FedNow might be the answer to check fraud

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When I was a college freshman I did what many freshmen do and opened a bank account with the local bank on the first day. They had a little booth at the campus center during orientation, and with my account I got a checkbook and a debit card and I think a couple of pens, a stress ball and a key chain.

Thing is, my debit card didn't show up in the mail for months — I think they mailed it to my parents' house and it got thrown out accidentally, and then it took forever for the bank to issue a new one. As a result, I spent that whole first semester writing checks for everything — I distinctly remember writing a check for 75 cents for a couple packets of ramen noodles at the campus store. And because the bank charged me a dollar to look up my balance at the ATM, I kept track of my balance manually with my checkbook ledger — and did a pretty good job of it, too.

This way of participating in commerce was obsolete even at the time, and today almost nobody writes checks for everyday purchases. But when they do, they run an increasingly significant risk of having their checks intercepted by fraudsters, who are ripping off banks and their customers with fraudulent checks at an alarming rate. A recent survey of bank executives by IntraFi found that 90% of banks experienced an increase in instances of check fraud in the last 2-3 years, with fully half saying instances are up more than 30% in that span.

Industrywide estimates of the total national value of check fraud losses are difficult to pin down, but the estimates are alarming. The Nasdaq 2024 Global Financial Crime Report estimated the total losses from check fraud in the Americas — that is, the western hemisphere — at $21 billion, representing 80% of check fraud globally. That's roughly equivalent to the loss the FDIC's deposit insurance fund took after the failure of Silicon Valley Bank last year. The software company Nice Actimize issued an article last year that estimated the average loss per check had grown from $2.30 in 2021 to $8 in 2022.

That's kind of nuts, especially when one considers that checks are the only payment medium besides cash that has been declining in usage over that same period. That being said, people still use checks and certain kinds of businesses prefer them over more secure forms of payment like credit cards because they are cheaper to use and in some ways more convenient. 

If only there were some way to allow businesses and consumers to make payments quickly and inexpensively that could replace the current use cases for checks. Oh wait, there is such a thing: The Federal Reserve's faster payments rail FedNow.

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The rationale for creating a faster payments rail distinct from the one introduced by the Clearing House in 2017 (known as RTP, for Real Time Payments) was that faster payments are inevitable, and because they are inevitable it is important that those rails not evolve into a monopoly controlled by the biggest banks. One can question that rationale, but it is a rationale that makes sense. 

It makes a lot less sense if the Fed — having taken the considerable time and expense to create FedNow — has no interest in making faster payments an everyday reality for ordinary consumers. I have argued before that the Fed could be more active in requiring banks to use faster payments for day-to-day transactions because it would make things easier for customers. But there is increasingly another rationale for expanding the adoption of faster payments, which is that it might obviate the need for customers and banks to process paper checks — or at least reduce their use to the point where banks can give the checks that are used the scrutiny they deserve.

To be sure, there are problems with faster payments as well. The Senate Permanent Subcommittee on Investigations issued a report recently about fraud on the peer-to-peer payments platform Zelle, which is not insignificant. But the problem there is the presence of scams — people being unwittingly duped into paying money to the wrong people, rather than a matter of forgery and counterfeiting.

Check fraud is a necessary evil only insofar as checks are necessary, and I am going to go out on a limb and say that the future of payments in the 21st century does not have to include paper checks. I suspect there's a reason why 80% of check fraud in the world happens in the Americas: because the country with the biggest economy is also one of the biggest laggards in adopting faster payments. Making that transition will take some thought and a careful weighing of carrots and sticks, but it needs to be a priority, and the failure to make it a priority is unwittingly enabling fraudsters.