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Check fraud scams: Old problem that isn't going away

Marcia Savage

Even though the number of checks used for payment is dropping, check fraud is an old payment fraud problem that continues to plague banks.

According to a Federal Reserve study, the number of

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checks used for payment fell by 6.7 billion between 2003 and 2006. Yet a survey released earlier this year by the Association of Financial Professionals showed that despite the declining number of checks, they continue to be a favorite target for criminals: 91% of survey respondents that experienced attempted or actual payment fraud in 2008 were victims of check fraud scams.

"It continues to be a thorny issue," said BC Krishna, founder and CEO of Memento, a Burlington, Mass.-based provider of antifraud technology to the financial industry. "Check volumes have been going down fairly dramatically in the U.S. for the past five to ten years, but check fraud is going up."

The evolution of checks with their increased conversion to Automated Clearing House (ACH) transactions to expedite payment has made it harder for legacy technology to detect check fraud, said Glen Ulrich, senior vice president and manager of the deposit services group at U.S. Bank in Portland, Ore. Minneapolis-based U.S. Bancorp. is the parent company of U.S. Bank.

"The environments we had built in the banking industry and the legacy products we used for years are often ineffective at detecting anomalies with these new types of payments," he said.

Web- and telephone-initiated ACH payments often don't have check numbers, and check number ranges in many cases have been a primary indicator of discrepancies, he said. They can also have dramatically different check serial ranges, which can lead to false positives. Consequently, the bank has to spend a lot of manpower on customer contact to combat check fraud, Ulrich said. "But that also generates a lot of good customer service opportunities," he added.

The transition of check payments from paper to image has changed the speed at which check fraud scams are perpetrated, said Vijay Balakrishnan, president of StratEx LLC, an Atlanta-based consulting firm.

"Just as the flow of images takes place at 'light speed,' so does fraud," he said. "The challenge that existing detection systems face is because fraud detection is traditionally a 'day two' process, with day one being the day in which check information is captured and sent onward to the paying bank."

"Thus, day two is a day late and many dollars short," Balakrishnan added. "The challenge is to bring detection forward to 'day zero' or detecting potential fraud as close to the instant of capture as possible, to give the institution early warning to flag suspect transactions for special review."

Memento recently released a new product that Krisha said makes detecting and preventing check fraud easier for banks by providing improved analytics to reduce false positives and a comprehensive interface to increase efficiency.

"The goal is to have a more manageable, meaningful set of fraud alerts so you can do that with a smaller team of people and therefore be much more targeted in your defenses," he said.

The product, Memento Security-Check Fraud, also looks beyond check transactions in order to catch cross-channel fraud.

Ulrich said Memento's solution is significant because it looks for anomalies at the customer level instead of just payment type and channel. "It's that customer-related analysis that the industry needs so badly," he said.

Richard De Lotto, principal analyst of banking industry advisory services at Gartner Inc., said technology like Memento's makes it easier to catch check fraud but "doesn't cut into the fact that it's easy to do."

Ultimately, banks need to wean customers off of checks entirely, De Lotto said. "What we think will eventually happen is that banks and merchants will increase the incentives to use debit cards, perhaps with discounts, that make it worth the consumers' time to move away from checking," he said.


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