3 minute read

Check Fraud Loss: More than Just the Tip of the Iceberg

Person writing out a check.

Check fraud loss is much like an iceberg. While we see the tip of the iceberg, which is the immediate loss from check fraud, what lies beneath the surface can be more costly than the check fraud loss itself. It is estimated that for every $1 of check fraud loss an institution experiences, it spends $2.90 handling the repercussions of the fraudulent item. So a fraudulent $1,000 check can ultimately cost $2,900! How is that possible? Let’s take a look below the surface.

Consider the negative customer experience. The general public does not understand check fraud and finds it especially confusing when it happens to them. When a customer or member unknowingly presents a fraudulent check to your institution, they believe they have put money in their account and are ready to go spend it…and they do. It can take several days for some institutions to determine that the check is actually fraudulent. The institution’s next step is to charge the fraudulent check back or deduct it from the member’s or customer’s account. This unexpected reduction in their balance is the beginning of the negative customer experience. Your account holder has more than likely already spent some or all of the deposit. You have now possibly thrown their account into an overdrawn status, or at a minimum have reduced what they believe their available balance to be, since the funds from the fraudulent check are no longer in their account.

Then there really is more to this iceberg: Many financial institutions still mail fraudulent check notifications out, which, can take 1 to 3 days to get to a customer or member. But what if the fraud-affected person doesn’t read their mail in a timely matter? In the meantime, they may continue to write checks because they think they have money. Now they are possibly being charged insufficient funds fees, and possibly have checks returned because the fraudulent item reduced their balance. Someone in customer service will have to try and explain this scenario to an account holder that doesn’t understand where their money went.

Let’s dive a little deeper to see even more of the iceberg. Unfortunately, the customer service person was not able to convince the unhappy customer or member to make a deposit into their account to at least bring the balance above zero. So now we are going to turn a back-office person or a customer service person into a collector of sorts. They will periodically call the account holder and “remind” them to make a deposit to cover the overdraft. This could go on for a couple of months. The indirect costs can just keep piling up. The average check fraud loss is $1,800 and happens to business accounts as well as everyday consumers.

And diving a bit deeper still…the institution has not been successful in getting the account holder to make a deposit. So now it is time to send the overdrawn customer or member’s account over to our loan department (particularly for larger overdrawn accounts), because they are skilled at collecting bad loans, right? But do you really want a loan officer spending time trying to collect overdrawn checking accounts? Maybe you contact a collection agency to collect for pennies on the dollar. Or maybe you just take the loss and move on.

While the tip of the iceberg, the actual check fraud loss is easy to see, what lies below the surface can be more costly than the check fraud loss. It is just hidden in people resource expenses, much like the large portion of the iceberg that is out of site. And these hidden costs can be substantial.

The real goal with check fraud is to catch it as early in the presentment cycle as possible. This will help reduce those hidden costs and let your people focus on the job for which you hired them.

Identifying fraudulent checks is really a challenge in today’s environment. Most institutions have a process where people manually review checks that are over a certain dollar amount. So you must determine what level of risk you are willing to accept. Reviewing checks manually is very time consuming. The reviewer must look at the account to see if it is in good standing, how long it has been open, overdrawn history, and more. They may also try and reach out to the financial institution that the check is drawn on, but in today’s world, many institutions will not verify funds.

The good news is that there are new tools available today that can verify transit checks automatically. Your institution can gain objective data to determine the collectability of your transit checks. While check fraud will likely never go away, there are effective ways to navigate around the most destructive “icebergs” out there and avoid hidden costs and unnecessary headaches.

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