Paper Check Fraud’s Weakest Link Is … the Paper Check

Given the chance, most consumers will choose digital payments over paper checks. Yet the check endures, expensive to make and mail and manage, and they often sit uncashed at the back of a drawer for weeks and even months.

And yet, as Rusty Pickering, president and chief operating officer of Ingo Payments, recently observed, there’s no great mystery behind their staying power, even though, when all is said and done, it can cost between $3 to $8 to create a check and ultimately send it on its way.

“Even with all its flaws,” he told Karen Webster, “it’s the only universal payment instrument — universally available to send and to receive. … I don’t need anything more to pay you by check than your name, a physical address,” and the amount of the payment. As to where the stickiness lies: In the post-pandemic age, while it may be true that consumers are writing fewer checks, businesses are in fact still enamored with them, as 80% of firms still process and mail paper checks to other firms, and especially when paying consumers.

But, amid $8 trillion in volume done in pen and ink, and sent via post:

“The weak link in payments is the paper check,” he continued, “because when you stick it in the mail, it’s susceptible to being stolen.”

Check fraud is on the rise, as fraudsters, ever adept at plying multiple schemes at any given time, are pinching checks (especially tax refunds) from mailboxes; stolen check fraud nabbed criminals $668 million last year; fraudsters also counterfeit checks or post the stolen check details to online platforms like Telegram. In other cases, bad actors will “wash out” the payment amount on a check and write in a bigger number, or digitally deposit a check twice, in hopes of double dipping a victim’s (especially a corporate victim’s) coffers.

All told, check fraud is a $24 billion business, up 90% as measured in 2023 from just two years prior. “Check fraud is easy to commit and hard to catch,” Pickering said.

It’s hard to catch precisely because there’s no central repository for checks — no place where banks can go and see if someone’s accepted a specific check before it’s been deposited, thus stopping duplicate fraud in its tracks. Check fraud has to be visibly detected, numbers compared, for forgeries to be detected. The banks, with hundreds of millions of dollars of check-related payment volumes, don’t have the resources to look at all those checks one by one, and so it can be quite some time before fraud is discovered.

Most checks are deposited through ATMs and mobile devices, Pickering said, so there’s a level of anonymity in the mix — a criminal can open an account from virtually anywhere, which adds another level of complexity to fraud defenses.

The key, he said, is to look not only at the person who’s depositing the check — and the account details of the check itself — but to look hard at the device that’s being used to open the account and cash the check.

“You can get a lot of attributes off that device,” Pickering said, “which can indicate whether there’s fraud … including the language, the currencies, the time zone, the geo codes and even the manufacturer of the phone and the data services that’s being used.” If the device is sold and used in Africa, and the check’s being deposited in New Jersey, something’s amiss, as Pickering illustrated.

There’s a business case for turning to third parties like Ingo as FinTechs and banks confront the rising tide of check fraud. Ingo, Pickering said, offers turnkey check-cashing solutions for financial brands such as Regions Bank, ADP, GreenDot and Incomm, as well as directly through the Ingo Money App. In terms of the mechanics, for checks that are accepted and cashed, the funds are guaranteed and stay with the check casher, even if the check is returned or later found to be fraudulent.

Separately, the company leverages artificial intelligence (AI), analytics and its internal investigations team to work with banks to discover fraudsters who might be lurking, even if they were not uncovered at the point of initial account opening.

“We have our own proprietary database of fraudsters,” Pickering said, “and so we can close those things down” in a matter of milliseconds. To do that, he said, scale is critical, as is an AI-driven data model. Ingo also uses inputs from know-your-customer vendors and early warning systems.

Replacing the Check

The ultimate goal of the payments ecosystem may be to replace the paper check — but to do that, Pickering cautioned, it’s imperative to pay anyone the way they want to be paid. We’re moving toward that reality, as banks and FinTechs are able to use data and advanced analytics and extant payment rails to make sure that funds get to the people who are who they say they are.

There’s no universal instrument, as some recipients will want to be paid directly into their bank accounts, others want to be funded directly into debit cards, some opt for PayPal or digital wallets — and yes, still others may opt for that paper check.

“You need the ability to reach out to them as easily as a paper check,” he told Webster, “and to reach out to them through email or a text, to tell them that you want to pay them and then let them choose how they get paid.” Consumers, he added, are willing to pay a fee for the certainty of getting paid, especially those underserved and underbanked households and individuals who live paycheck to paycheck.

“This eliminates the fraud of checks being intercepted,” Pickering said. “It’s a digital experience and it’s more secure — and the person gets paid directly into the account where they want it … and it costs a fraction of what it costs to mail and manage a paper check. It’s a ‘happy path’ where everything happens correctly.”