Bank losses from check fraud continue to rise, especially at community and smaller regional banks.
The overall rise was 32% from 1997 to 1999, according to the American Bankers Association's every-other-year deposit account fraud survey. But the figure was 35% at community banks - defined as those with less than $500 million of assets - and a 46% at banks with more than $500 million but less than $50 billion.
In contrast, check fraud losses at banks with assets of $50 billion or more increased only 27%. Nearly 600 banks, including 446 community banks, responded to the survey, which was released Thursday.
Nessa Feddis, senior federal counsel for the ABA, said that the overall fraud loss increase was expected, but that the leaps at smaller banks were surprising. Large banks had been the traditional target for fraud, because of the anonymity they provided, she said.
Criminals are more wary of larger banks today, because they generally have more sophisticated fraud detection and prevention methods, said Ms. Feddis and Dick Clausen, the head of liability and risk and Bank of America Corp.
"When banks install new technology the fraud operator has a choice - to go to another institution, or to try to get around the technology," said Mr. Clausen, a member of the committee that conducted the survey. "And the pattern seems to be that another institution is a more profitable choice."
Some of the fraud-fighting technologies used more frequently in large banks, according to the survey, include software that detects characters lacking magnetic ink as well as checks with invalid routing numbers. Many large banks also have systems that alert them of unusual check activity.
Community banks are using some advanced fraud prevention methods but are generally sticking to the low-tech basics, such as signature verification for large deposits, Mr. Clausen said.
Checks drawn against insufficient funds or overdrawn accounts made up the largest share of losses at community banks, 39%, according to the survey. By contrast, only 5% of the check fraud losses at superregionals were attributed to insufficient funds.
Mr. Clausen said that many community banks simply cannot afford many of the fraud-prevention technologies being used by larger banks. Some of the systems are not made for small banks, he said.
Large banks can easily prevent the passing of insufficient-fund checks through a shared database they have with other banks that alerts them of such accounts when a check is deposited, but many community banks do not have access to the system, Mr. Clausen said.
"In the case of this national database and with many other tools, vendors are focusing on large banks and have not scaled down the tools for the smaller banks that don't have the capability to run these systems," he said.
Even with advanced fraud prevention, larger banks were still victimized by some of the same types of fraud as smaller banks, including forgery and counterfeiting.
Ms. Feddis said that forgery and counterfeiting have increased at all banks since 1997 because advances in technology have enabled criminals to duplicate checks using high-quality scanners and desktop publishing systems.
This technology-based fraud is a major concern for banks of all sizes, she said. "Its just shows how technology helps and hurts banks when it comes to fraud."
