Security Problems With Check 21: Will it Really Reduce Fraud?

by Barbara Hurst, BOL Guru

One of the most talked about advantages of Check 21 has been the theory that it will reduce fraud significantly, or even possibly go away. Unfortunately, on closer inspection this seems to be considerably overly optimistic. And while there are positive aspects to the legislation, of all the myths and misunderstandings about Check 21, the notion that the regulations will eliminate float is still one of the most persistent.

Check 21 will undoubtedly change the payments world considerably - in fact, the changes have already begun. It is apparent that the innovations in check collection over the past 30 years will be dwarfed by events of the next three years. Experts agree that Check 21 will eventually create major changes in new technology, new fraud detection capabilities, and new revenue opportunities.

No doubt Check 21 will cut the time and cost involved in physically transporting paper items and to reduce float, especially in cases in which items were not already being delivered same-day or overnight. But imaged items may not be posted as quickly as they are received. The day or more from the time an image is received until it's posted still leaves a window of opportunity for the criminal element to exploit. The advantage, initially, will be that the criminal who had three or four days between the time a check was deposited in San Francisco and presented in Philadelphia for payment, could find that window cut to one day.

Many security officers believe that because check images are digital, they create new possibilities for detecting fraud. But criminals have access to the same new technologies we do. There is no reason to believe that they are not already hard at work figuring how to get around the new "system."

Some Security Features Are History
Some of the security features in our checks that have been perfected over the years will be useless when imaging takes place and we deal with substitute checks. Indeed a review of image-survivable security features made by The Standard Register Co. concluded, " ...there are no known image-survivable security features that are fully effective." For instance:

Chemical and thermal sensitivity - require original paper.
Security threads and fluorescent fibers - also require original paper to detect.
Watermarks, embossed designs, foil accents and holographic images - will generally have limited viability with image.
Anti-splice backers and borders - line patterns of varying thickness on the face or back of a check that make it difficult to alter may be lost as a security feature because of low resolution scanning for imaging.
Micro printed lines, prismatic images, gradient color blending - all require densities of imaging far greater than are currently being proposed.
The "Original Document" screen that appears on the back of a check disappears when the check is reproduced as a substitute check.
And the word "VOID" that appears on a photocopy may actually appear on the substitute check, which is the image-based reproduction of a valid item!

New Secure Features Already In Place
The financial industry and its suppliers and business partners have not been ignoring the problem. Automated image-based methods have been developed that have the potential to increase the number of checks that can be analyzed, and digital processes enable integration of fraud detection capabilities.
Already in place with secure features that will survive are:

Modulus Checks - check serial or reference numbers contain mod checking. These features are enhanced with image.
Bar Codes -- Also effective will be bar codes showing key information such as the maker, payee, date, amount and signature plate which are encrypted into a bar code and applied when the check is created. This security feature is retained with image, although multiple imaging and the image shrinkage may affect quality.
Signature and font verification -- visual recognition of check information and writing styles that are unique or difficult to reproduce will be effective.
Digital watermarking and seal encryption - key check information, such as payee, check amount and date, are "hidden" within the digital image of a check, often as random bits of information - will prove to be a very effective tool provided you start with a quality image.

Change is the Name of the Game
No doubt there will be other ways the financial industry will find to protect our depositors' money. But the fact remains that Security Officers will have to "think outside the box" during the transition time before Check 21 is fully effective two or three years down the road.

Research for this article was taken in part from "Float and the Domino Effect of Check 21: The Myth of the Disappearing Float" and "Check 21 and Corporate Customer Retention", both White Papers by Rick Kuhn, Senior Principal, Carreker Corporation, and can be found at www.BankersOnline.com in the Check 21 section.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 14, No. 5, 7/05