Don't Write Checks

August 28, 2009

Recently a friend discovered that somebody had forged checks with her account number on them and was slowly drawing down her account. The checks looked identical to hers, with the same routing and account numbers, but the name and address and signature belonged to someone else. The total amount lost was only about $350, but that’s still significant.

Now obviously this is the bank’s fault. They should be checking the name, address and signature on each check and denying checks when any one of those doesn’t match. And to be fair I think the bank will refund the money eventually. But my friend had to file a claim with her bank’s insurance company, file a police report, get a bunch of things notarized, not to mention set up a new account, switch direct deposit and get a new atm card. That’s pretty annoying.

The interesting part of all of this is that banks are apparently insured enough against check fraud that it’s not worth it to try to prevent it or even monitor for it, at least at relatively small amounts of money. Let’s presume that it costs a nontrivial amount of money to monitor for check fraud. It’s not too hard to see that from the bank’s point of view, if the probability of check fraud occuring is very low or if the cost to the bank (the bank’s “co-pay”) on average is very low, then it doesn’t make sense to monitor for check fraud. And in general the amounts of money stolen through check fraud will be small, since it’s nearly impossible to make any significant purchase by check.

Presuming insurance companies know the banks have no incentive to monitor check fraud means the price of the insurance is higher than it otherwise would be. That cost is likely passed on to consumers through higher account fees and/or lower interest paid. And you still have to deal with all the hassle mentioned above. That’s a double-whammy.

So what can you do? Not a lot. But a good start would be to stop writing checks. If your checking account is with a major bank it seems pretty easy to forge a check with your account number on it, but at least you can make a potential fraudster work a little harder to find out what your number is.

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