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June 24, 2013

The Forgotten Check

The paper check—remember those things that came 25 to a packet along with a vinyl cover? You could get them in basic solid colors, with floral designs, monogrammed, or even with your favorite sports team or your pet's picture. You would have to actually sit and write out all that information and even had to record the amount you needed twice, once in figures and once spelled out. (Does "fifty" have an "e" or not?) If you had the style that contained a duplicate to help you remember checks you’ve written to record in the register, you had to press down hard and put the divider in so the duplicate on the next check wouldn’t pick up the writing. It's no wonder that, when electronic bill payment and other alternative payment methods came along, they were so widely and quickly accepted.

Over the last three decades, there has been an ever-decreasing use of checks, especially by consumers. Aided by the advent of Check 21, image capture, and ACH conversion, volumes have decreased to the point that by 2010, the Federal Reserve System had consolidated its 45 check processing centers to a single operation at the Atlanta Fed. Still, despite the rapid decline in volume on the consumer side, the check remains a key payment instrument for commercial customers.

Despite physical security enhancements such as watermarks and holographs and services such as positive pay to detect unauthorized checks, the low-technology aspects of the paper check make it an appealing target to the less-sophisticated criminal. With knowledge of the routing-transit number and account number, criminals can quickly create a counterfeit check displaying high-quality graphics. Since signatures are generally checked only on a random basis and on extremely large dollar items by the drawee bank due to bulk filing process, passing "bad paper" at a number of locations in a short period of time can result in sizeable losses. Based on the Financial Crimes Enforcement Network's 2012 SAR [Suspicious Activity Report] Activity Review—By the Numbers, the number of check-fraud SARs increased 6 percent over 2011 and represented the largest category of fraud-related SARs in 2012.

While much of the risk management effort these days is focused on electronic payments, be sure not to forget about the paper check. It is obvious the crooks haven't.

Dave LottBy Dave Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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