How Can CUs and Small Businesses Fight Check Fraud?

More small turn to Positive Pay via the cloud.

October 23, 2012

Organizations may be losing as much as 5% of their annual revenues due to fraud, according to The American Institute of Certified Public Accountants.

While fraud affects businesses of all shapes and sizes, small businesses are disproportionately targeted and the most vulnerable to loss due to the expense  and lack of availability of fraud protection services.

To attract and retain small business customers, credit unions must strive to make fraud mitigation an affordable option—but first they must be able to afford it themselves.

Take it to the cloud
Positive Pay is one of the most effective fraud deterrents on the market. The technology validates a company’s payments prior to authorization by matching the account number, check number, and dollar amount of each check presented for payment against a list of checks previously authorized and issued by the company.

However, to offer Positive Pay as a service to businesses, credit unions must first absorb the substantial upfront costs of technology software and licensing. The cost is easy for big institutions to justify because they service a great number of large businesses that process a sizeable volume of checks.

Credit unions, however, have found it difficult to justify the upfront investment in Positive Pay because they serve a smaller number of businesses who have a lower price tolerance for fraud protection services.

Here, correspondent institutions can play a critical role. Because they serve a large number of credit union members, they can profit from investing in the latest Positive Pay technology and then facilitating its delivery downstream via the cloud.

Respondent institutions can then access and offer Positive Pay on a per-member basis with no up-front cost, enabling them to offer the service at a price their small business customers can afford. Everybody wins.

Next steps: Fraud and online payments

As banking continues to move into the online space, fraud activity is shifting from check forgery to electronic systems, including automated clearinghouse (ACH) processing.

While Positive Pay has been available for more than a decade to service fraud prevention needs related to hard checks— still a leading cause of fraud loss in the U.S.—the ability to use Positive Pay for ACH processing is a relatively new and promising option.

Positive Pay becomes even more valuable when it can address paper checks that have been converted to ACH. Because older check systems aren’t picking up inconsistencies that might occur from fraud in this transition, companies of all sizes are increasingly vulnerable when it comes to electronic fraud.

Credit unions that have Positive Pay systems designed to address this challenge will have a significant advantage over the competition in attracting and retaining business customers.

Offering fraud detection for small business customers also provides benefits for credit unions, including:

With growing globalization, more competitive markets, rapid developments in technology, and periods of economic difficulty, the risk of fraud will only continue to increase.

By creating a cloud-hosted and group-accessible option for fraud deterrent services, correspondent banks may hold the key to a much-needed small business solution.

SEAN PENNOCK is president/co-founder of Aptys Solutions, Rockwall, Texas. Contact him at 972-722-5400.