Every credit union has a percentage of members who need this service. If a credit union does not offer the ability to cash checks, then it will either not have the full wallet share of its members, or it will lose them to competitors, providing the service allows them to save the exorbitant fees that can be charged by other providers.

What is the risk of retention if the service is not offered? 

Many credit unions say they don't offer that service because their members don't need it. Although this may not be the most popular service, it is a service that is still required, forcing members to set up relationships with competitors. All of the major financial institutions offer this service, so why give members a reason to seek out a competitor?  The major banks offer this service because it allows them to present a complete solution to their most profitable customers including companies. International check clearing can bring additional services such as accounts, lines of credit, payroll, business loans and other profitable banking services.

How is the service of international check clearing provided? 

There are several ways to tackle this offering. One is to set up foreign currency bank accounts at foreign banks to clear your items. This is the most costly. In addition to legal costs, transaction costs, international courier costs and bank account costs, it requires a team to manage the foreign currency position. For this to be cost effective, a substantial volume of checks would be required.

Often, the most cost effective solution for credit unions is to partner with an international payment and receivables partner. These partners combine the needs of thousands of community banks and credit unions to facilitate international check clearing at a fraction of the cost of doing it themselves.

How does a credit union reduce the risks associated with fraud? 

This is the most critical question to deal with. The risk from international checks is greater than domestic checks because of the length of time they take to clear and be returned. U.S. check clearing rules do not apply in other countries. The key here is to understand the purpose of these items and to explain the risks to the client.

Members requesting to deposit foreign checks should be asked a few simple questions:

1. Do you know who gave this check to you and what is the relationship?
2. What is the reason that you are trying to clear this item?
3. Are you going to be sending any of the funds from this check to another party after the check has cleared?

Many credit unions do not want to ask these questions because they feel it questions the integrity of their members. Ignoring the red flags opens the credit union and its member to risks. Asking questions protects the clients from becoming victims of fraud.

Once it has been determined that there is a valid purpose for the check, the credit union can decide whether to send the check on deposit for provisional credit or final collection.

Provisional Credit

This is the fastest and most cost effective way to clear a foreign check and can be done in most major currencies and some exotic ones.

Assuming the credit union will be using a third party provider to clear they check, it will obtain a foreign exchange rate from the provider's online system. The credit union will send the original physical item to its provider and will credit the institution's account for the item at the agreed to exchange rate and totals. The client would then be provided access to their funds.

The risk for provisional credit is that the item could come back up to several months later as fraud, NSF, payment stopped, post/stale dated, etc. It is important to ensure that the member is aware that they are responsible for the item if it is returned. Member knowledge is very important when dealing with providing provisional credit. 

Final Collection

The credit union would send the check to its provider, who would then send the physical item to the bank where the check is drawn. The bank verifies that the funds are good and that the check was issued by the account holder. Once the due diligence is completed, credit would be sent to the provider and then to the credit union as good funds. 

There are two problems with collection items – expense and time. Foreign banks will typically take fees for processing these items. Those fees can range up to $200 per item. The other problem is that the collection process can take four to six weeks in most developed countries and longer in exotic countries. There is also no obligation on the part of the foreign bank to process these items, so investigations on these items can be extremely difficult to initiate.

Final collection is used for several reasons:

• Value of the check is substantial and too large for the member to repay should the check be returned
• Suspicion of check, check quality or check originator
• The currency of the check does not match the country that the check is issued from.

In summary, it is important to be able to serve the needs of clients, while protecting both the member and credit union from risks. While international check volumes might be small, the clients who require them are usually the most profitable for any financial institution and require a wide range of services. There are options to enhance the service offering without increasing risk.

Dan Caputo is vice president of global payment solutions for AscendantFX. He can be reached at 647-727-0973 or [email protected].