Positive Pay is an Effective Tool in Detecting and Preventing Check Fraud Losses
Despite the increasing shift
toward digital banking, check fraud remains a significant threat to financial
institutions of all sizes. Check usage has diminished, but check fraud has
surged, becoming the most common form of fraud in
the U.S.
According to Nasdaq’s 2024 Global Financial Crime report, fraud scams and bank fraud schemes were responsible for $485.6 billion in global losses last year. In the Americas, check fraud accounted for 80% of total global check fraud losses, highlighting the growing threat of check fraud in the United States.
Over the past two years, 90 % of banks and credit unions experienced an increase in check fraud. Mail related check fraud has also been on the rise with the Financial Crimes Enforcement Network (FinCEN) receiving an uptick in Suspicious Activity Reports. Criminals often target USPS collection boxes, stealing anything from personal checks and business checks to Social Security payments.
This increase in fraud threatens to undermine faith in the banking system and the U.S. postal service. However, solutions like positive pay offer a strong cost-effective defense against fraud, enabling institutions to protect themselves and their business accounts from fraudulent checks and electronic transactions.
Small businesses are disproportionately affected by check fraud
Small businesses are a staple within the U.S. economy comprising 99% of all businesses in the country. Despite their importance to the economy, they still experience fraud at an alarming rate.
In 2023, approximately 31% of small businesses reported experiencing check fraud, with 65% suffering losses exceeding $50,000. Criminals often "wash" stolen checks by using chemicals to remove ink, altering the dollar amount and recipient name or creating fake checks to mimic legitimate checks. This can lead to severe financial losses for small businesses and tarnish the credibility of financial institutions that fail to address the issue.
Leveraging positive pay as a defense mechanism
Many businesses still rely on paper checks, but financial institutions can offer better protection through positive pay services. Positive pay is an effective solution for protecting businesses against loss by encouraging the daily reconcilement of accounts. This product is an effective solution that enhances bank or credit union’s ability to identify fraudulent activities on business accounts.
A common fraud tactic employed by criminals involves altering the payee’s name on a legitimate check. Traditional positive pay works by verifying details like dollar amounts and check numbers. Payee positive pay takes this a step further, helping to prevent fraud by verifying a payee’s name printed on the face check, automatically scanning, reading and matching against the payee information in the issued-check file.
In addition to the standard service, banks offer various forms of positive pay. For instance, reverse positive pay enables corporate customers to self-review all paid items, while positive pay ACH allows customers to create blocks and filter for ACH debts, evaluating transactions based on these set rules. This system processes converted checks against original issue information, alerting customers to any alterations, mismatches or duplications.
Check fraud remains a pervasive threat financial institutions must address. The increase of fraudulent activity especially in the U.S. highlights the need for solutions like positive pay. As criminals become more sophisticated in their methods, the implementation of advanced fraud prevention measures is critical to protect consumers, businesses, and the financial institutions that serve them. By leveraging tools like positive pay, banks can proactively defend against check fraud, ensuring that they continue to provide secure and reliable services.
Todd Robertson is a senior vice president at ARGO.