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    The Hidden Cost of Check Fraud

    According to many industry experts, check fraud has grown 2-3X since the start of the pandemic – with an estimated $45 billion in attempts with $7B in losses.

    According to a news release from the Financial Crimes Enforcement Network (FinCEN):

    “In 2021, financial institutions filed more than 350,000 Suspicious Activity Reports (SARs) to FinCEN to report potential check fraud, a 23% increase from the previous year. That upswing continued into 2022, when the number of SARs related to check fraud topped 680,000.”

    Additionally, through Q3 of 2023, there has been a total of 508,865 check-related SARs – showing little slowdown in check fraud this fiscal year.

    While many financial institutions can calculate their losses in terms of funds, they are less aware of the other hidden costs associated with check fraud.

    What are the Hidden Costs?

    In any business, there will always be costs associated that are not immediately apparent – but can very easily add up. When banks think of fraud costs, they typically bring up the funds lost that affect their bottom line (I.e. a $5,000 fraud check is not detected, the financial institution reimburses customer and takes $5,000 off the bottom line). However, banking is no different than any other business and, in the case of check fraud, there are several hidden costs that need to be top of mind for financial institutions:

    Duplicate Checks: Duplicate checks are one of the major issues facing financial institutions. A common scenario is an individual depositing a check via mobile deposit and then going to a check casher to cash the check. Not only does the bank face double losses if not detected, there are double posting fees and other processing expenses.

    Chargebacks, Returns, and Back-Office: Financial institutions commonly rely on separate solutions to process Day 1 and Day 2 items, increasing costs and decreasing efficiencies within the back-office. In addition, many of these efforts involve manual research and corrections, costing time and money.

    Fraud Claims Reimbursement: In a recent ABA Banking Journal Podcast, James Hitchcock, the ABA's vice president of fraud mitigation, notes that one of the primary issues banks deal with is finding someone to contact from another bank when they are seeking reimbursements.

    Paul Benda goes on to explain that "knowing where to send that claim" is one of the biggest challenges banks face -- especially small banks. How important is this step? Crucial enough that both the ABA and NACHA are responding by putting together their own Check Fraud Directories, which provide contact information for banks needing to file a check warranty breach claim with another financial institution.

    Financial institutions will spend valuable internal resources, including employee labor, to find and contact another financial institution. Communications back and forth – sometimes incorporating legal counsel – is necessary to submit and receive reimbursements. Let’s not forget that many of these can fail and end up as write offs by the bank.

    Loss of customer: This is the hidden cost that is most impactful. Financial institutions value their reputation, and if their customers become victims of check fraud it’s likely that the bank will face negative feedback – warranted or not.

    There are many stories where customers have reached out to news stations and publications for their assistance in getting their money back. This is not only bad press for the financial institutions, but will lead to that customer – and possibly other customers – taking their business to another financial institution. This will also mean losses of deposits AND new business. While larger financial institutions are able to absorb these losses more easily, regional banks and credit unions are more affected when losing current and potential new customers.

    Fraud Technology: Key for Reducing Hidden Costs

    There will always be hidden costs associated with any process for financial institutions. However, technology is the most effective way to mitigate these costs.

    As noted in a recent PYMNTS.com article:

    “Fraud and financial crime solution providers must work with prospective customers to show how their investments in new technologies to combat fraud or financial crime can benefit bottom lines. They will also benefit from showcasing how their solutions address complex regulatory problems and reduce the costs that prospective business customers may incur due to reimbursing fraud-related losses. Businesses looking to mitigate those same issues will benefit from learning about such solutions and considering additional investments or upgrades to strengthen fraud detection and management. The latest solutions are not just about fighting fraud, however. They help vendors deliver intelligence to FIs, benefit fraud management and provide insights into consumer habits, economic stability, targeted solutions and services and more.”

    By investing in fraud technology, particularly check fraud detection solutions like behavioral/transactional analytics and image forensic AI, financial institutions are able to detect more fraudulent checks before they are posted. These solutions have proven to be effective, with a 95% detection rate.

    This will enable financial institutions to mitigate and reduce hidden costs by detecting duplicate checks before posting, reducing the amount of chargebacks and returns, reimbursement claims, and the number of lost customers – both business and personal – while protecting the financial institution’s reputation.

    by James Bi, Orbograph, orbograph.com