Lawmakers Zero In on Check Fraud Crisis

Regulators and lawmakers are taking a fresh look at payments fraud, and as a result, federal action may be brought to bear on the growing challenge of check fraud.

On Monday (June 16), a trio of regulators, including the Federal Reserve, the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., issued a request for public comment on fraud, with an emphasis on check theft and scams.

The notice, published in the Federal Register, detailed that the “rise in check fraud is particularly notable. Numerous sources report increasing levels of check fraud in recent years, despite overall decreases in check usage. Checks can be stolen, altered or forged. For instance, the physical nature of paper checks makes them susceptible to theft while in transit or when left in unsecured locations. Products and services to detect altered or forged checks during the clearing process have varying degrees of effectiveness, given that checks do not inherently include explicit security features.”

In a statement Monday, the Fed’s Vice Chair for Supervision Michelle Bowman said, “We need a comprehensive strategy to develop and implement an effective, coordinated approach that is focused on preventing payments fraud and assisting consumers, businesses and supervised institutions.” She termed the interagency request for comment a “welcome first step.”

Standards and Technology

As for the movement toward some frameworks, the request that kicks off the 90-day comment period includes questions such as “What types of collaboration, including standard setting, could be most effective in addressing payments fraud? What are some of the biggest obstacles to these types of collaboration?” The questions also ask whether “increased collaboration among Federal and State agencies help detect, prevent, and mitigate payments fraud? If so, how?”

More generally, the agencies have asked, “What measures, including technological solutions or services, have been most effective in identifying, preventing, and mitigating payments fraud at your institution? Are there actions that consumers can take that help institutions? For example, do financial institutions find it helpful when consumers alert the institution in advance when making large purchases, transferring large amounts of money, and traveling abroad?”

The request for comment by the regulators is, PYMNTS notes, among the most visible, joint efforts in recent months in the financial services space. And it comes just a few months after President Trump’s executive order that mandates that federal agencies stop issuing paper checks by Sept. 30  and accepting them for payment. The agencies will transition to direct deposit, debit/credit card payments, digital wallets, real-time transfers and other electronic funds transfer (EFT) methods, according to the fact sheet.

Separately, last week, proposed legislation in the Senate debuted that seeks to create a task force focused on payments fraud. Statistics show that check fraud alone accounted for $24 billion in losses, as estimated by the Federal Reserve.

The legislation is dubbed the “Task Force for Recognizing and Averting Payments Scams Act,” sponsored by Sens. Mike Crapo, R-Idaho, and Mark Warner, D-Va. The bill would create a task force, chaired by the U.S. Department of the Treasury and composed of the prudential regulators, the Consumer Financial Protection Bureau, the Federal Communications Commission, Federal Trade Commission, U.S. Department of Justice and representatives from industry. The task force would compile a report to recommend legislative and regulatory changes, “including best practices to coordinate state, local and federal efforts,” according to details available here.

The Annual Federal Reserve Financial Services Financial Institution Risk Officer Survey recently estimated that the number of financial institutions with monetary losses as a result of check fraud grew by 10% year over year.

In an interview with PYMNTS CEO Karen Webster, Rusty Pickering, president and chief operating officer of Ingo Payments (which offers check risk management technology), said that “even with all its flaws,” checks endure as “the only universal payment instrument — universally available to send and to receive. … I don’t need anything more to pay you by check than your name, a physical address,” and the amount of the payment. Eighty percent of firms still process and mail paper checks to other firms, and especially when paying consumers.

“The weak link in payments is the paper check,” he continued, “because when you stick it in the mail, it’s susceptible to being stolen.”

In a separate interview with Webster, Ingo CEO Drew Edwards said of the government mandate to shift away from checks (which he said as far back as 2022 are “fraud magnets”): “Nobody thinks checks are going to stay here forever. It’s a question of how fast we can build the rails, gather the data, and guarantee security so that Americans — and the government — can trust a fully digital process.”