Combating check fraud with EDI - electronic data interchange

Healthcare Financial Management,  August, 1997  by James J. Moynihan

• E-mail
• Print
• Link

The FBI now estimates that check fraud losses exceed $10 billion a year. Banks are reporting increasingly larger losses for themselves and their customers. The culprits are criminals with access to the wonders of modern technology. Low-cost scanning equipment, a personal computer, inexpensive software and a scheming mind are all it takes to exploit the banking system.

There was a time when check forgery required duplication of both the payer's signature and check stock that was relatively difficult to reproduce. With the advent of inexpensive scanners, that difficulty has vanished. To discourage check scanning, some institutions are using expensive check stock that incorporates watermarks. Unfortunately, improvements in computer graphics have helped criminals circumvent even this safeguard.

The good news is that EDI can be used to eliminate check fraud. First, a safeguard known as a "positive pay" arrangement should be set up at the bank. Through this arrangement, organizations send an "issued items" file that contains the check numbers and the dollar amounts of issued checks to the bank after every check run. The bank is instructed to honor only checks that have been authorized through this issued items file. The X12 EDI transaction set for this exchange is known as the 828 Debit Authorization. Many banks also accept computer file output that is in a non-X12 format.

The pricing for positive-pay arrangements is not uniform, but it is usually inexpensive. Some banks actually lower their prices on reconcilement services for organizations that send debit authorization files. The organization's primary cost then is in producing the file from the various systems that issue checks and transmitting it to the bank.

Sending a file to the originating bank allows the bank to "bounce" bad checks. That allows the payer to reduce financial loss but does not eliminate all the hassle and problems that occur when bad checks are passed. Employees whose checks have been stolen, banks that have cashed bad checks, and others involved in check fraud will contact the accounts payable department and try to resolve their problems. The time and attention it takes to resolve these and other problems are another cost of check fraud.

The fundamental solution to check fraud is to eliminate paper and to adopt electronic funds transfer (EFT). This is the second and more comprehensive EDI solution to the problem of check fraud.

In the words of Larry Hopkins, senior vice president, treasury management, Wachovia Bank, Atlanta, Georgia, "Every paper-based procedure can be defeated. The companies that employ and pay many people are at the greatest risk for check fraud. Most corporations issue most of their checks to themselves in the form of employee reimbursements, payroll checks, and various employee benefit checks. A corporate policy to use EFT for all repetitive payments can go a long way toward eliminating check fraud because these types of checks are most often stolen from the mail or duplicated by criminals."

Many provider organizations use direct deposit of payroll, but often expense reimbursements are done via paper checks generated by their accounts payable system. Many banks now offer a service called "comprehensive payables" that can help providers convert to EFT. The provider's bank can accept an EDI payment instruction in the 820 Payment Order/Remittance Advice standard and make some payments electronically while printing the rest on paper. This service allows providers to eliminate their blank check stock while also converting repetitive payments to EFT.

In the past, the primary motivation to initiate EDI payments was to obtain vendor discounts and reduce transaction costs per item. Now, many healthcare financial managers will have an incentive to implement EDI links to their bank to avoid check fraud.

James J. Moynihan, MBA, is a principal, McLure-Moynihan, Inc., Agoura Hills, California. He can be reached at (818) 706-3882 or via the Internet at JJMOYNEDI@AOL.COM.

COPYRIGHT 1997 Healthcare Financial Management Association
COPYRIGHT 2004 Gale Group