New opportunities for cheque fraud

In 2009 the Payments Council¹ announced their plans to abolish cheques in 2018 on the basis that there would be new payment mechanisms in place by then that would make cheques obsolete.  In 2011 they were forced into abandoning their plans due to growing unrest from campaign groups, politicians and businesses.  With the rise of online banking, fast payments, contactless payments, mobile payments and alike its not surprising that cheque usage has continued to fall dramatically from its peak of 11 million cheques being processed per day in 1990.  2016 saw 1.3 million cheques processed per day², a 15% drop on 2015 but clearly cheques are still popular with certain groups of society such as the elderly, charities and small businesses that still find it the best way to manage their payments, whether that be from resistance to change or because of the attributes of the payment method.

In a world where most online transactions are processed by computers in milliseconds and cleared funds transfer in a matter of hours, cheques are increasingly behind the times. The growth of cheap, easy-to-deploy card readers like Square and iZettle, and the adoption of technologies like Apple Pay and Paypal have made electronic transactions ever easier, faster and secure.

Likewise, with fewer and fewer banks available on the high street to pay cheques into, and the time taken to come through as cleared funds, cheques are becoming a more inconvenient and inefficient payment method for the receiver of the cheque to process.

But things are changing, Payments UK have recently announced that cheque clearing between banks will be made fully electronic enabling near instant transfer of funds (ironically, the slow speed by which cheques clear may be one of the features that was encouraging small businesses to keep using them!)  In addition, Barclays have launched a pilot giving their customers the ability to pay into their account by taking a photo of the cheque on a phone and uploading it using their online banking app. Although they can only pay in Barclays cheques, over 175,000 customers have joined.

Whilst the first move is a welcome improvement that will benefit all, the latter seems like it’s opening up cheque fraud from the serious fraudster who has the time and resources to counterfeit a printed document to anyone with a copy of image editing software.  Currently CPAS³ helps combat fraud by ensuring that chequebooks are printed to the highest security standards.  Images submitted from a phone will simply bypass all this security, putting much more emphasis on protection at the processing stage.

Fraudsters have previously utilised the slow speed of cheque processing to come up with scams to fool unwitting victims and will no doubt look at every angle for ways to exploit the new approaches.  For instance, I can imagine a negative financial attack on a well known utility company could easily be created by sending phishing emails to customers announcing that they had been awarded a refund.  The reader would be encourage to cash the attached counterfeited cheque image that has been automatically generated by computer software running some standard image scripting to doctor the image to be personal to the recipient.

With fraudulent activity primarily being analysed and identified by computer software algorithms it will be interesting to see how prepared the banks are for their software to recognise a doctored image of a cheque from a real one or whether they put more emphasis on customer behaviour Artificial Intelligence to detect potential frauds.  With over £10 million of cheque fraud last year, there is certainly plenty of need to improve the fraud statistics as well as the speed of processing.

If it weren’t for the serious legal implications, it would be interesting to test out their algorithms’ effectiveness.

1. The Payments Council was the predecessor to Payments UK
2. Source: https://www.chequeandcredit.co.uk
3. CPAS – The Cheque Printer Accreditation Scheme

Update:

Now, two years on from writing this article, electronic cheque clearing is now a mainstream offering from many banks but notable big players are still not offering this service. It’s also interesting to see that after a steady decline in cheque fraud losses to 2017, they increased significantly in the following two years.

Software security is an important consideration in any software project, not least when money and personal information is involved. Ultimately, it’s about finding a balance of risk vs benefit. Does the cost saving from the closure of most physical high street banks outweigh the increase in losses from cheque fraud perhaps?

Statista: Value of annual cheque fraud losses in the United Kingdom (UK) from 2003 to 2019 https://www.statista.com/statistics/326197/uk-fraud-losses-cheque/