There have been stunning breakthroughs in the payments space over the past few years, and many businesses and financial institutions have devoted significant time and resources to researching and adopting new payment methods. Although paper checks might seem outdated, over half of Americans wrote a check last year, and many organizations still rely on them.
Though fraud is a constant focus for businesses, many fraud teams have shifted their attention to emerging payment methods. As Jennifer Pitt, Senior Fraud and Security Analyst at Javelin Strategy & Research, found in her latest report, The Pervasiveness of Check Fraud: Banks are Paying the Price, check fraud is an increasingly rampant threat that financial institutions must address.
Comfort Level
Older adults tend to write more checks each month than younger people, in part because it’s a payment method they have grown comfortable with over the years. Some consumers also send checks as gifts because of the personalization aspect, allowing them to write a personal message to the recipient.
“Many Americans are also still under the mistaken impression that checks are more secure than peer-to-peer platforms, ACH transfers, and digital payments,” Pitt said. “The Javelin report found that most Americans believe those methods are either as secure as or less secure than checks.”
Credit cards were the only payment method that most Americans believed was more secure than checks. That is likely because credit cards have been around for longer and older adults tend to rely on tried-and-true payment methods like credit cards, checks, and wire transfers.
In Search of Checks
Credit cards and wire transfers have fraud risks of their own, but criminals have developed increasingly effective ways to commit check fraud. Although consumers are writing fewer checks, the amounts written have been increasing. In addition, many small businesses issue checks to pay bills or even payroll.
Some utility companies still require payment by check, and federal and local governments will often mail stimulus or treasury checks.
“Over the past few years, there have been more headlines about mail theft,” Pitt said. “Organized street gangs and criminal syndicates have moved away from drugs and other activities because those crimes are often prosecuted harder and there are stiffer penalties. Fraud, and particularly check fraud, carries minimal penalties at the moment.”
Often, criminals will rob mail carriers to steal an arrow key, a master key that opens every mailbox. Once criminals have the key, they will access mailboxes and steal any mail that has personally identifiable information. They are especially in search of checks, because those are easily counterfeited.
One way to counterfeit a check is through check washing, a method that has been around for over a decade. Criminals use normal household chemicals to wash the ink from the check and are left with a valid check that still has all its security measures intact. Bad actors will then change the amount and the payee, but sometimes they will leave the original signature intact.
Check cooking is a relatively new method whereby criminals scan a check into a computer and utilize software to change the check’s information, after which the check is reprinted.
“It’s also possible to manufacture checks from scratch using data from a stolen check,” Pitt said. “At the moment, it is harder to manufacture a convincing check, so check washing and check cooking are the more prevalent forms of check fraud.”
The Big Picture
Though most financial institutions have strong fraud and security measures, checks have fallen by the wayside in many instances. Only 22% of the companies that Javelin surveyed use check fraud detection solutions, which doesn’t align with how rampant check fraud has become.
Many financial institutions have made investments into artificial-intelligence-powered fraud detection tools because AI excels at sifting through data and identifying patterns. AI can be just as potent in detecting check fraud, such as in instances when check signatures are different or a check’s amount does not match historical data.
The technology to combat check fraud exists, but organizations must invest in it. Another key component of a check fraud prevention program is education. It is critical for banks and credit unions to educate their customers on the risks of using checks and the benefits of digital payments.
“What typically happens with fraud professionals is we shift all our resources to the hot topic of the moment, and we can lose sight of the big picture,” Pitt said. “However, the criminals have not lost focus, and they will shift to any avenue that is open. It’s important for banks and credit unions to inform their customers of the risks checks pose. No one should be putting checks in the mail right now.”
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