Ask most people younger than around age 35 about check fraud, and their response likely will be something along the lines of, “Wait, people still use checks?”
Oh yeah, they sure do.
And we’re not just talking about grandma pulling out her checkbook each month to pay the utility bills. A significant number of businesses in the United States continue to make payments the old-fashioned way, by cutting a check and placing it in the mail.
According to data from the U.S. Federal Reserve System, there were approximately 3.15 billion commercial checks issued in 2023. Granted, that is down considerably from the peak of slightly more than 19 billion in 1992. Still, it is more than 3 billion opportunities for somebody to commit check fraud, which has become a major issue for banks in recent years.
“It is a tremendous problem that is not getting any better,” says Scott Latham, president and CEO of the Alabama Bankers Association. “It is growing day by day and costing our industry a tremendous amount of money. Banks are writing off lots of losses due to check fraud.”
Karen Pugh, COO of Prattville-based River Bank & Trust, agrees. “The last few years have been rough,” Pugh says. “It’s not a consumer problem as much as it is our businesses. They are being hit big-time. We spend a lot more time than we ever did monitoring checks. Right now, it is the most important thing we do every day.”
It is a problem that had been growing gradually for several years, then escalated suddenly. The Financial Crimes Enforcement Network (FinCEN) reported last year that incidents of check fraud nearly doubled from 2021 to 2022, increasing from approximately 350,000 to 680,000. This jump has coincided with a dramatic decrease in credit card and debit card fraud following the widespread acceptance of chip technology in the late 2010s.
“Check fraud had been declining until the chip came out, which really reduced credit and debit card fraud significantly,” says Mark McVay, chief risk officer at Birmingham-based ServisFirst Bank. “Now it has really shifted back, and we have seen check fraud grow each year for the past three or four years.”
Though the problem stems from the use of 20th-century style paper checks, it is implemented these days through a 21st-century technology called check washing, which involves the digital manipulation of a physical check. Here is how attorney Jerry Powell, former general counsel for Compass Bank and Cadence Bank and current special counsel for the ABA, describes the process:
“Crooks steal a check and they digitally change the payee and the dollar amount,” Powell says. “Then they reprint that digitized information on another check and take it to a bank, generally a large money-center bank that has millions of checks coming through. They deposit it to an account, and by the time anybody realizes what has happened, the fraudster takes the money and is long gone.”
This digital theft is made possible by physical theft, usually involving checks that are mailed. Sometimes mail drop boxes are simply broken into, but there also have been cases where postal employees have assisted thieves by selling them keys to the drop boxes. Late last year, a former Mobile postal worker admitted in federal court to participating in a scheme that resulted in the theft of nearly $18 million in business checks sent through the mail.
“One of the reasons check fraud is rampant right now is because of fraud within the U.S. Postal Service,” Latham says. “That is how a lot of these criminals are getting their hands on the physical checks. We are strongly encouraging individuals and companies to exercise tremendous caution when it comes to mailing checks.”
Increasingly, financial institutions are using their own technology in an effort to combat the technology of check washing. One way is through a fraud-detection software called Positive Pay, which enables businesses to see images of their checks that a bank receives each day in order to verify that it matches with what the business originally issued. “That is the number one way to reduce losses,” McVay says.
One potential drawback to this system is it requires a daily effort by somebody within the business to confirm that all the checks the bank received are indeed correct. “Positive Pay is a solution,” Powell says, “but there can be a lot of customer resistance to it because it requires more work on their part to review all the items.”
Pugh says River Bank & Trust recently invested in a fraud-technology software called Verafin that constantly looks for sudden changes in patterns involving bank customers, including greater-than-normal deposit amounts.
“It takes our customers’ history and pulls any unusual activity like out-of-sequence numbers or amounts and images that don’t match up,” Pugh says. “It’s costly, but we think it is going to be worth the investment. It has definitely cut down on some of our manual work involving check monitoring.”
Of course, the best way to eliminate check fraud is to eliminate the use of physical checks entirely. Payment services such as CashApp, PayPal and Venmo allow transactions to occur electronically, as do ACH (Automated Clearing House) payments, in which money is directly deposited into an account.
“We are trying to make our customers aware of this problem and encourage them to shift to more digital-type payments,” McVay says. “There are so many digital-type options out there today, and they are all much more secure than checks.”
This is a stark departure from the general thinking of 15 to 20 years ago, when many people were reluctant to engage in any sort of electronic financial transaction because it seemed too risky. As a result, it remains difficult for many businesses to break their check-writing habit.
“We’ve been writing checks for more than 100 years. It is a tough transition for some people,” Latham says. “But until we can crack down and get ahold of the criminal aspect of it, which is going to be hard to do, then we have to find alternative secure ways to transact our business.”
It is a problem that may resolve on its own given enough time, as the generations that have been raised on technology and are comfortable with electronic payments — and, frankly, find paper checks kind of weird — become more involved in the business world. After all, according to data from the Federal Reserve Boards, the number of commercial checks issued in the U.S. has declined every year since 1999.
“I have two daughters, aged 31 and 29, and one of them is a banker,” Latham says. “And I can tell you, they don’t use checks.”
Cary Estes is a Birmingham-based freelance contributor to Business Alabama.
This article appears in the July 2024 issue of Business Alabama.
