Rowyn (rowyn) wrote,

Checks in the Paperless Era

Krud tweeted, "There are now mobile apps to deposit checks by taking pictures of them. So... watermarks and all that are no longer relevant? o_O *confused* !"

And I started to respond in Twitter, then realized that this was going to take more then 140 characters.

Most money is transfered point-to-point by electronic transfer rather than by paper money. Just as the cash doesn't change hands, neither do the physical checks. A few years ago, all banks were required by federal regulation to switch entirely to sending imaged checks to the clearinghouse, rather than physical ones. You probably got a notice about this, if you used to get your checks back with your statement and started getting photocopies instead. The chain works like this:

a. You give me a check drawn on your bank, GiantNational, to pay me back for your half of the groceries.
b. I give your check to my bank, Toddler, to deposit in my account.
c. A human being, usually a teller, looks at the check. This person usually looks for obvious signs of fraud, like the check says it has watermarks and doesn't, or it looks like a photcopy, or whatnot. If the teller doesn't think it's fake, then Toddler gives me credit for your check in my account.
d. The teller scans the check and encodes it with routing information as necessary. The check already has GiantNational's routing number printed at the bottom (that's the nine digit number on the bottom left), and if it's a preprinted check, it'll have your account number and check number. The teller will still need to encode the amount. Many banks have OCR software on their scanners, in which case the teller will just glance at the totals to make sure they're right when she finishes scanning all the items she's processing. Division of labor varies, so the teller might hand it off to someone else to scan, and a third person might verify the encoding on the scanned checks, for example. The original check gets put in a bin and held for some period of time, probably 90 days.
e. The scanned copy of your check goes to the automated clearinghouse. The automated clearinghouse credits Toddler Bank for the funds, debits GiantNational, and sends the scan to GiantNational.
f. GiantNational debits your account for the funds. Depending on how GiantNational handles it, a human being may look at your scanned check to match the signature to your signature card, or -- more likely -- a computer will review the scan for signs of fraud: an amount larger than the usual, for example, or the signature doesn't match according to its pattern recognition software. If the computer doesn't think it matches, it'll flag the item and a human will review it to make the final decision.

You'll note that there are two fraud-prevention steps in here, one at each bank. Only one of the banks gets to look at a physical check, though.

Looking at physical checks is inl send the check to the bank) and the bank (they have to scan it anyway).

It's also not the only way to transfer money between bank accounts at different banks. Many of you have direct deposit for your pay checks. Some of you have autodebits authorized to pay your bills automatically. You might have a Paypal account that's tied to your bank account.

All of these transactions are handled by electronic ACH. That generally means that you signed a piece of paper at some point, possibly in the far distant past, wherein you gave your employer/editor/Paypal your bank account number and routing number and told them they could debit and/or credit that account. (I don't know if Paypal actually makes you sign anything or if they use some other method to verify your identity; I'm guessing the latter.)

Here's a secret: no one at your bank ever sees that piece of paper. Here's another: they don't actually need your signature, or anything else from you, to take money out of your account. Anyone who knows your bank account number and the bank you use can take money out of your account. There are half a dozen easy ways to do it. Which is scary!

The good news is that you have 30 days after you receive your statement to contest *any* transaction on it. And if that company doesn't have your signature on a piece of paper, or some similarly good way to prove that you authorized that transaction, then you get your money back. The majority of the risk of fraud is born by banks and businesses (who only have a couple of days after the transaction is made in which to contest it). But it is, nonetheless, a *very* good idea to check your statement for erroneous or fraudulent transactions. In my experience, errors are more common than fraud.

In the last few years, some banks have started allowing what's called "merchant processing". This is when a business that receives checks turns the checks into a file of ACH transactions. The business sends that file to the bank, and the bank processes the file in the same way that autodebit transactions are processed. The impact on your account is the same -- you get a debit for whatever amount you wrote the check for -- but your bank never sees the check. If you've ever written a check at Wal-Mart and noticed that the check cleared your account, but you didn't get a copy of your check with your statement (this assumes you normally get copies of your checks), that's why: Wal-Mart turned your check into an ACH debit.

Your bank will let you block ACH debits if you find them too scary. They may also let you filter them: "Debits from my power company are okay but block everyone else". I don't know what the impact of that is on merchants that turn checks into ACH items.

I don't know whether the proposed mobile app is intended to converts checks into ACH items or if it's sending the scanned check to your bank for processing in just the same way a teller scans it for processing. The latter is a bit more secure, since there's still a signature to check and a check to view. So that seems more likely.

That the physical check is not presented to a bank doesn't mean watermarks have no value: they're still useful to merchants and check-cashing services when they determine whether or not to accept a check as payment.

But *your* main safeguard against fraud is "do not give your bank account number to anyone you do not trust, which includes not sending it through unsecure channels (like email)" and "review your statement for unauthorized activity." Most other protections against fraud are more for the benefit of banks and businesses, who (because of consumer protections) are generally the ones who lose if they honor a fraudulent transaction.
Tags: banking, financial
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