Mobile Deposit for Prepaid Cards And Wallets Poses Heightened Fraud Risk, A New Study Finds

The technology to deposit checks into prepaid cards or mobile wallets using a smart phone is less than two years old, but already the channel is proving to be 33 times more prone to fraud than mobile deposits into bank accounts, according to data from Fidelity National Information Services Inc.

Overall, some 10% of consumers who have used mobile deposit to load a prepaid card or mobile wallet have triggered a fraudulent return, most often resulting from counterfeit or duplicate items, according the FIS results. By contrast, the corresponding percentage for mobile deposits into bank accounts is 0.3%, FIS says.

The data on mobile deposit for prepaid cards and wallets cover the year from October 2012 to September 2013 and are contained in a report on check-cashing the Jacksonville, Fla.-based company released earlier this month. The report relies on data supplied by FIS’s Certegy Check Services and ChexSystems units.

With mobile remote capture, a consumer or business uses a smart-phone camera to snap an image of the front and back of a check, then sends the image to the bank for deposit. Because the user retains the paper original, there is a risk of duplicate presentment. Also, users could image fake checks.

Experts have long contended the actual risk of fraud for mobile deposit into bank accounts is relatively low, and indeed various studies have substantiated that claim. In a recent survey by Alpharetta, Ga.-based research firm RemoteDepositCapture.com, only 20% of financial institutions offering the service reported losses of any amount. In an earlier study by researcher Celent, the proportion of institutions with $50 billion or more in assets reporting no losses at all was 62%; for those with $1 billion up to $50 billion in assets, it was 85%, while 96% of those with less than $1 billion in assets reported no losses.

But remote deposit of checks into prepaid products and digital wallets is a much newer, and less understood, channel where the credit qualifications, deposit limits, and other controls imposed by banks are generally absent, says Aaron Calipari, vice president of product management and market development for FIS. “What the market is doing at this point is letting everybody have access to this [service],” he tells Digital Transactions News. “And we are starting to see the results.”

While it’s true that many consumers who use the service are unbanked or underbanked, that alone doesn’t explain the elevated risk, Calipari says. “We are seeing higher-risk individuals participating in that channel,” he says. “It’s a completely different population from what we would see depositing into a bank account.” But even so-called good consumers—people who have passed various underwriting routines—tend to go astray. “You see [them] behaving badly in this channel,” says Calipari. “Either they don’t know or don’t care.”

Mobile deposit into prepaid products and wallets is also riskier than other check-cashing channels, the FIS data show. The report uses the volume of consumers triggering demand-deposit inquiries in the past three years and forced account closures in the past five years as proxies for risk. By these measures, mobile remote capture scored highest, with 66% of consumers experiencing inquiries and 59% sustaining account closures. By contrast, the safest check-cashing channel is gaming institutions, with percentages of 47% and 35%, respectively. Still, the higher risk in mobile deposit is mitigated by its average ticket, $161, compared to a $452 average for all check-cashing channels.

Some remote-capture experts fault the FIS study for what they see as a bias in its sample set toward risky users. “You’re looking at the riskiest of the riskiest customers out there,” says John Leekley, chief executive and founder of RemoteDepositCapture.com. “It’s like going into a prison and asking, ‘How many of you have a criminal record?’ Of course the risk is higher. More analytics are needed to see how big or how little that risk is.”

Leekley also says the study would have been more useful if it had reported fraud loss by funds availability. Some products offer immediate availability, while others require a waiting period that can be five days or more. “Where the risk really increases is in dealing with higher-risk customers who want immediate access to funds,” he says.