The finance industry will always attract players with less-than-honest intentions. One of the growing issues is deposit fraud, and it seems fintechs cannot address the root cause either. There is always a trade-off between convenience, speed, and security, even if there shouldn’t be.
Deposit Fraud Is A Growing Problem
There are a few ways in which deposit fraud can occur. The most common version involves entities writing out checks without sufficient funds in their bank account. Once the check recipient tries to cash the check, it will be refused, yet they may pay a fee for the administrative process regardless. A fraudulent check can lead to a civil lawsuit, although that rarely happens.
One would think the decline in check usage would help curb deposit fraud. Combined with lower cash usage, the concept becomes much harder on paper. However, the digital era has given rise to a new option. Once funds from a paper or digital payment enter a bank account, the owner of the initial funds takes over. That allows them to control the disbursement of the deposit.
Some people may know this concept as using “mules“. By defrauding the recipients of transfers, they earn a commission per transaction. Due to low lawsuit rates, most of these actions seem like easy money. In addition, banks can now clear checks electronically in 24 hours. Unfortunately, that also exposes recipients to “bad checks”, resulting in funds being withdrawn from their accounts.
Although check fraud has noted a decline in recent years, it remains a problem. The electronic deposit fraud vertical, however, continues to boom. Digital fund transfers have no credit risk, leading to money from scams and thefts being deposited into freshly created bank accounts. As the culprits can control the bank account receiving their funds, it becomes easy to launder money.
Can Fintechs Curb The Problem?
In the UK, over 60 million GBP has been frozen in “mule” bank accounts since 2018. That involves blocking deposits used for fraud and money laundering. Interestingly, most of these mule accounts belong to young people without criminal records. The allure of easy money is powerful, especially during economic uncertainty. It would not be surprising to see deposit fraud rise again in late 2022 and early 2023.
The big question is whether fintech companies can address the issue. So far, that has not been the case, as making a dent in these actions remains tricky. Banks already maintain stringent monitoring procedures to identify unusual transactions, people owning multiple bank accounts, and payee bank discrepancies. If fintechs can develop “mule monitoring” solutions, things may evolve in the right direction.
Unfortunately, fraudsters always appear to be one step ahead. The current focus lies on using non-enabled Confirmation of Payee banks. Those represent over 90% of all banking accounts and providers worldwide. Fintechs must advocate for stricter payer-to-payee bank account information exchanges. Until such a system is in place, deposit fraud will remain an ongoing problem.
