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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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September 12, 2022

The Not-Quite-Forgotten Check

When did you last write a check? Last month, I wrote my first check in almost 10 years to send funds to sponsor an out-of-state friend for a charity event. This was after I failed to convince my Luddite friend to sign up for an electronic peer-to-peer (P2P) app so I could send the funds almost instantly.

That experience caused me to think a bit more about that somewhat forgotten payment method: the hand-written paper check. The triennial Federal Reserve Payments Study as well as the annual Diary of Consumer Payment Choice (DCPC) have consistently shown that check usage continues to decline. The 2020 DCPC revealed that of the average of 35 payments (including cash) made per month, 2.3 were made by check. The 2016 DCPC showed an average of 46 payments per month with 3.3 of those using a check. While the share of overall payments made by check dropped by just about one-half of a percentage point, the absolute number of checks written dropped by 30 percent in just those four years.

With the decline in check usage, why are financial institutions and merchants seeing an increase in fraud losses related to checks? The simple answer is because checks are easy to counterfeit or alter. The industry has made efforts over the years to improve check document security, including techniques such as microprinting, holograms, embedded fibers, and tamper-resistant paper. Despite these defenses, most would consider the check to be "low tech" and, as this blog has often stated, criminals go for the low-hanging fruit, making checks ripe for the picking. Anyone with graphics software and a high-quality printer can readily turn out counterfeit checks. Blank check stock, some even incorporating the defenses mentioned above, can be purchased at most office supply and stationary outlets. The 2022 Association of Financial Professional's Payment Fraud and Control: Key Highlights Adobe PDF file formatOff-site link report noted "that check fraud remains the most prevalent form of payments fraud," with two-thirds of their professionals reporting their organization had experienced some level of check fraud.

Losses from check fraud come in a variety of forms. I wrote about cashier's check fraud scams in a recent post. Criminals often use money mule networks to cash counterfeit checks or to purchase with a counterfeit check merchandise that the criminal then sells at a discounted price. The criminal may deposit counterfeit or altered checks and then take advantage of the time gap between funds availability and when the check is returned after being identified as fraudulent. Check out this comprehensive guide to check fraudOff-site link.

The industry is now seeing small to mid-size financial institutions and merchants targeted. To mitigate check fraud, the best action for both consumers and businesses is to monitor checking accounts closely to spot any unauthorized items posting to the account. For businesses, consider positive-pay software that automatically alerts you of incoming checks with altered amounts or checks that may have been counterfeited. For financial institutions, software that verifies document integrity or detects transaction data anomalies can be useful. For merchants, third-party check verification services as well as strong customer documentation will help minimize losses.

Although it may be another decade before I write another check, the prevalence of check fraud relative to check use suggests that Take On Payments will continue to highlight this topic and discuss the industry's efforts to combat fraud.

August 22, 2022

Not-So-Common Scams Result in Large Losses

We often write in this blog about the scams that criminals seem to favor at the time and describe defenses that targeted individuals or companies can use to thwart these scams. The most popular continues to be the broad category of advance fee scams. I thought it would be helpful to review two other types of financial scams that are not so frequent but that can result in large losses for victims.

Cashier's check fraud
A genuine cashier's check is a direct obligation of the bank that sells it. In a more innocent time, cashier's checks were viewed "as good as gold." Regulation CCOff-site link generally requires a bank to make the funds of a deposited cashier's check available the next business day, but a fraudulent cashier's check could take several days or weeks to be returned to the bank of first deposit.

Criminals use this time gap to their advantage. In some cases, the check is for the exact amount of the item being purchased, and the criminal departs with the goods. For remote purchases, the criminal may send the seller a cashier's check for an amount in excess of the purchase price: $1,500 instead of $1,000, for example. Then the criminal claims the amount was a mistake and asks the seller to send the merchandise as well as refund the overpayment. When the fraudulent check is returned, the seller is out not only the merchandise but also cold hard cash.

Fraudulent cashier checks can be very difficult to spot given the advanced technology of printers and graphics software. Here is some fraud prevention advice:

  • Accept a cashier's check only from someone you know or trust.
  • Never accept a cashier's check with an amount higher than the purchase price.
  • Consider using an escrow service instead of a cashier's check, where the goods are held by a trusted third party until the payment funds are fully verified.
  • Be aware of the difference between when funds from a cashier's check become available versus when the check finally clears.

You can find more information about cashier's check fraud on the website of the Federal Deposit Insurance CorporationOff-site link (FDIC).

High-yield investment fraud
In this type of scam, a fictitious financial institution or company, often located outside the United States, offers a risk-free, guaranteed return on a savings or investment instrument that is substantially above the market rate. The scammer claims to be able to achieve these returns by using sophisticated trading techniques involving "prime bank" financial instruments in foreign markets. Often, there is a promise that the funds are insured by a country's financial oversight agency or by the World Bank, a claim supported by certificates that look legitimate.

These scammers target their victims through advertisements in national and financial publications. They may also solicit victims with executive phishing attacks that have obtained contact information of high-net-worth individuals. The criminals assert that the victim will be part of an exclusive group and therefore should not discuss the investment with others, sometimes even requesting execution of nondisclosure agreements.

