Here’s how many checks consumers still write, and why that impacts holiday fraud

Check fraud is worrisome year-round, but garners particular attention during the winter holidays when money gifts change hands, small businesses log greater traffic and significant year-end payments are circulating.

The Treasury Department’s fraud-focused arm, the Financial Crime Enforcement Network (FinCEN), issued a recent update on its check-specific crime warning out last year.

In just the six months following the 2023 alert, financial institutions have reported more than $688 million in suspicious activity. Compared to other forms of payment, check fraud is the most susceptible to fraud, with FinCEN’s analysis identifying three primary outcomes for stolen checks:

1. 44% were altered before being deposited.
2. 26% were used as templates to create counterfeits.
3. 20% were fraudulently signed and deposited.

Mail theft–related check fraud remains a major threat to banks and other financial institutions, impacting customers’ checking accounts, business accounts, personal savings and retirement savings.

In addition to the upfront financial losses, fraud potentially puts a serious dent in an institution’s credibility.

We know that fraudsters are becoming more sophisticated in their methods, which requires that financial institutions counter with ever smarter detection and mitigation solutions of their own.

Many institutions are still reliant on legacy systems that may struggle to keep pace with the influx of fraudulent activity, especially with the increased volume and vulnerabilities of the holidays. Thwarting check fraud requires institutions to deploy solutions either created in house or via partners that detect fraud early and leverage automated verification and fraud detection at all points of the clearing process, according to fraud experts.

BAI talked with Todd Robertson, SVP at ARGO, a financial services technology firm focused on customer experience, improving acquisition success, and protections from undue risk and fraud, for his view on fraud practices this time of year.

BAI: We talked roughly this same time last year, Todd, on this very topic and FinCEN has updated its report on check fraud. In your view, what remains the same when it comes to holiday fraud and what has changed?

Robertson: There are a couple of different things that we are really homing in on. Today, consumers are writing about 30 checks per year, on average. Last year, that number was 23. And according to FinCen, check fraud has impacted about 800 banking institutions, so big area we are focused on is check alternation detection. It can be more difficult to pick up, but that’s, unfortunately, where we have to focus: alteration to stolen checks. That includes a physical check swiped out of the mailbox, which according to the U.S. Postal Service is becoming harder to do because of the new blue boxes, or a check swiped from a home mailbox, or if a bad actor came across some unused checks they can alter, and it includes high-tech graphics that are creating bogus checks from scratch. Pre-deposit detection is the more challenging, but also more fulfilling, side to be on.

BAI: As check writing persists, has fraud education for financial institutions, their staffs and their customers changed to address this reality?

Robertson: Well, yes, because I think if you talk to financial institutions across the board, there’s been a real shift in realization. Pre-COVID, if you talked to a banker about check fraud, they’d kind of look at you glassy-eyed, claiming “We don’t have a problem with that.” Post-COVID. They are now saying, oh, shoot, I got a problem and I’m missing a software solution that can evaluate millions of items that may be coming through. But increasingly, I would say most banks of any size – I mean, possibly some very small, high-touch community banks withstanding, check fraud software automation has been adopted for image analysis, signature analysis, transaction analysis and so on.

BAI: We’ve seen research that points to greater tolerance among consumers in accepting security levels, even if it means a bit more hassle, because safety-first seems to have caught on. Your thoughts?

Robertson: I would say the straight consumer segment is probably not all that much better-educated on check fraud even as the issue grows. I’ll put my mom in that group as an example as she is still a big check writer without much of a second thought. I would say the business side has definitely become more aware, and you’re starting to see that because you’re seeing a huge uptick in positive pay, and banks forcing business customers to become positive-pay customers also  [Positive pay is a cash management system that compares checks presented for payment against a file on hand that identifies typical check habits by a depositor]. There’s a big focus on payee positive pay. There was a local small business here in the Dallas area that had written checks to vendors. These were known vendors, known amounts that would fit within the guidelines of what they’ve expected to be written from the bank side. The check got intercepted. It got washed. It got written to another individual for the same amount, so the bank cleared it. It was a familiar check, it just had a different payee on it. But the business caught it at the 90-day mark, beyond the 60-day window allowable to identify the fraud. Small businesses especially are hit by this issue and a lack of recourse and lost SMB relationships, if it comes to that, will hurt the banks.

BAI: You’ve stressed the importance of leveraging automated verification and fraud detection across the clearing process, and we know that bank operations, while improving, can still be siloed in some instances. So what should the approach entail?

Robertson: When of the first needs that banks call for on this journey is image analysis to be able to detect the signature and really anything that’s off. But there still needs to be emphasis on having the global view of the whole transaction, asking does this transaction fall within the range of what we’ve seen with this account process and what we’ve seen this customer do? Does it fall within the velocity, the number of items that are coming through typically? If you’re not doing image and transaction, then you’re still likely getting just hammered with false negatives and false positives. But by having both sides, where you’re looking at cross channel, you’re looking at the transaction, you’re looking at all of the metadata, that’s where you really start driving down your false negative and false positive aspects. Detection accuracy in that case can reach upwards of 96%.

BAI: What else is top of mind for you this holiday season or as we look at anti-fraud steps throughout the year?

Robertson: I think that the back-office workflow side of this thing is just as important. You know, it’s one thing to be able to trigger alerts, but when we’re talking about hundreds of thousands of items, having the appropriate workflow on the backside is just as important. Upgrading there boosts accuracy as the right queues with the right individuals can look at potentially fraudulent items and that’s where the real dollar value is gained. I just think it takes a more comprehensive view of the whole process in order to combat this thing effectively.

Rachel Koning Beals is Senior Editor with BAI.