Check Deposit Fraud: How to Prevent it by Establishing a Risk Threshold

September 21, 2022
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Check deposit fraud isn’t new - it’s been around forever - but it has made a significant comeback. Volumes are much higher post-pandemic and it’s only expected to rise, mainly due to many government-funded unemployment initiatives ending.

These unemployment benefits are easier to take advantage of than a bank, but once the programs are no longer available, those looking to commit fraud go back to the tried and true act of committing check deposit fraud. Those who specialize in this type of fraud understand which institutions react more slowly to return bad checks, and they take advantage of that.

So how do you decide how to do customer segmentation most effectively to detect and prevent fraud, while also keeping your customers who aren’t committing fraud happy with you and your services? We’ll show you how to do that through:

Let’s start with how to build a strategy for dealing with deposit check fraud.

5 Critical Steps for Combating Check Deposit Fraud

Dealing with fake check deposits requires a constantly iterative process using data, and varies from one bank to another - there are no hard and fast rules. Saying that ‘holding checks for 5 days’ works for all banks is inaccurate, because this would save one bank from a lot of fraud, while it will sink another bank because the customers will hate it.

So what is the right strategy to fight check fraud? The answer is a flexible policy where customers have enough leniency that they still want to use the product and aren’t lost because the focus is entirely on fraud prevention, but where all regulations are still followed and the best possible attempts made to limit the number of instances of fraud. Here are 5 clear steps to follow:

1. Understand the Needs of Your Customers

Not every bank is the same, and your customers all have different needs; Not every rule you set at the service level is going to make everyone happy 100% of the time. However, there are some industry benchmarks you can use as a starting point to help limit instances of check fraud. Take a look at what other financial institutions (neobanks, crypto platforms, etc.) are doing and the limits they are using to establish your baseline.

If you did proper research prior to getting started, you should already understand your audience and how they use checks. Take a look at this data and data from other FIs to see how many checks the average person deposits, and how much money is deposited on each of those checks. For example, if your bank is serving consumers directly rather than businesses, a $50,000 limit for a check is far too high, as is allowing a customer to deposit 20 checks per week.

Take these benchmarks and apply them to your market research data. Will they work with the ideal customer you’re trying to target, or will they be too limiting?

2. Establish Dollar and Frequency Amounts on Your Check Deposits

Once you’ve reviewed your research, you need to set hard limits on the maximum dollar amount people can deposit with a check, as well as how often they can deposit checks. Technically there’s no wrong answers here, but you need to find the balance between allowing your customers to function the way they want to, and inhibiting fraudsters from using your product (at all, if possible).

Typically, setting really low limits like $2000-3000 per check deposit, or capping the number of deposits allowed per month at 10 or less is ideal because that’s not actually hindering most real people from using you, it’s only hindering fraudsters. Test different options, monitor caes, and adjust accordingly. Ultimately, these values need to be based on your customers’ behavior.

3. Set Hold Day Time Frame Limitations

Once you establish the rules for deposit amount and number of checks allowed, then consider the time frame: how many hold days will apply? If you hold checks for up to 5 days, that significantly decreases risk and exposure, but it also creates a lot of friction with regular consumers. If you don’t hold checks at all, the customers are really happy, but you're essentially guaranteeing that fraudsters will take advantage of that.

Typically you need to decide how much risk you’re willing to accept, and find some kind of middle ground by releasing them after 2 days. There are also other options like releasing a small amount of money (something like $250) immediately, and only holding the rest for 3-4 days. This still limits your exposure, and can keep customers relatively happy until they receive their full amount of money.

4. Segment Your Customers

To get to the next level of optimizing your check fraud strategy, you need to put your customers into segments, and establish rules that apply specifically to those segments; don’t treat all your customers the same. Instead, create risk thresholds that apply to customers based on past risk-based activity, or their tenure with you as a customer.

For example:

  • If they’ve been your customer for 3 months - Hold checks for 5 business days
  • If they’ve been your customer for 3-9 months - Hold checks for 4 business days
  • If they’ve been your customer for 9 months+ - Release checks after 2 business days
  • If after 9 months they also have no past history of risky activities - Give them partial availability to their funds

When you segment your customers this way, you maximize their happiness and minimize your risk exposure. In addition to the number of days checks are held, you can also create segments like this for check amounts, frequency of deposits, amount of partial availability to funds, and so on.

5. Collect Data and Analyze Your Segment Groups

When you segment customers and monitor this data closely, you can better understand - and predict - risk. With a window into what risky behavior is trending on your ecosystem, you’ll be more ready to combat it.

This segmentation applies just as much to financial institutions as it does to your users. For example, if you notice a lot of checks being returned from a small bank in Texas, you may want to consider limiting operations with that financial institution. First, determine what an acceptable ratio of returned checks you can accept. Then monitor this closely and cease (or limit) operations when this threshold is broken.

With detailed data, you can determine the ideal number of days to apply holds to reduce fraud losses and keep customers happy. Even more than that, you can determine how risky it is to apply different hold lengths. If most checks are being returned by the 2nd day, then you may have a risky environment and should put in more limitations. If most are returned on the 5th day, you may want to explore how you can use customer segmentation to apply these holds to specific users, so that you’re not forcing all of your customers to wait 5 days for a check to clear.

