Businesses Being Blindsided By Check Fraud, TROY Warns

The saying has probably been heard before: Don’t accept or cash checks from a stranger. The consumer world is well-versed on the threat of check fraud, as it is on other matters of payments security. However, a reluctance among corporations to make instances of check fraud public, coupled with the media’s focus on consumer payments fraud, are two of the biggest reasons why Heather Campbell, digital marketing & content manager at TROY Group, said B2B check fraud continues to fly under the radar.

“Companies keep quiet, so media outlets don’t know this is a huge issue,” she told PYMNTS in a recent interview. “On the consumer side, if you don’t know who it’s from, you know not to cash the check. You hear that a ton. But look at the business side, it’s very hush-hush.”

Regardless of the reason why, TROY’s latest survey reveals there is a significant lack of awareness and understanding of the check fraud risk in B2B payments. In its latest report, “Your Business is at Risk for Check Fraud,” TROY found check fraud to be the number-one type of payment fraud, affecting 74 percent of businesses in the U.S. last year.

Yet, only 10 percent of executives said they were concerned with check fraud. Researchers noted that high-profile security breaches have professionals more concerned with cybersecurity, with 70 percent of survey respondents reporting cybersecurity risks to be a top concern.

TROY isn’t the only firm working to boost awareness: Recent data from the Association for Financial Professionals (AFP) similarly found an uptick in instances of check fraud in B2B payments. In response to the findings, AFP Manager of Treasury & Payments Magnus Carlsson expressed to PYMNTS his surprise.

“It kind of makes sense that check fraud is going up,” he said. “I just didn’t think it would go up this much.”

With paper checks as a leading payment tool for supplier payments, companies are exposing themselves at multiple angles for fraud, which can originate both within and outside of the enterprise. According to TROY data, 30 percent of internal B2B check fraud stems from the accounting department, more so than any other area of an organization.

Fraud can occur with seemingly trustworthy partners, too. For instance, recipients can “double dip” on check deposits as remote deposit capture rises, meaning recipients can deposit their check via mobile device, then go to a bank teller or ATM and deposit that same, physical check again. Campbell noted that suppliers can also alter checks to steal money from corporate customers.

“If a company writes a check for $100, what that vendor can then do is easily turn that check into $1,000,” she said, adding that companies can also change payee names to commit fraud.

For many payers, fraud is a concern, but particularly when it comes to credit card payments banks can often reimburse a customer when card details are stolen. Yet, when it comes to check fraud, the burden of liability is less clear.

According to the Office of the Comptroller of the Currency (OCC), if a bank can prove “that it accepted the check in good faith and exercised ordinary care and diligence in handling the transaction,” that institution may not be held liable for check fraud. Furthermore, the OCC’s website warns, the way a payer handles their checkbook must be taken into account when liability is determined.

“It’s a split liability,” Campbell explained. “The business may end up bearing the majority of the burden because they should have been proactive.”

It’s one of the biggest mistakes companies make when it comes to check fraud, she said  taking a reactive, not proactive, approach. That’s because so many companies fail to understand the risk of check fraud in B2B payments, and few take the appropriate measures to address the issue, which can include implementing technologies that can automatically reconcile transactions linked to check payments and flag any suspicious transactions that may need to be audited.

All of this may beg the question: Why don’t companies stop using paper checks in the first place? Indeed, checks are often viewed as the least reliable and secure payment method, with ACH and commercial cards pushing their way into accounts payable, largely on the promise of enhanced security and control.

However, according to Campbell, it’s easier said than done to let go of checks entirely. As the data shows, paper checks remain a sticky payment tool for U.S. businesses.

It’s unclear exactly how much of the B2B payments market goes to paper checks. The latest Ardent Partners and Corcentric report, “The State of ePayables 2018,” found 59 percent of B2B payments to be electronic today, though NACHA research late last year concluded accounts receivable executives don’t expect ACH the second-most popular B2B payment rail to surpass checks until 2020. Meanwhile, an AFP report on the topic, released last year, found that paper check use in B2B payments actually increased in 2016.

That means that while encouraging businesses to use electronic payments can help, the industry must also tackle the issue of B2B check fraud directly on the assumption that checks are sticking around.

“Considering [checks] are the number-one way that businesses are paying their vendors,” said Campbell, “I don’t see it going away any time soon.”