The Real-Life Impact of Duplicate Payment Postings for Financial Institutions

From the March 2008 issue of Transaction News
By Frank Stokes, president, Technology Group, CONIX Systems, Inc.

Being duped is never a good thing. This is especially true for financial institutions when the age-old back-room problem, payment duplication, is magnified because of new electronic clearing protocols.

In the past, duplicate postings to demand-deposit accounts (DDAs) were a manageable processing anomaly because financial institutions became proficient at minimizing these exceptions prior to posting in the paper-check-based environment. However, times have changed. Payment systems must now deal with automated clearinghouse and lockbox items, as well as image exchanges and IRDs (image replacement documents).

In the current environment, payment duplication carries greater concerns and more impact on the bottom line because they are not identified and resolved until after posting and customer impact. The majority of a bank’s T&O (technology and operation) expense is due to the handling of exceptions, and duplicate payments will increase that expense by at least 10 percent per year.

Today, banks receive 25 to 30 duplicates for every one million payments processed. Of even greater concern is the expected increase of duplicates by at least ten percent each year over the next three to five years as the industry continues to convert to remote capture. This will become extremely costly for financial institutions as the direct cost, including management intervention, of a duplicate is estimated at $75 – which translates into billions annually.

The impacts of duplications are also critical when it comes to customer dissatisfaction. The direct damage to account relationships occurs due to overdrafts, NSFs, and associated charges, resulting in ten percent of the bank’s impacted customers moving their banking relationship because of a duplication issue.

The greater the payment’s value, the greater the risks resulting from the reporting of inaccurate overdrafts. Associated marketplace and operational risks are also affected. In addition, the impact on profits is substantial due to costs associated with processing extra items, increased research and adjustment case load, increased management intervention, loss in customer accounts due to dissatisfaction, the granting of concessions to disgruntled customers and ultimately, the undermining of the bank’s image as a secure repository.

The number of opportunities to create duplicates has increased dramatically because the same payment may be processed through multiple payment systems. Consequently, an enterprise duplicate detection mechanism needs to look across all payment channels (paper checks, IRDs, image exchange, lockbox, and ACH).

To be successful, duplicate payment detection must be performed at the item level. Once identified, duplicate payments can be treated like any other exception (bad image quality, gross dollar error, fraud); therefore, existing exception processes are part of the solution.

Of the four predominant forms in which a payment can be presented (check, ACH, image, and substitute check), all possibilities must be compared, one with another, to prevent duplicate posting.

An effective duplicate detection system should have the capability of monitoring all payment processes within the financial institution over at least a full statement cycle. The Electronic Check Clearing House Organization (ECCHO) suggests that banks must likewise ensure that their agents responsible for printing substitute checks also implement duplicate prevention processes to ensure that duplicate IRDs are not being printed.

Clearly, proper controls are needed. These can include validation between the input and output control totals, validation of first and last substitute checks created, physical counts of the number of substitute checks, proper restarts of printers, and others. For substitute checks processed through a reader sorter, the total sorted should be compared with the number of substitute checks that were supposed to be created.

The duplicate situation is critical for financial institutions; however, it is a problem that has gone virtually unnoticed by many. While Check 21 and image exchange have taken the banking industry into a new dimension, the concepts have also created an operational glitch that poses a serious threat to the financial institution’s bottom line and its customer relationships. Therefore, to remain competitive in today’s financial landscape, financial institutions need to evaluate and implement a solution to address the duplicate payment issue.

Frank Stokes is the president of Technology for CONIX Systems, Inc. A recognized leader in the payments processing industry, Stokes brings to CONIX Systems extensive experience gained from over 30 years in the payments industry.

CONIX Systems, Inc. is a leader in providing payment processing software and related services to the financial services industry. The company's products, in some form, touch or process an estimated 100 billion paper and electronic items each year and handle virtually every aspect of payment processing – including work flow management, balancing, branch capture, corporate capture, and electronic check presentment. CONIX software and services are used by approximately 90 percent of the largest banks in the country. Founded in 1992, the company is headquartered in Manchester Center, Vt., with offices throughout the United States. For more information about CONIX and its products and services, please contact Frank Stokes, president, Technology Group, at 800-332-1842; email at rfs@CONIX.com; or visit the company’s website at www.conix.com.