Detect and Prevent Check Fraud in Real Time

Financial institutions are engaged in a never-ending battle to stay a step ahead of fraudsters that are clever and nimble enough to continuously exploit their organization or system weaknesses.

Many banks focus on combating digital fraud given the rapid digital developments in the financial services industry. However, fraudsters continue to leverage digital and physical channels to commit check fraud. In fact, checks serve as the payment method most impacted by fraud activity; 66% of payments professionals reported check fraud activity in 2020, according to the 2021 Association for Financial Professionals Payments Fraud and Control Survey.

Banks encounter check fraud in many ways, including counterfeits, forgeries, alterations, serial numbers, stop payments and check kiting. Technological advances have made it easier for fraudsters to create realistic counterfeit and fictitious checks, as well as false identification that can be used to defraud financial institutions nationwide.

Digital banking provides customers with many conveniences but also leaves banks vulnerable to risk. Perpetrators are no longer required to show their faces at physical branches or ATMs to deposit fake checks. However, 49% of fraud occurs in over-the-counter transactions, according to a recent ABA Deposit Account Fraud Survey Report.

Fortunately for financial institutions, there are three key tools they can use to combat check fraud.

The first is leveraging transaction analysis, which 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 duplicate check numbers and out-of-range check numbers and amounts. It also applies tests at the account and entity level, measuring things such as account velocity, account volume and deposits or withdrawals of unusual amounts.

The second tool is check stock validation, which analyzes presented check images against historical reference check images to authenticate the check stock. This can help institutions identify counterfeit in-clearing and over-the-counter checks quicker and more effectively. accurately and reliably than visual inspections. Check stock verification leverages technology to spot aberrations that the human eye cannot detect. It also reduces the number of manual verifications and decreases false positives through digital check image analysis. This improves the check fraud detection process and alleviates the burden on in-house anti-fraud teams.

A third tool is signature verification, which 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.

Banks can improve on their ability to detect fraud by combining software innovations such as decision tree/multiple variable analysis, image analysis and machine learning predictive analytics. Data topology, which is a way to classify and manage real-world data scenarios, will increase over time, which allows banks to include contextual information and negative historical analytics. In turn, these outcomes detect transactional fraud and suspicious activity, reducing false negatives and enabling a financial institution to make better and faster fraud-related decisions.

Automation software performs fraud risk scoring on deposits and withdrawals, using specific detection algorithms for each type of check such as on-us, transit, treasury checks and local government checks. The software applies transaction and image analysis on each item in the deposit, along with a configurable scorecard that calculates the risk for the parties involved in the transaction. Today, software can analyze more than 60 parameters covering the conductor, beneficiary, issuing account, and items to produce a single fraud score. This calculated fraud score provides the bank with an appropriate interdiction message — including a hold recommendation that gives the bank the option to accept the deposit, covering the fraud and other collectability risks by holding the fund.

Fraudsters become more innovative every year, targeting vulnerable victims to execute their plans and schemes. Even though check use is increasingly uncommon, fraudsters still utilize checks as a convenient medium to exploit banks and their customers. But banks can mitigate risk and reduce fraud loss efficiently. Used together, tools like transaction analysis, check stock validation and signature verification enable banks to prevent check fraud. Providing a safer banking experience protects the financial institution from fraudulent risks, strengthens the customer experience and earns trust.