This is a consistent balancing act of offering best-in-class service that is fast and efficient and including enough preventative and protective measures to reduce the impact of fraud.

How to Establish & Optimize an Ideal Risk Threshold Level for Check Fraud

Many businesses make the mistake of setting thresholds on credit usages, such as time, quantity, and amount, and never revisit this or update it. However, to best service your customers - and combat fraud effectively - you should be analyzing and updating limits for check services regularly.

Setting and Changing Your Threshold is Key

Having a real person manually review checks so that you can release funds as soon as possible seems like a good practice in theory, but it requires significant manpower. This gets especially challenging as you scale; what is the manual review process if you receive 10,000 checks a day?

Because of this, setting thresholds for checks is often the best way to manage transactions, but it can expose you to the risk of fraud. To find the right balance, you’ll need to determine what your risk tolerance level is and what fraud losses your organization is willing to accept. Is a $50 check worth the time and operational effort to review, or is it easier to take that loss and focus on higher dollar amounts?

While you want to root out all fraud if possible, you need to maximize your prevention efforts while mitigating your operation costs.

It’s also important to remember that fraudsters are quick to understand your auto-approval thresholds, and will use this minimum to exploit your system. They will test to determine your minimum thresholds for immediate release of funds, and then exploit this. For example, if your minimum threshold is $1,000 USD, they will cash in 10 checks under that value as opposed to a single $10,000 USD check.

Because of this, it’s best to revisit and adjust your thresholds so that bad actors can’t take advantage of it. This will also allow you to perfect the balance between reducing fraud losses and wasting time on efforts that will drain your resources unnecessarily.

Remember, don’t treat all customers the same. It’s a good practice to segment customers by their tenure and behavior. Offer customers different limits, partial amounts, and shorter hold times based on their credit history, past behavior on your platform, and other indicators.

Set limitations based on how long users have been on your platform, how many risk-free transactions they’ve had, and the overall number of suspicious activity reports they’ve had over their time as a customer. This way, you can offer customers that are using your products properly better service while still protecting against fraud by mitigating the most risky actions.

A general rule of thumb is that if there is a lot of fraud occurring, you should adjust rules to bring it down. If there is no fraud occurring, then you can raise your thresholds to allow for increased business. Monitor and adjust regularly, and you’ll strike a good balance.

Establishing Limits on Repeat Fraudsters

When segmenting customers, you’ll want to make sure to monitor the behavior of repeat fraudsters - or potential fraudsters. Bounced checks can be a serious problem for your business, but they aren’t always fraud. There are cases where it’s not the customers fault, and you don’t want to penalize those users unfairly - however, you can’t let fraud slide by.

Have a concrete strategy in place for what to do with customers that are constantly returning checks. You could simply charge a fee for every bounced check (and allow exceptions in special circumstances); but that can involve a lot of manual review. You can also restrict and remove users that exceed a maximum threshold of returned checks; you can remove them fully from the platform or simply restrict their access to specific services. You can then reinstate services after a minimum threshold of checks go through without bouncing, granting them access to your full suite of services.

With controls like this in place, you can manage how customers use your platform more effectively. Most customers can gain access to the top-level service you provide, and only customers with the biggest risk factors will have restrictions on their usage. This allows you to mitigate risk and balance offering the seamless, convenient service customers want.

Identifying Patterns to Consistently Update Your Threshold

The best way to stay on top of check deposit fraud is to regularly update thresholds according to the behavior you’re seeing.

Link analysis can be a great way of analyzing this, as it will help you link users and organizations with transactions - helping you identify patterns faster and more effectively. See which users are depositing checks from the same place, look at the transaction history of users to understand which people and organizations they interact with most, and identify when behavior is out of the ordinary.

How Unit21 Prevents Check Deposit Fraud

Unit21 enables users to do three specific things to help with this form of fraud:

  1. Monitor Checks: Monitor check deposits and the user behavior associated with them to identify suspicious activity and flag it for investigation.
  2. Investigate Cases: Analyze cases using a single solution that amalgamates data from other sources, making investigations more efficient and effective.
  3. Link Analysis: Identify patterns between transactions, users, and accounts to detect - and prevent - fraud.

Combined, this creates a complete process for managing check deposit fraud on your platform, and allows you to limit fraud losses in the process. Identify not just individual fraudsters, but larger rings that are operating together.

You’ll never fully be done with this process; you’ll regularly need to refine your rules, alter thresholds, and analyze user behavior to determine which thresholds are ideal for your business. 

Change (or at the very least evaluate) thresholds on a monthly basis, and listen to what the data is saying about your performance. Over time, you’ll not only weed out fraud, but you’ll actually be able to reduce fraud losses and increase revenue.

Unit21 is ideally suited for check deposit fraud, as it lets you monitor transactions, investigate cases, and perform detailed link analysis quickly and efficiently. With a powerful fraud detection infrastructure, you can easily set up customizable transaction monitoring rules that screen checks for frequency and maximum amounts. You may even be able to reduce check deposit fraud from occuring in the first place by optimzing ATO fraud detection.

Schedule a demo today to find out how we can help you perfect this balance and reduce fraud losses, save time on investigations, and optimize your fraud prevention efforts.

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