How do bank Cheques work? How can a bank accept one from another bank, whilst having different standards, shapes, paper material? How is forgery not rampant?

Question

I cannot wrap my head around the security of Cheques. They have been around since forever (and I still don’t get how they got verified, although I can understand that fraud could have been way higher back then).

Is there a unified standard for them? Or a proof that it is valid from the government?

In: Economics

Answer 1

There is typically a standard set by the government that checks must include specific information (routing number, account number, amount, date, names, signature, etc.).

The banks involved in the cashing of a check have procedures and processes in place (combination of legal regulations and their own corporate rules) to negotiate the exchange (validating the check, ensuring there are enough funds, etc.).

The only thing preventing fraud are the banks’ validation procedures and people’s desire to actually commit fraud.

1. If you attempted to cash a check using a non-standard medium, this would likely raise flags in and of itself and bring additional scrutiny on the exchange. Would-be criminals generally don’t like scrutiny.
2. The other option would be to use stolen checks but anyone that has their checks stolen should report those to their bank. Checks are individually numbered and banks can basically void those checks making them ineligible for use.
3. Lastly are forged checks. Forgery requires skill and special equipment which increases the overhead and reducing the potential profit. Not to mention the risk of forging the number of a check that’s already been used.
4. Intermediary organizations protect themselves quite often by requiring those paying by check to provide identification. People attempting to pay by fake checks, then would have the additional cost of forging fake IDs.

Not to mention that you can only steal what’s in an account, meaning you have to know that head of time.

This is why most check scams/frauds today don’t actually rely on getting fake checks cashed. One of the most common scams is giving someone else a bad check for too much money and then asking for the difference in cash. Once you have the cash, you disappear and the mark is left with a worthless check that fails to cash.