Remote deposit capture represents the technological next step in check image processing. Instead of physically bringing in checks to the bank for deposit, the bank customer simply scans an image of the front and back of each check and electronically sends the file of images to the bank.
Implementation of remote deposit capture places significant responsibility upon your customer and the employees of your customer. They are responsible for entering or verifying the amount of the check in the electronic file; retaining the original check and being able to produce the check for a period of time; making certain a check does not get scanned and deposited a second time or deposited at the wrong bank and eventually responsible for destroying the original check.
Banks remain responsible to ensure that each check is properly payable to the customer and contains all required endorsements. Banks electing to bypass the review of image deposits, may expose themselves to additional risk of loss resulting from deposits being made without proper endorsement or from being credited to the wrong accounts.
A bank is exposed to several new types of risk when it allows a customer to create and deposit images of checks, including the following:
I. CONTRACT WARRANTIES
There must be a very good contract between your bank and any customer that is allowed to send images of checks for deposit. Failure to have good contract language can result in some unexpected consequences.
When a customer deposits a physical check, by state law, specifically the Uniform Commercial Code 3-416, 3-417, 4-207 and 4-208, the customer makes various warranties, including warranting that signatures on the check are authentic and authorized and warranting that the check has not been altered, as well as other warranties.
The federally enacted Check 21 Law and Regulation CC and Regulation J also provide certain warranties between banks for imaging replacement documents.
None of these laws provide that a customer depositing an image of a check with a bank makes these same warranties.
If a bank accepts an image of a check for deposit and does not have a written contract with the customer in which the customer agrees to be liable for a returned check when such check is returned to the bank under any warranty by law or contract, it is possible that the bank has no right to debit the customer’s account or collect the amount of the returned check from the customer.Every bank should consider including in its contact with any customer depositing images of checks that: “The customer agrees that the customer shall be liable to the bank (and that the bank may charge back the customers’ account) if the bank is liable to other banks or customers because of a warranty, or otherwise, for the item the customer deposits as an image of the check.”
II. UNAVAILABILITY OF ORIGINAL
Under the Check 21 Law, there is liability in instances where the original check not being available causes a loss. Though losses caused by the original not being available are rare, the bank should let the customer know that failure of the customer to retain the actual original check could result in some possibility of loss to the customer. Though most banks and customers retain the original check for only a short period of time, it is still advisable to let the customer determine how long to retain the original check since the customer would have the potential liability.
III. IMPROPER ENCODING OF AMOUNT OF CHECK
When a paper check is deposited, bank personnel review the amount of the check and micro-encodes the amount on the check. With Remote Deposit Capture the amount of the check is electronically encoded by either character recognition software or by the customer. Errors in this encoding process can result in potential liability to the bank if the customer is unable to unwilling to reimburse the bank when the check was encoded for an amount in excess of the actual amount of the check. When a customer is a large financially sound business which deposits many small checks, some banks choose not to view the image of the checks. These banks choose to accept the potential risk of encoding errors. Banks need to determine how much risk they can accept for the savings in bank personnel time. For less financial strong customers and for checks with larger amounts, a bank needs to continue this review function for image deposits. Insurance is not available for the failure to encode a check or image of the correct amount whether the error was by the bank or the customer.
IV. CHECKS DEPOSITED NOT PAYABLE TO THE CUSTOMER
When a paper check is deposited, bank personnel normally look at the check to verify that the check is payable to the depositor and properly endorsed. With Remote Deposit Capture, banks still need to review the images to verify that the check is payable to the customer. Some banks do not look at the image of the checks to verify that checks are payable to the customer if the images are deposited by large financially sound businesses which deposit many small checks. In those cases, the bank determines the risk involving these customers is acceptable. Banks need to determine how much risk they can accept for the savings in bank personnel time. For less financially strong customers and for checks with larger amounts, a bank needs to verify the payee shown on the image is the customer depositing the check. Insurance is not available for losses resulting from a bank allowing a customer to deposit a check payable to others into his account, whether the paper check is accepted by a teller or an image of the check is accepted using Remote Deposit Capture.
V. BOTH CHECK IMAGE AND ORIGINAL CHECK DEPOSITED
If the customer, through error or with intent, deposits the original check as well as the image of the check, the bank that handled the image deposit will eventually have the image deposit returned to it. If the depository bank cannot collect the funds bank from the depository customer because the customer is bankrupt or has disappeared, the bank will sustain the loss. This type of loss can generally be insured. You should contact your bonding company about adding this type of insurance.
VI. IMAGE OF THE SAME CHECK DEPOSITED MULTIPLE TIMES
If the customer, through error or with intent, deposits an image of the same check multiple times either at the same bank or different banks, the bank that handled the image deposit will eventually have the image deposit returned to it. If the depository bank cannot collect the funds back from the depository customer because the customer is bankrupt or has disappeared, the bank will sustain the loss. This type of loss can generally be insured. You should contact your bonding company about adding this type of insurance.
VII. FORGED MAKER SIGNATURE ON ORIGINAL CHECK
If the customer creates an image of a check for deposit and the original check contained a forged signature of the maker, the bank that handled the image deposit may eventually have the image deposit returned to it. If the depository bank cannot collect the funds from the depository customer because the customer is bankrupt or has disappeared, the bank will sustain the loss. This type of loss can generally be insured. You should contact your bonding company about adding this type of insurance.