In the age of digital dominance, skepticism based on overarching fears of fraud within digital banking still lingers. Although consumers’ preference for digital banking continues to increase, 75% of consumers remain concerned about the potential for fraud within the online banking realm.
With this in mind, some might find it ironic that one of the most low-tech types of payment fraud — namely those involving traditional paper checks — remains a substantial problem for consumers and financial institutions across the US, with instances of potential check fraud increasing year after year.
Let’s put this into context: In 2021, financial institutions submitted more than 350,000 Suspicious Activity Reports (SARs) of potential check fraud to FinCEN. Fast forward to 2022, and this number almost doubled, surpassing 680,000 SAR reports related to check fraud.
Understanding the industrial scale of check fraud
While check transactions are declining throughout most of the world, consumers in the US maintain a higher reliance on checks compared to many other nations.
Having spent most of my career working in the UK banking sector, it’s fascinating to witness the scale of check fraud play out in the US, to the point where the Postal Service feels it necessary to issue warnings against mailing checks due to a surge in mailbox thefts.
The resurgence of check fraud over the past four years is often traced back to the early days of the COVID-19 pandemic, when organized crime rings targeted government relief checks to falsify the recipients, created fake IDs in order to cash checks, and even infiltrated postal distribution centers.
To make things worse, as consumers continue to consider checks a valid method within the US payment ecosystem, there are limited financial security frameworks — that are commonly found in other regions — to protect consumers when check fraud occurs.
Our annual report on the State of Fraud in North America 2023 uncovered several alarming trends surrounding the pervasive nature of check fraud:
- The share of fraudulent transactions linked to physical forgery fraud or counterfeit activity has doubled to 14%. This increase is likely a result of the surge in check-related fraud, suggesting a shift in the tactics used by fraudsters.
- Checks have emerged as the second most vulnerable payment method. While credit cards and prepaid/debit cards have long been considered the most vulnerable payment methods, checks have now entered the fray as a formidable contender.
- The percentage of financial institutions reporting a rise in check payment fraud increased from 38% in 2022 to a staggering 70% in 2023.
Download the full 2023 State of Fraud and Financial Crime North America report here.
The future of check fraud prevention
The advanced strategy adopted by many banks and credit unions for check fraud detection combines relatively basic rule processing with image profiling. However, this method still results in a substantial overhead because of the significant number of false positives that are produced.
Some institutions have transitioned to leveraging advanced analytics and even machine learning models, with a primary focus on minimizing false positives to boost operational efficiency.
The check payment instrument itself possesses a set of unique vulnerabilities. However, when processed as a transaction, the data can still be linked with customers’ behavior patterns and profiles, where analytics can be used to gauge the risk of fraud.
Leveraging cutting-edge analytics in the fight against check payments fraud
In our pursuit of innovating fraud detection methods, we at Featurespace collaborated with a leading US credit union. Utilizing the most advanced analytics in the industry, we analyzed both inbound and outbound customer payment behaviors and patterns to create a profile of normal behavior.
This empowered us to identify anomalies — be it a deposit or an in-cleared check — and prompt further investigation. Thanks to this innovative solution, we achieved an exceptional fraud detection rate of over 80% with a low false positive ratio of 2:1.
To learn more about how our unified, cutting-edge solution and holistic approach to check fraud detection can help you identify and mitigate fraud attacks across various channels and payment types, explore the ARIC™ for Payments page here.