Check usage has been steadily decreasing for the past two years, but losses associated with check fraud remain a significant cost to financial institutions, individuals, and businesses. With an estimated cost to financial institutions of $893 million in 2010, checks closely trail debit cards as the second-largest source of fraud loss to financial institutions, according to a 2011 ABA Deposit Account Fraud Survey Report.
Source: ABA 2011 Deposit Account Fraud Report.
The popularity of checks as a payment method is diminishing, but checks and deposit accounts remain an easy target for fraud. According to the 2010 Federal Reserve Payments Study, check usage decreased about 20% between 2006 and 2009 from 30.5 billion checks cleared to 24.5 billion. Yet the amount of check fraud attempted against financial institutions’ deposit accounts decreased less than 4% from $11.4 billion in 2008 to $11 billion in 2010. The relatively small amount in attempted check fraud contrasted with the larger decline in check payments shows that even with the proliferation of debit cards, prepaid cards, and other types of payment methods, checks persist as a preferred method of defrauding financial institutions, individuals, and businesses.
Not only have three out of four financial institutions been affected by check fraud, but consumer and small business accounts are targets as well. According to the ABA survey, in 2010, 62% of losses affected consumer accounts while 21% of losses affected small business accounts. While traditional check fraud scams remain popular among less-sophisticated (yet still effective) fraudsters, there is recent evidence that indicates advanced cybercriminal fraud rings are now using checks as a vehicle for international payment fraud schemes. The application of modern cybercrime techniques to the traditional vulnerabilities of check processing highlights a relatively new area of risk not typically considered when analyzing check fraud losses.
The steep decline in check usage masks the fact that check fraud losses have remained relatively stable over time. In fact, the cost of check fraud is decreasing at a slower pace than checks as a payment method. Without constant improvement of fraud prevention systems and techniques, check fraud will continue to be a significant source of loss to financial institutions and the individuals and businesses that they serve.
Proper Regulation CC Holds Are An Invaluable Safeguard
Institutions concerned about check fraud may want to consider comparing deposited checks against information in the National Shared Database. By doing so they can gain greater insight into the probability of a check being paid or returned. They can also make better-informed hold or no-hold decisions.
The process is simple. When accepting a deposit, a teller scans the check and receives an immediate response. Based on the type of response, the teller can place an extended Reg CC hold on that item, inform the depositor that the check they are presenting may be returned and that they should seek an alternative form of payment, or try to collect it directly from the issuing bank.
In doing so, a credit union is not only protecting itself against potential losses but it is also protecting its member. Depositing bad checks often results in losses to the account holder who is unaware they are the victim of fraud. By notifying the member at the teller line that a check is potentially going to be returned, they have the option to seek an alternate form of payment or to proceed with the deposit subject to an extended hold. Depending on the circumstance, this simple information can save them from incurring bounced check fees, or worse yet, a negative account balance.
Credit unions are a trusted custodian of businesses and consumers, and providing the greatest amount of protection possible against check fraud is a valuable service for your members.
The following article was an excerpt from a longer white paper that examines best practices in lowering check losses and combating check fraud. Click here to download the complete white paper from Bluepoint Solutions.