MICR 101 WHITEPAPER Jan. 2014

Transcription

1 MICR 101 WHITEPAPER Jan. 2014

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3 3 About This Whitepaper Source Technologies provides integrated software and printer solutions for official check printing management and control. We are the market leader in MICR-based payment solutions, with thousands of customer installs and tens-of-thousands of MICR printers deployed since We offer a suite of secure MICR print management software products and the broadest family of encryption-enabled MICR printers, ranging from printers starting at 35 ppm to lightproduction printers offering 55 ppm. We have produced this white paper for our customers, partners, and prospects to give them a deeper understanding of how MICR check printing solutions can improve check issuance process management for securities firms. In this paper, we look at the basic concepts behind MICR check printing by identifying what MICR is and how this technology enables bestpractice check issuance. We discuss problems associated with check fraud, difficulties in maintaining a consistent check issuance process, and how MICR-enabled printing streamlines operations while giving securities companies a competitive edge by allowing them the ability to print dividend, interest and distribution checks on-demand in branch locations. We also review how Source Technologies solutions deliver capabilities to support best-practice official check issuance and fraud control.

4 4 What is MICR? A fundamental check printing technology is Magnetic Ink Character Recognition, or MICR. MICR is a special kind of optical character recognition (OCR) technology that was adopted mainly by the U.S. banking industry to facilitate the processing of checks. In addition to a specialized font, MICR characters are printed using ink that has magnetic properties, allowing the MICR characters to be read by high-speed check reading/sorting equipment used by financial institutions to process checks and other negotiable documents. Almost all US and UK checks include MICR characters, known as E-13B, at the bottom of the paper (see left and below). Checks travel through a country s check clearing system, typically passing through machines called MICR reader/sorters. High-speed reader/sorters use a device that functions similar to the head of an audio tape recorder. As the check passes through the machine, the reader/sorter sends a magnetic charge to the check, which allows the reader sorter to read the information contained within the MICR line very quickly; checks pass through reader/sorters at speeds of up to 20mph. The combination of specially-designed characters and magnetic ink make the error rate for scanning checks significantly smaller than other optical character recognition applications. Reader accuracy is even higher than when processed by hand, and has made the processing of billions of checks annually an extremely efficient process. The US Federal Reserve and all banks require that checks be printed with MICR toner for ease of processing. If negotiable documents are printed with regular toner, the reader/sorter will reject the check, forcing a manual process for clearing. As a result, the company that issued the check may be charged a fee per item rejected. Modes of Check Issuance Official checks include distribution, dividend, interest checks as well as payroll, AP, and expense checks, or any other type of check written by securities firms. Official checks are issued in a variety of ways. While small companies may have only a single check book that is maintained manually with preprinted checks, many companies maintain several check books for a variety of purposes. Large securities companies may manage dozens of check books across

5 5 Before and after: Using MICR printers with blank check stock, businesses are able to print the entire check including both static and variable information. multiple locations and departments. For example, an organization may have different check stock for distribution, dividend and interest checks versus internal checks like payroll, accounts payable, expenses, vendor invoices, etc. When using preprinted checks, the issuer manually adds variable information (payee name, date, legal amount, etc.) to the check. An alternative mode of check issuance to using pre-printed checks, known as MICR printing, is the printing of checks using MICR ink or MICR laser printer toner. Using this approach, all check information, including static information such as company logo, name and address, et cetera, as well as all variable information, is printed using MICR toner directly onto blank check stock. There are two ways that MICR check printing can be implemented into a securities company s check issuance process: Before and after: Using MICR printers with blank check stock, businesses are able to print the entire check including both static and variable information. Production check printing On-demand check printing Production MICR printing is often employed by large companies that print checks at a central location in large batches on high-speed production MICR printers. In this environment, the check request is sent by local staff and processed centrally. The check is then printed and mailed either to the branch or directly to the recipient. Many securities companies print their checks centrally in order to ensure control over their check issuance processes. While security and control are critical factors, there are hard costs and competitive costs that must be considered. Printing centrally requires every check to be mailed to a remote location. This incurs additional forms costs for envelopes or specialized self-sealing check stock, physical handling of the checks, and of course, postage. In a large organization, this can add up fast. Also, the competitive ramifications are compelling. The ability to provide clients with immediate payment of distribution, dividend, and interest checks and other disbursements in the branch allows securities companies to provide better client service. Regional or national firms that print checks centrally are at a disadvantage versus companies that issue checks locally.

