Fed Expands FedDetect to Cover Commercial Checks, But Is It Enough to Stop Check Fraud?
- Check fraud is being addressed by the Federal Reserve
- Their system, however, is only effective with checks processed through the Federal Reserve
- The best solution detects fraud activity across the entire check ecosystem
Earlier in 2024, we took a deep dive into two tools from the FED to combat fraud: FedPayments Reporter for Check, which enables financial institutions and their customers to see check images before formal presentment to make timely returns to avoid financial loss, and the FedDetect Duplicate Treasury Check Notifier Service, which gives financial institutions early notice of potential duplicate Treasury checks even with sight of checks deposited at another institution.
Via a recent press release on BusinessWire, the FED has announced an expansion of its FedDetect Duplication Notification for Check Services to include commercial checks.
Detailing New Capability of FedDetect Duplicate Notification for Check Services
According to the press release, "FedDetect Duplicate Notification underscores the Federal Reserve’s purposeful investment to support banks and credit unions as they fight fraud related to check clearing."
The capability to detect duplicate commercial checks will be a new feature available alongside the existing Treasury check notification service. FIs will now be able to access the deposit information and images of potential duplicate commercial checks. Additionally, this new feature will be available at no additional cost.
“Commercial checks remain a critically important form of payment, but they’re also vulnerable to fraud,” said Shonda Clay, FRFS executive vice president and chief of product and relationship management. “With the expansion of our FedDetect service, we are providing financial institutions of all sizes another powerful tool in their risk mitigation toolkit. Even better, we are now offering this service at no cost as part of our commitment to supporting depository institutions in the collective, industry-wide mission to combat fraud.”
However, this addition does NOT address the flaws with the system...
Flaws with FedDetect
While the Fed's offering adds a useful tool to fraud-fighting, it does not by any means address the full scope of the growing check fraud problem.
Previously, we noted inherent flaws with FedDetect: The FedPayments Reporter for check lacks the ability to compare the item with previously cleared items, which is crucial in reviewing images of checks for fraud AND the amount of time it will take to review all checks manually. The FedDetect Duplicate Treasury Check Notifier Service can identify duplicates, but if a fraudster alters a treasury check instead of duplicating it, the system will not be able to detect this.
Furthermore, FedDetect only covers checks processed through the FED -- which, according to estimates, is between 30-40% of the total volume of checks in the US. The majority of checks are processed outside the Federal Reserve's infrastructure, through private clearing houses or directly between banks. As the FedDetect service has no visibility into these transactions, a significant portion of the check market is left unprotected.
This by no means should deter an FI from utilizing the system. However, this should just be just one of the tools in the FI's arsenal against check fraud. In order to detect over 95% of check fraud, FIs will need to utilize a multi-layered technology approach that include leveraging transactional/behavioral analytics, image forensic AI, consortium data, a rules engine, dark web monitoring, and other services like FedDetect.