The world is changing quickly with rapid technological developments and scientific advancements; but those aren’t the only things. Scammers and fraud schemes can change quickly, too. Yet often, businesses are slow to adapt.
One thing that’s slow to change is the habit of using checks for payments. According to the Association for Financial Professionals (AFP), check business-to-business (B2B) payments are one of the most common forms of fraud – but many businesses still use checks as their primary payment option. In the U.S. B2B payments amounted to $25 Trillion, of which $16 Trillion were in the form of checks. That’s twice as much as ACH, at $8 Trillion.
Fraudsters also target B2B payments in other ways. According to the AFP, in 2022 the next highest incidence of payments fraud was commercial credit card (36%), followed by wires (31%), and ACH debits and credits (30%). Scammers also target businesses through Business Email Compromise (BEC) – nearly 71% of organizations survey experienced attempted or actual BEC in 2022.
B2B Check Fraud Explained
The 2023 AFP Payments Fraud and Control Report showed that, of companies surveyed, 63% reported that their organizations faced fraud activity via checks.
“There are so many ways that check B2B payments are vulnerable to fraud,” explained Heather Gigliotti, Director of Treasury Management Sales with First Merchants Bank. “Checks are commonly discarded after mobile deposit – if you’re not careful, criminals can obtain the account number, routing number, check number and signature to create counterfeit checks. Checks are more vulnerable than almost any other form of payment.”
Fraudsters may employ numerous different strategies to defraud a business using check B2B payments, including:
- Counterfeit Checks: Fabricated or altered checks that appear legitimate but are fraudulent. Fraudsters create counterfeit checks by replicating the design, account information, and signature of legitimate checks. These checks are then used to make unauthorized withdrawals or purchases.
- Forged Signature: The unauthorized signing of someone else's name on a check. Fraudsters may steal checks, or even the entire checkbook, and forge the signature of the account holder.
- Check Kiting: A form of fraud that takes advantage of the time it takes for checks to clear the banking system. It involves writing a check from one bank account to another, knowing that there are insufficient funds in the account from which the check is drawn. The fraudster deposits the check into the second account and withdraws funds before the check is returned due to insufficient funds.
- Payee Name Alteration: Altering the payee name on a legitimate check to divert the funds to their own account.
- Check Washing: Altering the payee name, the amount, or other details on a check using solvents or other chemical means. This allows fraudsters to remove the original information and replace it with fraudulent details.
- Account Takeover: Account takeover occurs when fraudsters gain unauthorized access to a legitimate account holder's bank account and control their checks.
- Remote Deposit Capture and Mobile Deposit Fraud: Remote Deposit Capture and Mobile Deposit both allow individuals and businesses to deposit checks electronically by capturing images of the checks using a mobile device or scanner. Fraudsters exploit this technology by depositing the same check multiple times through different banks or accounts, taking advantage of potential delays in check clearing and verification processes.
“With all of these different avenues, it’s essential that businesses verify the authenticity of the recipient and transaction before making any payments,” Heather shared. “Even if that request is coming from within your own company or from a trusted vendor.”
How Positive Pay Can Prevent B2B Fraud
The good news is overall B2B payments fraud has decreased recently, but that’s not a call to rest on your laurels. Check fraud is consistently one of the two largest forms of payments fraud for businesses. ACH fraud is also high on that list.
“Businesses should take proactive steps to prevent payments fraud, as scammers are always on the lookout for weak points,” Heather explained. “Just because there’s a current decrease in fraud activity doesn’t mean it won’t pick up in the future – you should always be prepared.”
One way to lessen your risk is to implement security software such as Check Positive Pay or ACH Positive Pay.
“Check Positive Pay is a banking service that decreases B2B fraud by allowing business owners to provide an approved list of authorized checks,” Heather explained. “When a check is presented for payment, the bank verifies it against the list provided by the business. It’s a proactive approach that helps mitigate fraud, especially when combined with other strategies.” “ACH Positive Pay helps mitigate the risk of unauthorized ACH transactions by allowing businesses to review and approve or reject each transaction before it’s processed. Payment rules can be set up for reoccurring transactions.”
It’s important to be proactive, if you plan to continue using checks for B2B payments.
“More than 75% of companies surveyed by AFP who use checks plan to continue using them,” Heather said. “And while financial service providers and companies get more sophisticated security measures, fraudsters will continue devising ways to find weaknesses, especially from those who are slow to change.”
How to Lessen Risk of Business Fraud
There are also sound policies and procedures you can use to mitigate the risk of payments fraud – particularly with check B2B payments. These include:
- Educating Employees: Train your employees about common fraud techniques and how to recognize potential scams. Teach them to be cautious when receiving suspicious emails, messages, or phone calls, and emphasize the importance of not sharing sensitive information unless they are sure about the legitimacy of the request.
- Implementing Strong Passwords: Encourage employees to use strong, unique passwords for their accounts and avoid reusing passwords across different platforms.
- Securing Devices and Networks: Ensure that all computers, laptops, and mobile devices used by employees have up-to-date security software and operating systems. Encrypt sensitive data and use firewalls to protect your network from unauthorized access. Regularly update software and apply patches to fix any security vulnerabilities.
- Verifying Payment Instructions: Establish a clear process for verifying payment instructions, especially when there is a change in payment details or when dealing with new vendors or clients. Independently verify the authenticity of payment instructions by contacting a known representative through a verified contact method, such as a phone number obtained from a reliable source.
- Monitoring Financial Transactions: Keep a close eye on financial transactions within your business. Regularly review bank statements, invoices, and other financial records to detect any discrepancies or suspicious activities. Implement robust internal controls, such as requiring multiple levels of approval for significant transactions. Daily account reconciliation is important.
- Conducting Background Checks: Perform background checks on employees who have access to financial systems or sensitive information.
- Staying Updated on Fraud Trends: Follow reputable sources, such as industry news, government websites, or cybersecurity organizations, to stay up-to-date on emerging threats.
“It’s important to be vigilant against fraud,” Heather said. “In the best-case scenario, if a business detects and prevents fraud early on, the potential impacts can still be challenging, but manageable. In the worst-case scenario, if fraud goes undetected or unaddressed, the impacts can be even more severe – including large financial losses, legal consequences, a damaged reputation, or business failure.”
We Can Help
“If you're uncertain about how to protect your business from payments fraud, consider seeking advice from professionals,” Heather explained. “Our Treasury Management Team, Accountants, Financial Advisors, or Cybersecurity experts can provide guidance tailored to your specific business needs and help you implement effective fraud prevention measures.”
“Remember, fraud prevention is an ongoing process,” she added. “By staying vigilant, educating yourself and your employees, and implementing security measures, you can significantly reduce the risk of falling victim to payments fraud and protect your business.