6 6 In contrast, on-demand MICR printing allows securities companies to issue checks locally. By printing checks in the local branch, firms of all sizes can offer a differentiated customer experience. This translates into greater customer service, and the ability to attract and retain more high-value clients. Some securities firms issue checks on-demand in local offices by means of the traditional manual method using preprinted check stock. This may be adequate for very small firms issuing a limited number of checks from a single check book. However, in offices where multiple people are issuing checks, or in firms with many branches, the costs and risks of manual issuance are significant. The balance of this white paper will compare manual check issuance using preprinted stock versus on-demand MICR check printing using blank check stock. Shortcomings of Manual Issuance Securities companies that issue checks manually incur significant costs including check fraud, manual fraud prevention systems, and the management of pre-printed check stock. Check 21 image compliance is another cost that businesses will soon face in issuing checks. All of these costs add up to a heavy but avoidable burden. The following describes these issues in more depth: Check Fraud and Internal Fraudsters Check fraud is the perpetration of fraud on a business by its employees through the misuse of the company s checks and check issuance processes. How much does check fraud cost businesses? The Federal Reserve states that the cost of check fraud in the US is 24 cents for every check issued. Often these fraudsters work in teams that may include both employees and people outside the business. Fraudsters possess a variety of tactics that allow them to steal from businesses: Check stock pilfering The most basic form of check fraud is employees stealing preprinted check stock and using it to write and cash checks before the theft is discovered. Check alteration/duplication Altering or duplicating a properly issued check is also a common method. Computers, printers, and photocopiers have made this form of fraud more common, though checks altered using ink erasers and typewriters is still the most common form of check alteration.

7 7 Unadvised checks This form of fraud requires both an issuing employee and a customer. The employee issues a check to the customer, then logs the check incorrectly or fails to log it entirely. Typically the check is written on stock obtained improperly from a vault, secure office, or another employee s unlocked desk drawer. GL mismatching A stolen or duplicate check is logged under the wrong general ledger number, hiding the theft until a detailed audit uncovers the mismatch. Piggybacking An employee will issue a legitimate check to a customer, but record it for a larger amount than the check was actually issued. He then writes a fraudulent check for the difference. In all of these cases, two key enablers must be present. First, the perpetrators must acquire an actual or high quality duplicate of a check. Second, they must take advantage of information barriers within the business: it often takes months before reconcilers or auditors find an imbalance and even longer to unravel how the theft occurred. Many businesses make it even easier for potential fraudsters by failing to implement some basic check issuance security measures. These self-inflicted causes of check fraud include: Slow adoption of check security features In a manual environment, replacing preprinted stock is expensive, so companies are not likely to incorporate new anti-fraud features into their checks until stock is depleted. This is an uneven, difficult to manage process for businesses that maintain so many different checks often hundreds for a large enterprise and the various pre-printed checks deplete at different rates. Process breakdowns Train all you want; staff turnover inevitably leads to control failures and fraud. And when employees conspire, there is no way to enforce secure procedures. Limited on-check print security There are a number of oncheck security features that can only be applied when the check is issued, such as microfonts, reverse-image numeric fonts, and E-13B font management. Typewriters cannot supply these features and standard laser printers are also limited in this regard.

8 8 Positive pay latency Positive pay is a form of fraud prevention where the issuing company sends issued data to its bank, allowing the bank to match checks presented for payment against the company s actual issuance records before paying. Banks often fail to make positive pay file information available to their branches thus introducing latency in the system; checks that are stolen, altered, or duplicated can be cashed well ahead of any knowledge by the company or its bank. While this is the bank s failure, companies that do not demand good positive pay practices are simply encouraging fraudsters to take advantage of their broader issuance processes. Securities companies that issue checks manually on pre-printed checks can reduce the risk of check fraud through various internal distribution, storage, and issuance schemes; for example, issuing small quantities of sequentially numbered checks to each authorized employee with the manager and employee both signing out the checks. The same is true for defeating improper logging; for example, varied approval policies for different types of disbursements or different amounts. The only effective way to deal with information barriers within a manual system is to increase the frequency of record inspection. Many businesses take a multi-layer approach, including weekly check ledger reviews, weekly research on missing items, back-office item reconciliation, monthly audits, plus quarterly audits, often conducted by a third party. These manual processes add up to hard costs, often exceeding $2.00 per issued check. In addition, companies incur significant opportunity costs by engaging in all of the non-value added activity required to secure and control the use of pre-printed stock. Maintaining this manual process is even further complicated when organizations have multiple types of pre-printed check stock to manage. In addition to the time and money wasted on these procedures, they are far from foolproof, as human error, poor training, and conspiring employees can all produce ways to beat the system. Preprinted Check Stock Costs Many businesses (and banks for that matter) continue to use pre-printed check stock because they do not consider the hard dollar savings of using blank stock.

