Check fraud has more than tripled over the last five years—Just between 2018 and 2022, there was over a 200% increase in check fraud incidents. This trend is particularly shocking when you consider that check use has steadily declined over the last few decades. So, what’s driving the increase? It’s simple—Check fraud is a low-tech crime with low barriers to entry, making it attractive to inexperienced criminals.
According to The New York Times, the Financial Crimes Enforcement Network reported that banks filed 680,000 reports of check fraud in 2022, nearly double the previous year’s total of 350,000 cases, which was higher than the year before. At the time of writing, FinCen has not published numbers for 2023, but as of October 2023, banks had reported nearly 450,000 cases of check fraud, putting 2023 on track to beat 2022.
A lot of this fraud happens when thieves and rewrite them — The U.S. Postal Service recently reported a 161% increase in mail theft. However, this isn’t the only cause of increasing check fraud. Scammers also hijack accounts, steal paper checks, open fake accounts to write checks, and engage in many other types of check fraud.
To prevent check fraud, you must understand how the fraud takes place, and then, you must tailor your responses accordingly. To protect your bank, keep the following strategies in mind.
1. Segment your customer education efforts.
Customer education is a key part of fighting bank fraud, but your customers don’t all need to hear the same messages. When sending out educational alerts, segment your efforts to make them more relevant to your audience. This will make your messages more effective.
Check fraud tends to affect your elder clients the most. Often, this is because these clients are the ones who are the most likely to mail paper checks — this is particularly true for low-income elder account holders. However, check fraud also happens when scammers prey on elder people. They leverage loneliness and fears about Social Security checks to trick this population into sharing sensitive details about their bank accounts.
In addition to letting your customers know about the risks, advise them to check their bank statements every month. Then, they’ll be more likely to notice if a fraudulent check has cleared their account. The laws vary from state to state and based on the type of fraud, but generally, customers must report the check within 30 to 60 days if they want the bank to cover the losses.
2. Train tellers to spot fake IDs.
Once the thieves have stolen a check from the mail, they wash it, put in a new payee, and boost the value of the check. Then, they go to the bank and cash it. You need safeguards in place that prevent these criminals from cashing the check.
Although the practice is relatively rare, some smaller banks still cash checks written from accounts at other banks, from people who don’t have an account at the bank. If you’re still doing this, you should consider adjusting your policies.
In situations where the check was written from an account at your institution, be very careful about identifying the person cashing the check. While many legitimate consumers cash checks at the banks where they were written, this practice is waning, and your tellers must exercise due caution.
Train your tellers to look for signs of a fake ID. Have them familiarize themselves with real IDs from your state and the surrounding states. Then, they will be more likely to spot discrepancies if someone presents a fake ID. Common issues include rounded edges, lack of rigidity, or absence of holograms.
3. Look for aberrations in customer patterns.
Also, consider investing in software that will help you spot aberrations in customer patterns. Many customers write checks to the same entities every month, and they tend to be in a similar dollar range. You should have a solution in place that alerts you if you get presented with a check that falls outside the norm. Then, you can manually review the check before cashing it.
Legacy check-fraud detection systems flag checks outside of set parameters for fraud reviews. For instance, these systems may flag all checks over a certain value, checks written from new accounts, or out-of-order check numbers. Unfortunately, rule-based systems miss a lot of fraud, and they generate a lot of false positives.
When customers write a legitimate check, they don’t want to deal with issues because the bank suspects fraud. They just want the check to clear easily. When investing in fraud detection tools, it’s critical to look for something that can detect fraud effectively, without disrupting the customer experience.
Fraud detection systems that look for patterns identify fraud at higher rates, and they also reduce false positives. These systems know if a customer tends to write out-of-order checks. They understand that certain customers regularly write high-value checks. They know that a new business account may have a lot of checks right after opening. These systems don’t look at traditional signs of fraud.
Instead, they develop an understanding of your customer’s patterns in particular and of legitimate vs. fraudulent patterns in general. Then, they analyze transactions based on anticipated patterns, and they request a manual review when a transaction doesn’t play out as expected.
4. Strengthen new account opening procedures.
In some cases, thieves open accounts so that they can cash checks more easily. Once a thief has an account, they can deposit bad checks in an ATM or through an online app, and they don’t have to worry about presenting an ID to a teller. Then, they withdraw the funds and run before the bank realizes they’ve cashed a bad check.
This happens when thieves open accounts with fake, stolen, or hybrid identities, but it also happens when thieves open accounts with fake business names. To protect your bank, you need to be aware of the risk of new account fraud, and you need to invest in solutions and strategies that help you prevent thieves from opening accounts at your institution.
5. Deal with customers before they get to the media.
Legally, your financial institution is only liable for check fraud losses if the customer reports them in a certain time frame and if the customer’s negligence didn’t contribute to the scam. However, in the court of public opinion, the rules are a bit different.
Even if you’re not liable for the losses in a strictly legal sense, your customer is likely to feel that you should be held responsible. People expect their banks to protect them from scams. This can become a significant problem if your customers go to the media.
Nearly every news story about bank fraud involves an interview with a victim. Typically, the victim names their bank and explains what the bank has done to rectify the issue. Even if you are in the right from a legal perspective, these types of stories can hurt your reputation.
Whenever possible, deal with your customers before they get to the media, and keep in mind that even if they aren’t interviewed for a story, they will likely be spreading the tale to their contacts which can also hurt your reputation.
Consider offering victims a provisional credit. Then, if your investigation reveals that they were at fault and you’re not responsible, you can remove the credit at that time. However, for a legitimate victim, this strategy can go a long way to alleviating their financial struggles as they wait for a resolution. Keep in mind that sometimes it may be more cost-effective to cover a $5,000 loss than it would be to deal with reputational damage, even if you’re not strictly liable for the check.
Contact Us About Check Fraud Solutions and Services
At SQN Banking Systems, our mission is to help our clients avoid check fraud and other types of bank fraud. We offer a range of services and solutions designed to protect your bank from financial losses and reputational harm.
When you connect with us, we’ll start with a conversation about your needs. Then, you can get a free fraud process review to help you spot vulnerabilities. You need a solution customized to your unique risk profile and customer base — we can help you find exactly what you need. To learn more, contact us today.
Link to new post about mail-related check fraud