Checks are falling out of style as a payment type in 2023, to no one’s surprise. The efficiency gains of digital payments are increasingly well understood, and with the U.S mail slowdowns intensifying, businesses are wisely fleeing paper payments.
But a new spike in check fraud may accelerate the move away from paper checks. In the past, businesses have been willing to hold on to some of their check stack when fraud was not a major concern for checks, but unfortunately, that’s no longer the case. A scan of outlets and experts in the know reveals that Positive Pay, often referred to as Payee Positive Pay, the last bastion against a stolen check being turned into a fraudster’s windfall, has been compromised by a relatively simple fraud that is beginning to crop up across the United States.
Here’s what you need to know about this fraud, as well as why it should spur you to continue to wind down your check payments in favor of digital ACH and virtual card payments through a secure network.
How this new check fraud works
Say you’re trying to pay your supplier, Apparent Apparel, using a check. You put it in the mail and wait several business days for it to arrive and for your customer to cash it, but little do you know that a fraudster has intercepted the payment from that customer’s mailbox. With Positive Pay, you should be safe, because the bank will only pay out the check to the named business. Our intrepid fraudster has found a workaround for that, however.
They have opened business accounts they registered with the state at various banks for Greenest Landscaping, McFraudster’s Hotdog Stand and AlwaysRight Print Designs.
The fraudster then heads to the state business registration website and adds a fictitious Name or Doing Business As (DBA) name form to their profile for Apparent Apparel. It’s often instantaneous and the new name is AlwaysRight Print Designs DBA Apparent Apparel. Now, they bring that to the bank or upload it virtually. They now have an account with a name they can use to deposit the check into and the payee’s name will match Positive Pay.
A sense of urgency is key to recovering funds from a fraudulent payment. Check reconciliations take a long time due to transit time to the point where a vendor finally opens the check, matches it to an invoice, and then deposits it in a bank account. It’s not uncommon for 3 months to go by before the real vendor wonders where their check is and reaches out to their buyer/payer to find that the check was in fact already cashed.
The speed, ease, and low cost of the scam means it’s primed to be more widely adopted. Banks will have to increase their vigilance, and states will need to consider more stringent application processes.
Assault on safest measure might spell end of an era
With check fraud rising by as much as 143% in some states over the past few years and the best security measure for checks now under assault, we may finally be seeing a substantial decline in check usage. As Citizens Bank head of treasury solutions Michael Cummins put it recently, “checks continue to be the payment method most impacted by fraud activity.” This is just an escalation and acceleration of an existing problem.
It’s part of the reason that checks have been declining for so long, falling from a high of 19 million business payments in 1992 to 3.3 million in 2022. As more businesses have gained a foothold in electronic payment methods and found those to be more secure and efficient, those numbers have continued to fall.
Still, no organization is truly free of checks just yet, for reasons ranging from force of habit to supplier preference. The only solution to this alarming new type of fraud, however, is working to eliminate as many check payments in your organization as possible.
That approach is two-pronged. Switching to digital payment methods and finding a secure B2B payment network to route them through and encrypt this bank account data. This involves educating your check paid vendors on the benefits of digital payments, security, efficiency, and convenience.
There are opportunities at every step once a check leaves your building for fraudsters to intercept the payment. A digital payment takes that opportunity off the table. The last advantage of check payments in positive pay is being increasingly exploited and the natural downfalls of checks such as time in the mail and long reconciliation make chances of funds recovery exponentially harder.