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Don’t forget about check fraud

The clear trend is toward digital, but payments using paper still represent a big chunk of the market.

May 20, 2022 / Fraud Prevention

As millennials and Gen Zers take on more prominent roles in business and financial institutions, the adoption of digital payment apps is likely to accelerate.

With the rise of digital payments, the printed check might seem to be heading for obsolescence, but nothing could be further from the truth. Many businesses, large and small, still rely on checks as their primary form of payment — checks are still used as a payment method for 42% of B2B organizations.

Ignoring that checks continue to be relevant makes businesses easier targets for fraud. Check fraud remains among the top forms of payment fraud. Roughly two-thirds of companies experienced actual or attempted check fraud in 2020, and it accounts for 60% of attempted theft aimed at deposit accounts.

Even though check fraud has been declining over the past few years, the drastic changes in banking processes caused by the COVID-19 pandemic have created new vulnerabilities that criminals are sure to exploit.

While most consumers believe that banks are ultimately liable for any losses, revisions in the Uniform Commercial Code have shifted the liability from the bank to the party in the best position to prevent the loss. Along with the monetary loss, fraud can cause serious harm to a bank’s reputation.

How do you protect your customers from fraud?

Proactively improving payment security is the best way for banking institutions to protect businesses and customers from fraud.

The first step toward protection is to become familiar with how check fraud is committed. The most common method is to alter the physical check, which takes two primary forms: “check washing,” the removal of a printed character with a common solvent, such as acetone; and “check scraping,” the removal of a printed character by carefully scraping the ink or toner with a sharp object or simply lifting it off with tape. Once the payee or amount has been removed, the check is simply reprinted with the fraudulent information.

There are ways to protect the checks being printing. Magnetic ink character recognition (MICR) printers ensure that printed checks meet all financial industry standards, and some have built-in security features that can provide added protection. Some printers have advanced features that prevent unauthorized access to MICR print functions, signatures and form overlays, or protect the data stream while it is being transmitted.

In addition to printer firmware security enhancements, institutions should use high-quality MICR toner to ensure proper character density. This not only reduces the chance of scanning errors and returned checks, but also includes modified adhesion characteristics that guard against scraping. MICR toner is also available with incorporated red dye, which releases a stain onto the check if someone tries to wash it with chemicals.

The highest level of protection against mechanical alteration is the use of “indelible” printing, a process in which the printed characters permeate the document so that a criminal can’t remove the entire character without destroying the check. Best-practice MICR check printing also uses blank check stock, rather than stock with a preprinted MICR line, to keep valuable information such as account and routing numbers secure until the check is printed.

Security fonts are another key element in fraud mitigation. A secure, numeric font provides an added layer of security to MICR checks. This type of font is difficult to alter because of unique characteristics such as special backgrounds, texts and numeric elements that are printed in the amount line of the check. A microprint font adds yet another layer of security, with personalized micro text and numbers embedded into each check. Specifically developed to work with MICR-specific printers, these fonts are not readily available online and are extremely difficult to forge.

While there is no doubt that digital transactions are the future of payments, they have not completely eliminated other forms just yet. Checks and other physical payment methods are still in daily use and are not going away any time soon. Given the volume of payments that checks represent, financial institutions should take steps to protect their customers and themselves.

Matt Klempa is a marketing specialist at TROY Group.

Explore ways to stem the growth of banking-related fraud in the BAI Executive Report, “Banks are pushing back against the surge in fraud.”