of endorsements and 26% are updating client scanners to support the printing of endorsements on the backs of RDC items.
Leekley presented additional findings from the survey during the webinar, which drew over 1,000 participants. Payments legal expert Paul Carrubba of the law firm Adams and Reese also provided an overview of the pending Reg CC amendments and answered questions about potential applications.
The April 23 webinar,
67 Days and Counting: Is Your Bank Ready for the July Reg CC Changes and Restrictive Endorsements? is available for viewing on demand at no charge.
Click here to learn more and to view.