Check deposits have been a constant focus for fraudsters, but during the pandemic we saw a significant decrease in check fraud as government stimulus programs were targeted. By the middle of 2021 however, check fraud was back with a vengeance and the water level has seemingly risen to historic heights. To mitigate risk and losses, financial institutions should consider partnering with third-party companies, like Fiserv, to help manage and safeguard against rising fraud exposure.
A recent webinar from PaymentsJournal features industry leaders in check deposit solutions, who discuss how they can help financial institutions reduce fraud losses through new technology and insight. The webinar features Brian Riley, Director of Credit at Javelin Strategy and Research; Jeff Burton, VP of Deposit Solutions at Fiserv; and Rodney Drake, Chief Strategy Officer at Valid Systems.
The three speakers provided important insights into check fraud, which are summarized below.
Financial Institution’s without Check Deposits Fraud Tools Are an Easy Mark for Fraudsters
With the increasing risk of check fraud and the migration of transactions to mobile channels, institutions must provide efficient and secure services to customers while managing risk.
“Clients are looking for less friction and faster availability of funds once they deposit a check,” Drake said. “Yet in providing that, the bank is obviously leaving itself exposed to more risk, particularly in mobile.”
Traditionally, there was a significant period between when a check was deposited and the funds were made available. Customer expectations continue to grow around instant payments and availability. But shortening that period can drastically increase risk, making it easier for crooks to commit check fraud.
After the onset of the COVID-19 pandemic, the government injected an unprecedented amount of stimulus money into the economy, much of which was distributed through checks.
“Those checks became easy targets for fraudsters, who took advantage of the lack of investment in fraud prevention in the check business,” Burton said. “Additionally, with more people working from home, more checks were sitting in the mail, which led to an increase in check fraud.”
Checks are obviously not top of mind for many banks as the emphasis shifts toward digital payments. However, Despite the declining check usage, it remains an important payment method and therefore requires investment in fraud prevention to safeguard depositors.
“Organizations have historically invested more money on other payment types like Zelle, ACH, and P2P payments,” Drake said. “Check payments have been neglected due to the perception that it’s a declining business. This makes check payments an easy target for fraudsters since they know where the spending has historically been focused.”
Fiserv has partnered with Valid Systems to offer clients ’ machine learning solutions to detect anomalies in checks that can indicate fraud.
Here are a few ways artificial intelligence and machine learning can be applied:
- Image recognition: AI and machine learning algorithms can be trained to recognize the features of a genuine check, including the font, the layout, and the presence of security features. Any deviation from these patterns can be flagged as potentially fraudulent.
- Data analytics: Machine learning can be used to analyze large datasets of check deposits, customer profiles, and transaction history to identify patterns that may indicate fraud. These algorithms can detect anomalies in account usage, such as an unusually large number of check deposits or withdrawals made from a new account.
- Behavior analysis: AI can be used to detect behavioral patterns that may indicate fraud. For example, if a customer has a history of overdrafts and suddenly begins depositing large checks that clear immediately, this activity can be flagged as suspicious.
By analyzing large datasets, identifying patterns and anomalies, and monitoring transactions in real time, banks can improve their fraud detection and protect their customers from financial losses.
The Future of Deposits
The check processing industry is consolidating, and new technology is being incorporated to speed up check clearing to deliver a best of breed experience for both the institution and the consumer.
“If checks could be converted to instant payments, it would unlock a lot of value and improve the customer experience,” Drake said.
Instant check conversion would greatly benefit the customer experience and reduce costs and risks for banks. This includes improving back-office processing, reducing manual review queues, and minimizing expenses and waste for banks.
To improve the customer experience, banks need to broaden their focus beyond just managing customer deposits.
“Fraudsters are experts in understanding bank policies, so it is important to be proactive in managing risk across all transactions, not just at the point of presentment,” Burton said.
Furthermore, banks can more easily accomplish this by partnering with a third party like Fiserv.
“Fiserv helps smaller institutions compete with larger ones by democratizing the availability of these solutions,” Riley said. “The consortium approach to managing data creates a learning loop and helps all companies involved, regardless of their size.”
As check volumes decrease, the risk of fraud increases, so managing that risk market-wide and investing in technology to safeguard banks’ balance sheets is essential. By doing so, banks can improve the experience for customers and reduce their expenses and costs.