9 9 For every $205 spent on pre-printed check stock, it will cost an organization approximately $20.00 in waste and $20.00 in securing and distributing, for a total cost of $ The same amount of blank check stock will cost just $75.00 with minimal waste and approximately $2.00 in securing and distribution, for a savings of 68% on check stock alone. Check Stock Costs Pre-printed Blank Form Acquisition (printing, shipping) $ $75.00 Waste (voids, damage, obsolescence) $20.00 $2.00 Inventory/Distribution $20.00 $2.00 Total Cost $ $79.00 Cost Savings 68% Dot matrix printing and Check 21 compliance. Upper image: check scanner image of the amount field using a check produced on a dot matrix printer. Lower image: result of binary conversion of the same image for electronic exchange purposes. Check 21 Image Compliance An issue that may increase the check issuance burden on businesses in the future is image compliance. The Check Clearing for the 21st Century Act (often referred to as Check 21) allows banks to exchange checks electronically to avoid having to process them physically. This requires that both the front and back of checks are scanned and that the images become part of the electronic exchange file. Before a check is exchanged electronically, the images are compressed and converted to pure black and white (also known as a binary image). In the process, lighter marks on the images tend to drop out, that is, disappear partially or completely. The result may be a check image with payee names, amounts, et cetera, that are illegible or missing. This problem appears to be isolated to checks being printed using dot matrix printers; basically, too light is becoming commonly associated with the purplish ink used on most dot matrix printer ribbons. According to the Financial Services Technology Consortium, images that were lighter, with fewer than 2.1% black pixels, have a 72% chance of causing document rejection. Image compliance is already a problem for large organizations issuing a high volume of checks. As electronic check exchange ramps up, businesses using out-dated printing equipment will see an increase in items that cannot be exchanged as a direct result of poor printquality. These checks will either be rejected, or the issuer may be charged fees for handling what banks deem as non-compliant

10 10 checks, similar to fees charged today for fixing an unreadable MICR line on a check. Automating Check Issuance Organizations dealing with the risks, inefficiencies, and costs of manually issuing on-demand distribution, dividend, interest and other checks should seek a technology solution that reduces operating costs and implements complete security around the issuance process. Automating check issuance and the use of blank stock has proved to be a cost efficient and secure alternative. There are two main components required of an automated check issuance system that will provide a securities company with complete security and functionality: MICR check printing software, and secure MICR laser printers. MICR Check Printing Software Secure MICR check printing software can be utilized by businesses as either a stand-alone application or in conjunction with securities or accounting software platforms. MICR check printing software allows businesses to define their process and control check issuance within an on-demand environment. The software application can manage user accounts and define workflows for all official items, including checks, being issued. MICR check printing software applications allow businesses to build security controls into the issuance process by placing userdefined rules around item types, issuers, requesters, reporting, and post-issuance reconciliation. Secure MICR Laser Printers Secure MICR hardware is the other aspect of an automated on-demand check issuance solution. Secure MICR laser printers allow businesses to utilize blank check stock instead of pre-printed stock eliminating many fraud enablers right out of the gate. MICR laser printers print the entire check which includes the fixed data found on preprinted stock as well the variable data/areas of interest (payee name, legal amount, date, etc.). Secure MICR laser printers featuring specialized security and control features are sometimes considered optional for on-demand check issuance versus standard laser printers used with MICR toner cartridges. But while standard laser printers support consistent issuance processes, they do not address the security needs of ondemand check printing, especially in highly-distributed check printing scenarios.