My prevention tip for this scam is to follow the old adage that "if it's too good to be true, it probably is."

If there are other financial scams that you think we should address, please let us know by leaving a comment.

May 23, 2022

Vulnerable Populations and the Case for Cash

We recently wrote a post about communities not being able to access cash Adobe PDF file format because of natural or man-made disasters. Severe weather and war, for example, may leave a bank branch inoperable. But even in "normal" times, access to cash Adobe PDF file format remains an important consideration, especially for consumers who use it as their only or preferred means of payment. With this post, we look at how cash remains an important payment option and how accessing it may be becoming more difficult for certain vulnerable populations. These vulnerable populations—who tend to be low- to moderate-income households, rural communities, and recent immigrants—are more likely to be un- or underbanked (underserved) and often rely on cash to buy groceries and pay utility bills.

Even with an uptick in digital payment usage Adobe PDF file format, cash remains a critical payment choice for many Americans. Some may be unable to use digital payment options because they lack access to broadband or a smartphone, for example. Others may not be able to access these options because they are unbanked. Data from the Federal Deposit Insurance Corporation's 2019 report How America Banks reveal that approximately 5.4 percent of households Adobe PDF file formatOff-site link (7.1 million) were unbanked in 2019. Almost 14 percent of Black households are unbanked and presumably rely on cash or alternative payment options.

There are many reasons why cash can be a person's default method of acquiring goods and services, according to a forthcoming paper titled "Cash Is Alive: How Economists Explain Holding and Use of CashOff-site link" by Oz Shy, a senior policy adviser at the Atlanta Fed.

Unfortunately, recent data suggest that challenges to accessing cash existed prepandemic and accelerated during the pandemic. It may be especially difficult for the underserved, cash-reliant consumer, according to a report by the National Community Reinvestment CoalitionOff-site link:

  • The number of banking institutions declined from approximately 18,000 in 1984 to fewer than 5,000 in 2021.
  • The rate of bank branch closures doubled during the pandemic.

Rural areas tend to see the most bank branch closures, and those closures have contributed to a decline in ATMs as well. Adding to this, banks have been more cautious in providing accounts to independent ATM operators in part because of anti-money-laundering concernsOff-site link. So some banks are adopting policies that prohibit business relationships with independent ATM operators or are charging much higher fees for their services—which means some ATM accounts with banks are closing and fewer ATMs are being established.

These closures matter, even to the unbanked consumer, who may need bank branches and ATMs, for example, to obtain cash from a prepaid benefits card for unemployment or social security payments, get a cash advance on a credit card, or cash a check at a bank where the check writer has an account.

As the digital economy expands, people in underserved communities and those who are cash reliant, whether by choice or lack of other options, are at risk for being further marginalized in the financial system. To help ensure that everyone, regardless of payments preferences, is included in this system, cash access and preservation in underserved communities across the nation remain important to maintain.

May 16, 2022

The Cost of "Free"

When I began my banking career in the early 1970s, we essentially had only three consumer payment methods: cash, check, and credit (or charge) card. My checking account had a monthly service charge, and the account permitted me to write 15 checks a month—any more than that cost me 15 cents each. The overdraft/nonsufficient fee was $15 per check. My credit card had an annual fee of $25.

Today, I pay no fees for my checking account, debit card, online banking services, mobile banking services, electronic bill payments, or electronic wallet. I pay no annual fees for my credit cards unless a card is a premium card that bundles other products such as product protection or roadside assistance. (Of course, my statement about free checking is slightly exaggerated—most banks impose some sort of monthly maintenance fee, which you can often avoid by keeping a minimum balance or having a recurring direct deposit.)

The banking and payments industry has invested billions of dollars in these free channels and products. But is there really such a thing as a free lunch? Have financial institutions (FI) adopted a benevolent social policy giving everyone the right to free banking services?

It’s more complicated than that. Publicly traded FIs answer to their stockholders, and even nonprofit credit unions must generate sufficient revenue to maintain their financial health. So how can they offer all these free services and products? I believe there are four primary reasons that FIs are willing to forego explicit pricing for their services. The first is competition. Banks must compete in their market with the pricing of their products and services along with other factors such as quality of service and convenience of location. Second, debit card usage creates significant interchange revenue for the issuing FIs. Third, core deposits are the lifeblood of an FI's ability to fund its credit-related, revenue-generating products. Fourth, the bundling of services like bill payment and direct deposit have been shown to create a level of "stickiness"—in other words, the bundling increases the level of dissatisfaction a consumer must experience to believe it is worthwhile to move their account.

Will the bundling of these free services continue, or will the evolutionary cycle return to more explicit fees? Many FIs have been announcing of late that they are eliminating or reducing their overdraft/nonsufficient fund (OD/NSF) fees. The Consumer Financial Protection Bureau estimates that FIs collected almost $15.5 billion in OD/NSF fees in 2019Off-site link, which was about two-thirds of their fee income. You have to wonder if fees in other products and services will increase to replace this lost revenue. What do you think?