March 30, 2024

Financial institutions relying on manual fraud detection methods face both benefits and limitations. While this method allows for a more personal and attentive approach to banking, it also has significant drawbacks. The process of manually verifying checks through visual inspection and an ID checking guide is time-consuming and prone to human error, often leaving tellers overwhelmed and struggling to keep up with the high volume of transactions.

Two real-life cases illustrate this vulnerability. In one case, a member who regularly deposited checks from an employer had checks processed without thorough scrutiny due to a trusted member status. However, one day, a fraudulent check with the member’s name and account number was presented for deposit. The teller, relying solely on visual verification and the member’s reputation, failed to detect the forgery, resulting in a significant financial loss for the credit union.

In another case, a teller accurately identified a fraudulent attempt by an individual who presented someone else’s ID and matching check to be cashed. The documents were convincing enough to pass the financial institution’s standard scrutiny. The teller only recognized the transaction as fraudulent because they had interacted with the actual account holder a week prior and remembered their appearance.

Third Party Solutions

Outsourcing and automating solutions to combat check fraud represents a significant advancement in financial security, leveraging cutting-edge technology to safeguard institutions and their clients from increasingly sophisticated criminal activities. Q6 Cyber, known for its proactive and comprehensive approach to digital threat monitoring, employs a blend of real-time surveillance of the dark web, digital footprint analysis, and predictive analytics to identify and mitigate potential threats before they materialize. By specifically targeting the mechanisms and digital traces associated with check fraud schemes, Q6 Cyber solutions enable banks and financial institutions to preemptively address vulnerabilities, significantly reducing the risk of financial loss and maintaining the integrity of customer trust. This modern, technology-driven approach not only enhances traditional security measures but also adapts to the evolving landscape of cyber threats, ensuring that financial entities are always one step ahead of fraudsters.

DLT as a Solution

Utilizing distributed ledger technology (DLT) and non-fungible tokens (NFTs) presents a formidable solution to the challenges of check fraud. The inherent immutability and transparency of DLT offers a framework for securely storing and validating member information. This technology stands out for its scalability and adaptability, empowering financial institutions to set their own protocols for information verification and fraud investigation, thus eliminating the dependence on external parties.

DLT encrypts all data using advanced cryptography, ensuring that access is restricted strictly to authorized personnel. This encryption process is complemented by the generation of unique, tamper-proof identifiers for each transaction, known as “hashes.” Furthermore, digital signatures, which are linked to the personal identifying information (PII) of the involved parties, serve to authenticate each transaction. This authentication is bolstered by node consensus algorithms, which leverage the transaction’s unique codes, the identities of the involved parties, and the network’s overall structure to safeguard pertinent data efficiently.

NFTs introduce an additional layer of security to this process. By incorporating detailed metadata within each token, NFTs significantly enhance the verification process, ensuring the integrity and authenticity of personal information. Together, DLT and NFTs forge a comprehensive and secure approach to tackling the pervasive issue of check fraud, by embedding trust and reliability into every transaction.

Enhanced Identity Protection

Blockchain-based credentialing systems offer financial institutions a stronger solution to mitigate fraud and decrease the amount of time it takes for members to verify their identities during customer service calls. Explained simply, the DLT based “Know-Your-Customer” (KYC) system stores member information in a blockchain ledger, which is protected by a secure network architecture. This information is easily accessible to all financial institutions sharing the blockchain, allowing for seamless verification and automated authentication. These benefits reduce the risk of errors, fraud, and money laundering while improving customer satisfaction.^[i]

Real-time Transaction Monitoring

Like the Know-Your-Customer PII validation procedures referenced above, Know-Your-Transaction (KYT) DLT-based procedures improve financial institutions’ ability to mitigate fraud. The KYT system has been used to provide financial institutions with real-time anti-money laundering compliance alerts. The system is designed to generate and send a warning when a large amount of money is sent to or received from someone considered a high risk. This gives financial institutions more time to investigate and protect their members.^[ii]

Improved Risk Assessment

DLT provides financial institutions with enhanced risk assessment tools, including immutable data storage, improved data quality management, increased transparency, and collaborative capabilities. This allows financial institutions to assess transaction and member risk levels more effectively. The information stored in DLT is protected from unauthorized modifications and can be accessed by relevant financial institutions for cross-verification purposes.^[iii]

Improved Industry-wide Communication:

Fraud managers frequently express frustration over the industry’s communication gaps, which criminals exploit by navigating through the varied fraud prevention strategies of different institutions. While initiatives like the South Carolina Fraud Table have made strides in fostering collaboration among fraud managers at the state level, such coordinated efforts are not commonplace nationwide. DLT offers a promising solution to bridge this gap, enabling a seamless and secure platform for information exchange across the industry. This technology could transform the landscape of fraud prevention, facilitating a more unified and effective approach to combating financial crime.

Reach out to see how we’ve helped other organizations integrate blockchain into their operations. Not ready for the DLT option? Ask about the e-crime intelligence service and how we can help partner on combating check fraud.