Combating check fraud: Still a major challenge in the digital age

By Todd Robertson

Checks remained the payment method most impacted by fraud activity (66 percent), reports from the 2021 Association for Financial Professionals Payments Fraud and Control Survey. Financial institutions encounter deposit fraud in many ways, including counterfeits, forgeries, alterations, serial numbers, stop payments and check kiting.

While many organizations are rightly focused on combating digital fraud, fraudsters are also still dialed in to check fraud. Improving efforts to combat check fraud should start with financial institutions utilizing extensive mathematical and machine learning methods to analyze transactional data, check stock and signatures to identify potential suspicious items and corresponding risk exposure. Effective check fraud prevention will help FIs evade exploiters and their newest innovative fraud schemes.

Staying ahead of fraudsters

The 2019 Deposit Account Fraud Survey report by the American Bankers Association showed that check fraud represented 60 percent of attempted theft aimed at deposit accounts. During the pandemic, mobile banking increased by 200 percent in new registration, leaving banks vulnerable to risk. This innovation has given fraudsters just as much convenience as it has customers. Perpetrators no longer have to show their faces at physical branches or ATMs to deposit fake checks.

Another recent check fraud scheme financial institutions have been combatting is fraudsters leveraging unwitting accomplices via Instagram. These individuals are contacting Instagram users and paying them to use their accounts to commit the scam. Then, the fraudster utilizes these accounts to post photos of bank account statements with large balances and claims how easy it was to make money through a “currency exchange.” If the target agrees, the fraudster sends the target a check to deposit in their bank account. Once the check is deposited, the fraudster tells the target to withdraw money from the deposit account and send it via an online money transfer system or through cash. After a couple of days, the bank notifies the victim that the check was fraudulent, and the victim could be responsible for the check’s amount.

Fraudsters become more innovative every year, targeting vulnerable victims to execute their nefarious plans. Although check use is not as common in the digital age, fraudsters utilize checks as a convenient medium to exploit banks and their customers. Fortunately for financial institutions, a few key methods can be utilized to combat check fraud in 2022.

A proven trio to detect and prevent check fraud

Transaction analysis is one of three key tools financial institutions can use to combat check fraud. Transaction analysis is the process of examining bank transactions to look for unusual and suspicious activity or other issues. This key component scrutinizes debits and credits contained in deposits and withdrawals to identify suspicious items such as out-of-range check numbers and check amounts and duplicate check numbers. It also applies tests at the account and entity level, measuring such things as account velocity, account volume, and deposits or withdrawals of unusual amounts.

Check stock validation is the second tool used to combat check schemes. Check stock validation consists of analyzing presented check images against historical, referenced check images in order to authenticate the check stock. The solution helps institutions more effectively identify counterfeit in-clearing and over-the-counter checks with greater speed, accuracy and reliability than visual inspections. Check stock verification leverages technology to spot aberrations that cannot be detected by the human eye. It also reduces the number of manual verifications and decreases false positives through digital check image analysis. This process improves the check fraud detection process and alleviates the burden on your in-house anti-fraud team.

Signature verification is the final component used to combat check fraud. This solution uses machine learning algorithms and sophisticated decision trees to provide a detailed analysis of check signatures. This results in efficient evaluation of suspect in-clearing and over-the-counter checks and increased confidence levels for acceptance and return decisions.

Signature verification compares digitized signatures to referenced images, manages multiple signatories on the same account and monitors items requiring dual signatures to validate check signatures on personal and business accounts. Focusing on dynamic aspects of the signing action, including signature fragments, handwriting trajectories, and geometric analytics helps produce confidence scoring based on these aspects when comparing newly presented check signatures with previously saved images to determine matching and nonmatching elements.

Check fraud doesn’t seem to be slowing down anytime soon. But there are tools banks can use to mitigate risk and reduce fraud loss. Used simultaneously, transaction analysis, check stock validation, and signature verification empower your financial institution to prevent fraudulent check deposits. Financial institutions that focus on combatting check fraud will earn the trust of their customers and provide an overall safer banking experience.

As SVP for business development at ARGO, Todd Robertson works with more than 425 banks to transform customer experiences and improve operational efficiency.