How do banks and credit unions verify checks?

May 10, 2022

Check fraud on the riseCheck fraud is when false or illegitimate checks are used to acquire funds. Although the amount of checks being used by customers has decreased over the years, check fraud still manages to pose a significant risk to banks and other financial institutions. Each year, over 500,000 people in the U.S. fall victim to a check fraud scam. Out of all attempted fraud attempts in 2018, 60% were done via checks. And today, attempted check fraud is up over 106% from 2021. In fact, despite a 50% decline in check usage in the U.S. between 2003 and 2018, fraudsters are still coming up with new ways to take advantage of those who still use this transaction method.

There are several ways that criminals carry out their plans. Some go the old-fashioned route and find ways to steal physical checks from people, like out of the mailbox. But more often, fraudsters focus on finding vulnerabilities in new bank technologies like mobile check deposit. It’s important for banks, credit unions, and other types of financial institutions to never underestimate the creativity of a fraudster and the lengths they will go. That being said, are current check verification systems robust enough to protect customers and businesses from more technologically advanced forms of check fraud? Let’s first start by taking a look at how checks are verified in most financial institutions today.


        Learn how financial institutions are getting a higher degree of confidence in check fraud detection with Mitek's patented technology

How checks are verified and cleared

Whether you deposit a check into a bank account from an ATM, in-branch with a teller, or from a mobile deposit capture, the process for clearing and check acceptance is generally the same. Because paper checks have no actual monetary value themselves, banks have to verify whether the transaction can actually be completed or not. When the check is captured, financial institutions use a variety of data points to make a judgment about the validity of the check. The data they acquire needs to answer questions like, is the account of the check issuer in good standing? Are there enough funds in their account? Is the check a high dollar amount?

Afterwards, a subset of the check’s images are sent to a human fraud checker within the bank. These fraud checkers are trained to spot signs of counterfeit checks and make the overall decision of whether the check is good or bad. As you can imagine, the process of verifying a check can be time consuming, involving multiple parties and rounds of verification. This is why it can take two to five business days for checks to clear.

In order to reduce the amount of time customers have to wait to receive their funds, banks often allow checks up to a certain amount to be made available for customers to use within the next day, even though they have not technically been cleared. This time consuming verification process is highly targeted and exploited by fraudsters.

The evolution of check fraud

There are several points along the check verification process where fraudsters attempt to take advantage. One of the most common ways to con the system is to create a fraudulent check. They can forge another account holder’s signature, steal checks, erase the ink on a check and write a different amount, or use a known routing and account number with mismatched payor information. They can also take advantage of next-day fund availability policies and create new or fake accounts, deposit bad checks on their phones, and drain the money from ATM machines right away (i.e. before the checks can be verified).

More recently, fraudsters have been tricking unsuspecting Americans through stimulus check fraud. Scammers urge people over the phone or via email to pay a fake debt with their stimulus check, or ask for the check received from the IRS to be forwarded to them instead. They also solicit personal information as part of their scheme, later using those identity verification details to file false tax returns.

With so many loopholes and vulnerabilities in how checks are verified through traditional payment processing methods, it is easy to see why check fraud is gaining popularity amongst fraudsters. Georgia State University’s Evidence-Based Cybersecurity Research Group found a dramatic increase of stolen checks being sold on social media—from just 632 in October 2020 to 5,300 in October 2021. There is a significant underground market for those wanting to commit check fraud, and sales can easily circulate through encrypted messaging platforms like Telegram and Whatsapp.

Check Fraud Defender: A better line of defense

There is dire need for bank security technologies to catch up to the speed at which criminal methods are evolving, especially when it comes to check fraud. The consequences can be devastating to financial institutions and their customers. The damage and losses from check fraud is on the rise, with attempts costing $15.1 billion in 2018. Checks and wire transfers continued to be the payment methods most impacted by fraud activity in 2020. Although check fraud may not be top of mind for many financial institutions more focused on digital transformation and other forms of cybercrime solutions, it is crucial that advanced security solutions be in place to protect against the growing trend.

One thing that many financial institutions are not fully leveraging in this age of digital transformation is the potential for AI and truth databases to do a lot of the heavy lifting during the check verification process. With machine learning and verification system technology, banks can quickly and accurately spot counterfeit patterns. Banks also have the opportunity to share this data with other financial institutions, and collectively create a more robust range of fraud data. Taking advantage of these approaches could save banks a significant amount of time and money, as well as increase the likelihood of identifying potential fraud attempts.

With Mitek’s AI-powered and cloud-hosted Check Fraud Defender, financial institutions are able to reduce the number of checks routed for manual review and detect forgeries otherwise missed by traditional fraud. This advanced solution complements your existing fraud prevention processes and fraud management tools by visually inspecting checks from all channels – mobile deposit, in-branch and ATMs. Using a proprietary visual inspection model, Mitek leverages AI & machine learning to score 18 check attributes beyond account data. It’s a powerful tool that can help reduce risks associated with synthetic and account fraud, forged checks, and theft. Visit our website to learn more about how Check Fraud Defender can strengthen your security, or contact us and ask about a secure, Find-The-Fraud Assessment.