“You Still Write Checks?” Check Fraud Remains an Expensive Headache for Banks and Credit Unions

Authored by Christopher McGee

On a daily basis, you can find numerous headlines across the country where scammers are being apprehended and arrested for fraudulent check schemes. It’s happening across all our cities and local communities. News coverage on fraud is abundant and check fraud continues to create major and expensive headaches for all financial institutions alike including global banks, regional and community banks, and credit unions. These banks and credit unions are facing a multitude of challenges as check fraud surges —largely driven by increased mobile deposit usage and digital banking conveniences, which are essential innovations designed to improve customer retention and digital customer experiences (CX). While digital innovations have streamlined operations and enhanced CX, they've also inadvertently opened new avenues for fraud. 

Why Has Check Fraud Worsened?

 Although the number of checks being written by customers has declined over the last couple decades, checks continue to be used frequently to make payments. For many, it remains a payment habit that has been hard to break. Recipients of checks (payees) typically include contractors, landlords, household helpers, the government, local and regional businesses, charities, children’s programs (such as school functions and sporting activities), churches and places of worship (often for donations, services, and dues), and family and friends for special occasions such as weddings, birthdays, and graduations. 

With so many checks still in regular circulation, the dramatic increase in check fraud primarily stems from two technological advancements:

1. Mobile Deposits: The introduction of mobile deposits has been a notable breakthrough where customers no longer need to physically visit their branches and credit unions to deposit their checks. However, this convenience relies heavily on those customers securely destroying deposited checks, which is what leaves checks vulnerable to theft and fraud. For example, how often do customers write the word “deposited” on their check after a mobile deposit, how often are deposited checks left in office drawers or on desktops in to-do piles that don’t make it to garbage cans, and how often are checks torn up or shredded after being deposited?
2. Digital Check Imaging: Digital imaging allows customers ease of visibility to check details through online banking portals. However, when fraudsters gain access to customer online accounts through weak passwords and other cyber techniques, these fraudsters exploit the images replicating crucial details like signatures and account numbers to facilitate check fraud.  Contrary to popular belief, fraudsters no longer need high-quality check images to be successful either. Remember the movie “Catch Me If You Can” from 2002 directed by Steven Spielberg and starring Leonardo DiCaprio and Tom Hanks? DiCaprio plays Frank Abagnale Jr., who claimed to have successfully performed numerous check fraud schemes working tirelessly to replicate watermarks, check images, and microscopic details. Today, fraudsters are simply copying essential details such as account numbers and signatures to produce convincing duplicates that pass mobile deposit screening. At AArete, we’ve seen basic white printer paper cut into the size of a check with some account details added, a seemingly minimal effort to deceive banks. 

Another longstanding practice for scammers also remains an issue – mail theft. Yes, that’s right. Scammers and fraudsters continue to steal mail directly from mailboxes and from the U.S Postal Service to hunt for checks. Combine mail theft with these digital banking innovations and the unintended consequences are new vulnerabilities that are increasingly profitable for fraudsters and exposing banks and credit unions to substantial financial losses and heightened customer security risks. 

How Can Banks and Credit Unions Improve Education and Communication?

One critical area being overlooked by banks to reduce check fraud is customer education. At AArete, we have conducted some simple research by speaking with branch employees about their experiences with instances of check fraud. In one case, the response that we received from a branch employee was, “You still write checks?” Therein lies the disconnect! Bank employees lack awareness of all the reasons why checks are still being written and the demographics of customers who write these checks to payers.  

Leaders at banks and credit unions will argue that they have already designed Digital Payment, Mobile Bill Pay, and related features to reduce the need for customers to write their own checks and make payments more secure. However, if wider bank employees are not educating their customers on these methods, then adoption will remain slow. If you’ve ever read “The Power of Habit” by Charles Duhigg, you will know how difficult it is for habits to be broken without significantly changing a customer’s habit loop. To do so, financial institutions must proactively encourage customers to transition away from physical checks.  

It's not that difficult to promote better communication and education either. Here’s how:

• Review accounts where customers are frequently writing checks and directly encourage those customers to switch to new and secure digital payment methods such as mobile bill pay (e.g., “Did you know that you no longer need to write that check?”). 

• When customers go to purchase checks (yes, banks and credit unions are still making it easy for customers to purchase more checks), provide prompts and notifications that purchasing more checks should not be necessary if customers switched to new and secure digital payment methods such as mobile bill pay (e.g., “Did you know that you no longer need this many checks?”). 

• Advise payees on the safe destruction of physical checks post deposit. This should occur not only right after a check has been deposited but also a day or two after the deposit takes place (e.g., “Did you remember to destroy that check?”). 

• Educate bank employees more widely on check fraud schemes and promote better dialogues between employees and their customers (e.g., a branch employee should never respond by asking “You still write checks?”). 

• Continue to educate customers on maintaining strong passwords and safeguarding digital accounts (e.g., “Did you know that fraudsters can gain access to your checks if your passwords are weak?”).

These communication strategies and educational campaigns can significantly mitigate risks by reducing the volume of physical checks, and thus opportunities for fraud, safeguarding both customer finances and institutional reputations.

How Can Banks and Credit Unions Use Technology to Fight Check Fraud?

Let’s face it though – no matter how much communication and education are delivered, habits are hard to break, and customers will still find it easier to write a check than change their payment behavior (e.g., a contractor asks for payment on the day-of service, so a check is written versus a mobile payment). Meanwhile, financial institutions are drowning in expenses driven by check fraud. Check fraud departments are ballooning with staff who work on investigating and resolving hundreds of thousands of check fraud cases per year. That’s a lot of operating expense to combat fraud. At AArete, we work with our banking clients to reduce operational costs and improve firm-wide processes with technology to drive efficiencies that improve the bottom line. Fraud departments, and particularly check fraud departments, are a prime target for these efficiency gains, and CFOs should review with their Global Heads of Fraud.  