11 11 For example, data encryption is a critical component of MICR check printing that eliminates the risks that fraudsters pose at any point in the issuance process. By encrypting a data file containing check information, the data stream can be sent from an issuing PC to a remote printer without having decryption take place until the data stream reaches the printer. Secure MICR printers decrypt the data and communicate reports of completed jobs back to the issuing PC where the check-printing software resides. The issuer is ensured that the job was completed the moment that the printed checks hit the tray. This level of security is not achieved using standard laser printers in the issuance process. Also, when MICR check printing software is used in tandem with secure MICR laser printers, any remaining fraud issues from a businesses automated solution are eliminated. Check printing software working with secure MICR laser printers yields end-to-end security, especially for businesses printing checks in environments with multiple users and remote locations. An automated check issuance system streamlines the process, reducing issuance time from an industry average four-to-seven minutes to less than a minute per check. It reduces voids, eliminates missing items, and eliminates manual logging. Moving to MICR printing also lets companies incorporate new check stock and oncheck security features quickly and cost effectively. Because of these improvements, multi-layer record inspection is no longer necessary; simple item reconciliation and quarterly audits are usually sufficient to ensure that processes are followed and check fraud is not occurring. Finally, a full-featured check issuance software system supports positive pay, assuming a company s bank is set up to implement this security feature. Positive pay lets a bank validate a company s checks in real-time while the bearer is standing at the teller window. This eliminates another information barrier and stops check fraud in its tracks. Secure MICR hardware also eliminates image quality issues by using quality toner that is not susceptible to gradual image fade found in older print equipment such as dot-matrix printers or older laser printers. Secure MICR laser printers ensure the highest toner quality for printing the entire check including the variable information or areas of interest vital for imaging.

12 12 New Tools, New Risks Automating the issuance of paychecks and other checks should not be considered a panacea. New technology can bring new risks, some with serious consequences. When considering automating your check issuance process, keep these potential threats in mind: Not all check printing software is alike, especially in distributed environments and where security is concerned. Some potential security holes include: Print stream eavesdropping Hi-tech thieves can potentially capture check information as the print stream travels through your corporate or public network. For maximum protection, ensure that all data is encrypted from the requesting PC client all the way to the printer for decryption not the server or PC to which a printer is attached. Client and printer spoofing Fraudsters can potentially log into the system from an unauthorized computer or location. Worse yet, they could hijack the print stream by redirecting it to another printer on the network and abscond with checks well before the breach is uncovered. This is prevented by the check printing system restricting access to registered IP addresses and firmware serial numbers on both the printers and client PCs. Distributed-print disconnect When either the requestor or approver is not local to the MICR printer, the local party can claim that the check did not print properly and request a reprint, potentially walking off with a perfect duplicate check. If you are considering such distributed MICR printing, ensure that the printers talk back to the check printing system. Such bi-directional communication should not only confirm successful printing, but should also support full control and status of the printer. Not all MICR printers are alike. As discussed above, necessary security features found in a complete MICR printing solution are forfeited by companies using MICR printers that lack strong security features, or worse, using standard laser printers with MICR toner cartridges. Security features such as secure numeric fonts, MICR toner detection, and auto-jam recovery disablement help prevent unauthorized printing, duplicate checks, and even theft of the blank check stock.

13 13 Not all MICR toner is alike. High-quality MICR toner is typically formulated by the printer manufacturer specifically for each printer. Sometimes companies will look to save money by purchasing lowcost toner for their MICR printers from 3rd-party manufacturers. If the toner is of poor quality, it can result in serious performance and durability issues such as: Low yield rates resulting in higher costs per check High reader/sorter reject rates and associated bank charges Toner leaking inside the printer, damaging printer mechanisms Abrasive toner causing premature failure of the fuser or other high-cost components Using toner approved by the printer manufacturer ensures that the toner and printer will perform up to the manufacturer s specifications, including toner yield and useable life. In order to achieve the expected return on investment, companies should carefully scrutinize MICR toner quality and any performance guarantees provided by the manufacturer.

14 14 About Source Technologies Founded in 1986, Charlotte, N.C.-based Source Technologies provides integrated solutions for controlling financial transactions and other secure business processes within the financial services industry and FORTUNE 1000 companies. Clients include nine of the Top 10 U.S. banks and many of the world s largest securities companies. Source Technologies value proposition goes well-beyond hardware and software. As thought leaders in the field of paper and electronic disbursements, we ensure delivery of successful solutions by providing: Deep domain expertise in the flexible design and delivery of back-office and customer-facing applications in a variety of banking and retail environments. Over 20 years of software implementation, API/Host integration, logistics fulfillment, installation, and customer service to hundreds of large and mid-size banks, Fortune 1000 companies, federal and state governments, and other clients. Extensive ASC X9AB committee work in setting check and Image Replacement Document printing and processing standards. Packaged solutions for secure, real-time management of MICR laser checks, electronic disbursements, and other sensitive documents on-demand, with centralized approval and process control. Print platforms with virtually unlimited scalability and advanced control features for high-volume environments, including thread management and load balancing. Source Technologies 4205B Westinhouse Commons Dr. Charlotte, NC Toll Free Sourcetech.com