ThePaymentsReview continues a new feature that occasionally highlights regulatory topics important to credit unions.
A major change to Remote Deposit Capture is coming this July, which may have an impact on whether financial institutions want to continue offering this service.
Mobile Remote Deposit Capture, or mRDC, is one of the shortest adoption curves of any aspect of online and mobile banking. Despite the slight decline in the number of checks written, recipients overwhelmingly prefer to deposit checks from the comfort of their phone, rather than going to a branch or ATM. RDC was initially developed as a convenience for a business that received checks to deposit the checks electronically (typically using a scanner provided by its bank), and was made possible by Regulation CC, which implements the Expedited Funds Availability Act of 1987 (“EFA Act”) and the Check Clearing for the 21st Century Act of 2003 (“Check 21 Act”). Mobile remote deposit capture, and specifically, the ability for a fraudster or forgetful person to deposit a check by taking a picture using their smart phone, and then depositing the paper copy at a different financial institution or check-cashing business, was not taken into consideration by these two pieces of regulation. How often does this happen? 3.5 of every 10,000 checks deposited to banks and credit unions are duplicates according to the 2017 Mobile Remote Deposit Capture Industry Report.
What has become a problem for the check-cashing industry is that when a financial institution receives a check deposited via mRDC and receives settlement, and later the paper check is presented at a check-cashing location, or any other financial institution other than the issuing bank, that second business gets the check returned and has no means of recovery for the loss.
This is about to change.
On July 1, 2018, changes to Regulation CC shifts the liability for double presentment to the financial institution that accepted the deposit via mRDC. Under the revision, a credit union or bank that created the image of the front and back of a check is known as the truncating bank, and in so doing, indemnifies any other depositary institution, which includes check-cashing businesses, for losses incurred due to accepting a check that was previously deposited. After July, if someone deposits a check into their credit union account (the truncating bank), then goes to Norton’s Check-Cashing Service to “cash-out”, Norton’s Check Cashing Service can recover directly from the credit union the full amount of the check plus legal fees and other associated expenses.
There is one exception to this shift: if the check has a “restrictive endorsement,” for example “For mobile deposit only at ABC Credit Union”, and if a second institution accepts that check, it is not eligible for reimbursement from the truncating bank. This exception is something for credit unions to consider. Making it mandatory for members to endorse their check eliminates the indemnification to any FI that later receives the original (paper) check for losses from paying the check. But it also brings two drawbacks. First, this is a point of confusion for some members, and creates a friction to a service that better image recognition has made fairly frictionless. The second drawback is that this must be enforced for all checks, meaning that the credit union must request their RDC vendor to enable optical scanning to look for the endorsement. Given all of the variabilities of handwriting, many more checks may be rejected as a result of this, causing member dissatisfaction.
What Credit Unions Need to do Next.
Credit unions will certainly want to weigh the cost of the additional technology, and potential for increased member dissatisfaction with the liabilities involved in duplicate check presentment. Given that the widely rumored death of checks doesn’t look like it is happening anytime soon, RDC is here to stay. Making it convenient for honest members is a defining goal. The CU should 1) Determine if their mRDC is capable of scanning handwritten endorsements, and 2) update their mobile banking user client agreement to require that both sides of the check be scanned (via phone for example), a restrictive endorsement (“for mobile deposit only”) be placed on back, and clarify that if the customer fails to properly endorse and scan the check the CU will hold the customer responsible for any and all resulting losses.