FirstMerit Bank: How to guard against corporate check fraud

There are many ways for fraud to be committed against your organization, but corporate checks are one of the more popular attack methods.

The problem is not a small one. Fraud against bank deposit accounts cost the industry $1.74 billion in losses in 2012, according to the American Bankers Association Deposit Account Fraud Survey. Of that amount, debit card fraud accounted for approximately 54 percent of losses, followed by check fraud at 37 percent.

To combat the problem, banks have added layers of fraud protection through services such as positive pay. By matching a list of checks issued by a business against the checks presented for payment, positive pay can spot discrepancies before fraud occurs.

“The positive pay service is essentially a fraud protection service,” says Korlin Scott, senior vice president and director of Commercial Product Management at FirstMerit Bank. “It’s a way for a business to monitor check disbursements and control items that might potentially be fraudulent.”

Smart Business spoke with Scott about how positive pay works and recent enhancements that provide additional security.

Why is positive pay a necessary business feature of corporate disbursement?

Phoenix-Hecht conducts an annual survey of corporate treasury managers at middle market and large corporations. The 2012 survey found 82.5 percent of midsize and 76 percent of large corporate respondents experienced attempted check fraud.

With the increasing sophistication of forgers and technology, corporations are turning to banks to detect and reduce fraud exposure. Large corporations are more likely to use positive pay, according to Phoenix-Hecht, with smaller corporations citing cost as the biggest reason for non-use. However, the relatively small fees pale in comparison to the potential costs incurred when a fraudulent incident occurs.

How exactly does positive pay combat corporate check fraud?

The service requires customers to provide the bank with a list of issued checks, which they can key in manually, upload as a spreadsheet or from an accounting system, or send automatically via direct connection. Then, as payees present checks, the bank matches details on each against the records.

There are extra levels of service in which checks are viewed systematically to match against things like the check microdata and the courtesy amount versus the legal amount. Other fields flag things like stale dated checks. By matching all components of information that are on a check against the issue record provided by the customer, the bank can provide the exception to the customer whenever there’s a discrepancy.

What are some recent improvements to positive pay services?

Standard positive pay services typically scan the check amount and serial number, but one enhancement adds another checkpoint: the payee name. If that name doesn’t match, exceptions are returned to customers daily for review and payment decision.

As the banking industry has moved to settle check payments by clearing check images, through processes like remote deposit capture, positive pay with payee name verification helps offset additional exposure to fraud due to loss of physical check stock security features.

In addition, checks are typically reviewed during a nightly posting process. Now, bank tellers scan checks as they’re passed across the counter, before the posting process begins. It gives tellers control at the point of presentation.

One of the biggest ways check fraud is committed is by fraudsters intercepting real checks and either washing the payee name off and adding their own name, or recreating the corporate check in their own name. Then, they’ll present those to the branch.

With its added layers of security, positive pay can proactively spot discrepancies before funds are paid out to help companies catch check fraud as well as prevent minor errors that throw accounts out of balance. The key, though, is being proactive.

People get excited about this when something actually happens to their account, but by then it’s too late. Positive pay is beneficial because it gives the ability to prevent potential losses by being proactive, instead of reactive.

Whether it’s actual fraud or error-related processing, you can mitigate potential losses that may be fairly notable.

Korlin Scott, senior vice president, director of Commercial Product Management at FirstMerit Bank. Reach him at (330) 996-6496 or [email protected].

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