The potential lies in reducing operational burdens by incorporating smarter fraud detection and prevention solutions. Banks and credit unions can take advantage by deploying AI-driven detection capabilities that quickly identify irregularities and minimize operational costs and the risks of customer attrition due to security breaches. Here are some ways that financial institutions can address these vulnerabilities through strategic prioritization and leveraging advanced solutions:

1. Prioritize Anomaly Detection 

While an effective defense against check fraud is anomaly detection, many firms are still lacking in their detection techniques and algorithms to identify irregularities, such as unusual check numbering sequences or anomalous deposit patterns, before the funds transfer occurs. 

 For example, if a check with an out-of-sequence number appears (e.g., check #1274 immediately after check #766), anomaly detection algorithms should automatically flag it for review before funds transfer, preventing potential fraud and minimizing costly remediation efforts. Similar types of detections could be used to track how checks are typically filled out (e.g., written versus typed), check style anomalies (e.g., does the customer use branded checks and suddenly an unbranded check appears?), unrecognizable payees (e.g., has the customer ever paid this person before?), and sequencing of check patterns (e.g., was this check previously used?). We’ve seen examples where fraud occurred using each of these techniques and yet none of these detections are being used.  

 Adopting these anomaly detection solutions would also improve response times. Banks should be preventing check fraud faster, before funds transfer, and especially before customers detect fraudulent checks themselves. However, this is surprisingly not happening. At AArete, we conducted simple research by speaking with customers who have experienced check fraud to identify the range of offenses and common trends. Customers noted they found fraudulent checks withdrawing funds from their account's hours or even days before the bank detected it was happening! The fraud techniques approached were incredibly unsophisticated too, yet major banks were delayed in flagging these payments in a timely manner. These are recent instances that have happened over the last 6 months (not years ago).

2. Improve Digital Payment Capabilities and User Interfaces (UI)

When asking customers why they were not using mobile bill pay, one of the core responses is a lack of awareness. Communication and education will improve awareness, as noted above. However, beyond lack of awareness, the next most common reason is a lack of trust in the digital payment interface.  

 For example, customers highlighted that their banking bill pay interface is clunky and not intuitive, which highlights user experience (UX) issues with how the mobile payment UI is being designed. Additionally, less tech-savvy users expressed discomfort with mobile bill pay, citing fears of input errors, misdirected payments, and uncertainty around payment confirmation. These are real challenges impacting adoption that banks and credit unions need to resolve now.

3. Clean Up the Post-Investigation Process

Fraud investigations are lengthy and costly activities. Improved anomaly detection and increasing digital payment adoption rates will reduce investigation needs. However, you still can’t catch everything (at least not yet), so investigations are not going away any time soon. Certain costly activities continue even after a fraud dispute and investigation have been resolved —these require attention. For example: 

• Unfreezing accounts too soon  Frozen accounts being reopened only to be subject to further fraudulent activity. Once a customer’s account information has been compromised, it has likely been sold to other scammers who are going to also try to withdraw funds. At AArete, we’ve seen check fraud departments allow customers to unfreeze accounts only to experience more fraudulent activity, resulting in further investigations and costs.  

• Keeping an account frozen for too long  Frozen accounts remain idle, prompting customers to switch to new checking accounts, or even worse to a new bank altogether. For the latter, it is the fraud department and the customer services team’s shared goal to retain the customer through this fraud incident by giving them confidence that it will not occur again. However, it is also important to get the customer’s accounts cleaned up versus having the customer call the call center months later, re-explain the issues that occurred, and get the accounts closed, which is time consuming and adds further costs long after the incident was resolved.  

• Lacking clear and timely customer communication and education  Following a fraud resolution is a great time to educate the customer on check writing. However, our experience with banks has identified that any form of education post-incident is typically a templated email with a few high-level tips that often goes directly into a customer’s trash bin within their inbox. Communications should be far more personalized with steps to improve security and assurances to ease any additional worries.

4. Embrace Low-Code, No-Code AI Platforms

Not every institution has an extensive in-house data science team. Regional banks and credit unions can leverage emerging low-code/no-code AI platforms to create fraud detection models at significantly lower cost and complexity compared to maintaining specialized teams. These solutions are particularly useful for fraud monitoring, credit risk assessment, and underwriting processes. 

 By utilizing external partners, credit unions and regional banks can affordably integrate AI-driven fraud detection capabilities into their existing operations, significantly reducing financial losses and enhancing customer trust. 

In Conclusion – Strengthening Check Fraud Prevention

Financial institutions can dramatically reduce their vulnerability to check fraud through a two-fold approach: 

1. Educating Customers: Shift consumer behavior toward safer financial practices, reducing fraud risks and enhancing overall customer security. 
2. Leveraging Technology: Utilize readily available AI-driven solutions to improve fraud detection, significantly decreasing potential financial and operational losses. 

Implementing these strategies not only protects banks and credit unions from increasing financial and reputational risks but also enhances their overall operational efficiency and customer satisfaction. By strategically adopting emerging technologies and educating customers, these firms can stay ahead in the ever-evolving landscape of financial fraud, protecting both their bottom line and the financial security of their valued customers. The next time you walk into the branch, we hope the conversation shifts from, “You still write checks?” to “Did you know we’ve improved our digital payment capabilities, so you no longer have to write checks?”

Looking to get in touch with Chris McGee for more of his banking perspective? Follow him on LinkedIn or send him an email – cmcgee@aarete.com