Check Fraud: The Threat is Real

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Check deposits have always been a focus for fraudsters, but during the pandemic we have seen a significant decrease in check fraud as government stimulus packages are targeted. However, by mid-2021, check fraud is back and the waters appear to be at an all-time high. To reduce risk and loss, financial institutions should consider partnering with third-party companies such as Fiserv to help manage and prevent the growing risk of fraud.

A recent webinar hosted by PaymentsJournal featured industry leaders in check deposit solutions discussing how new technologies and insights are helping financial institutions reduce their losses due to fraud.Features of the webinar Brian RileyCredit Director, Javelin Strategy and Research; Jeff BurtonVice President, Deposit Solutions, Fiserv; and Rodney DrakeChief Strategy Officer, Valid Systems.

Three speakers provided key insights on check fraud, summarized below.

As the risk of check fraud increases and transactions migrate to mobile channels, institutions must manage risk while serving customers efficiently and securely.

“Customers expect less friction and faster access to funds after depositing a check,” Drake said. “However, banks are clearly exposing themselves to more risk when providing these services, especially in the mobile space.”

Traditionally, there is a long period of time between when a check is deposited and when funds become available. Customer expectations for instant payments and availability continue to grow. But shortening that period greatly increases the risk, making it easier for scammers to commit check fraud.

In the wake of the COVID-19 pandemic, governments have injected unprecedented stimulus money into the economy, much of it by check.

“These checks are easy targets for fraudsters who take advantage of the checking business’ lack of investment in fraud prevention,” Burton said. “Additionally, as more people work from home, more checks are being mailed, which has led to an increase in check fraud.”

As the focus shifts to digital payments, checks are clearly not a top priority for many banks. However, despite the decline in check usage, it is still an important payment method, so investment in fraud prevention is needed to protect depositors.

“In the past, organizations have invested more in other payment types like Zelle, ACH and P2P payments,” Drake said. “Check payments are overlooked because people think it’s a declining business. This makes check payments an easy target for fraudsters who know where the historical focus of spending is.”

Fiserv has partnered with Valid Systems to provide customers with a machine learning solution to detect anomalies in checks that could indicate fraud.

Here are a few ways artificial intelligence and machine learning are being applied:

1. Image recognition: AI and machine learning algorithms can be trained to recognize characteristics of real checks, including font, layout and the presence of security features. Any deviation from these patterns could be flagged as potentially fraudulent.
2. Data analysis: Machine learning can be used to analyze large data sets of check deposits, customer profiles and transaction histories to identify patterns that may indicate fraud. These algorithms can detect anomalies in account usage, such as unusually large checking deposits or withdrawals from new accounts.
3. Behavioral Analysis: AI can be used to detect patterns of behavior that may indicate fraud. For example, if a customer has a history of overdrafts and suddenly starts depositing large checks that clear immediately, this activity can be flagged as suspicious.

By analyzing large data sets, identifying patterns and anomalies, and monitoring transactions in real time, banks can improve fraud detection and protect customers from financial loss.

The future of deposits

The check processing industry is consolidating and adopting new technologies to clear checks faster to provide the best experience for institutions and consumers.

“If checks could be converted to instant payments, it would unlock a lot of value and improve the customer experience,” Drake said.

Instant check conversion will greatly benefit the customer experience and reduce costs and risks for banks. This includes improving back-office processing, reducing manual review queues and minimizing expenses and waste for the bank.

To improve the customer experience, banks need to expand their focus beyond just managing customer deposits.

“Fraudsters are experts at understanding bank policies, so it’s important to proactively manage risk in all transactions, not just on presentation,” Burton said.

Additionally, banks can more easily achieve this by partnering with third parties such as Fiserv.

“Fiserv helps smaller institutions compete with larger institutions by democratizing the availability of these solutions,” Riley said. “A federated approach to managing data creates a learning loop and helps all companies involved, regardless of size.”

As check volumes decline, the risk of fraud increases, so managing that risk market-wide and investing in technology to protect banks’ balance sheets is critical. By doing this, banks can improve customer experience and reduce their expenses and costs.