Check Management and Fraud Prevention Needed More Now Than Ever Before

A recent article in Bank Technology News stated, “Bad checks are the single greatest source of losses at the retail point of sale.” Research by the University of Florida suggests the average merchant sees 1,365 bad checks for every $100 million in sales. According to Nilson Report, USA merchants lost $15.56 billion to check fraud in 1994.

Check usage in the USA is immense. Sixty-one billion checks, totaling $40.9 trillion, were written in the USA during 1994 by individuals, companies, and governments.

Personal checks accounted for 57% of the total number of checks written, yet comprised only 7% of the total dollar value — approximately 35 billion personal checks, totaling $2.9 trillion. This includes 18 billion personal checks, totaling $636 billion, written at retail point-of-sale and 11.8 billion, totaling $1.6 trillion, written to pay bills.

The number of checks written is projected to increase through the year 2005 — albeit at progressively slower rates. Checks, as one of the twelve consumer payment systems used in the USA, lost four percentage points of market share over the past five years and the trend is projected to accelerate over the next ten years.

Approximately 1.2 percent of the 18 billion personal checks written for point-of-sale (“POS”) purchases in 1994 were returned — significantly more than the 0.46% return rate on the 11.75 billion personal checks written to make housing, automobile and other bill payments. Fraud is also higher on checks written for POS purchases than for bill payments — 0.14 percent versus 0.05%.Three segments of the $2.2 trillion USA retail market — grocery, pharmacy, home centers — accounted for 45% of the 18 billion of checks written for point-of-sale purchases in 1994.

The three segments accounted for a total of $240 billion in check usage, of which one segment — grocery — made up $165 billion. In addition, grocery stores cash more payroll checks than banks, often charging a check-cashing fee of 1.5% as a service to customers.

Grocers are motivated to cash payroll checks by a potential for increased sales resulting from higher customer traffic and the availability of additional “fresh funds” as well as by the check-cashing fee. Payroll checks are typically cashed at stores’ customer service desks by supervisory clerical personnel. The nature of payroll check cashing makes it a target for organized fraud, whereby “runners” are used to pass many bad checks before stores can react.

Check tender is poorly managed by grocers. Most chains cannot detect check-scams until checks bounce. By then, it’s too late. Chains rely on bad check data bases which reduce sales and are largely ineffective against fraud. Banks offer little help.

CRISP dramatically reduces fraud, with minimal impact on sales. CRISP tracks check writers by linking stores to MicroNEX’s fraud prevention database. Realtime fraud pattern recognition is used to turn down high-risk checks. Check writers are “flagged” to limit exposure across multiple stores in a chain, or across multiple chains if data is shared. Ten protection levels are offered.

Merchants prefer check verification functions to be integrated into their register systems. However, few register systems offer more than passive database look-up. Merchants with legacy register systems can turn to Vx without upgrading their registers.

Check related expenses exceed 0.75% of sales — this, in an industry where earnings average 1-1.5 %. CRISP cuts the cost by more than half. Most chains, however, would prefer to wash their hands of the entire problem and outsource check management by selling their checkstream.

CRISP and Vx so reduce check fraud that the resulting rates of return have sufficient consistency to support securitization. In other words, the industry’s $160 billion check flow lends itself to being securitized. MicroNEX is conducting exploratory conversations with financial institutions about creating check based securities.