Most of us assume that paper checks aren’t used much in our modern digital economy. And it’s true. Checks now account for less than 5% of total consumer transactions. But that small percentage still adds up to billions of checks written and cashed each year.
Unfortunately, any method of monetary transactions at that scale will attract criminals who try to defraud innocent consumers. That includes third-party checks.
What is a third-party check?
In simple terms, it’s a way of transferring funds without using cash or a mobile method like Zelle.
A check is considered third-party when it is written by one entity (payer) to another entity (payee), who then endorses the check over to a third-party. The entities can be a person, organization, or business.
Here’s a quick example — You write a $500 check to your friend Mark for fixing your fence. Mark owes $500 to his landlord for rent, so instead of depositing the check into his own account, Mark endorses your check over to his landlord. The landlord may then take it to a bank for deposit or cashing.
Obviously, third-party checks can be convenient for the entities involved. Endorsing the check over to the third-party allows for transferring the money without the need to deposit it first.
Why they can be risky
Many banks have stopped cashing third-party checks unless the person cashing or depositing the check has an account with the bank, or unless both the payee and third-party are present when the check is deposited or cashed.
Even then, some banks may refuse to cash the check if there are questions about the check’s legitimacy.
Although some of the more common concerns are forgeries, tampering, and endorsements, there are other risks for the bank and its customers.
- Theft or coercion: The person with the check may have acquired it through illegal means, or by coercing the original recipient to sign it over to them.
- Tampering and forgeries: Because there are more opportunities to alter the signature and other information on the check, third-party checks are naturally more vulnerable to fraud.
- Incorrect endorsement: If the original payee incorrectly endorsed the check to the third-party, there are legal and financial liabilities for the bank of the check is later disputed.
- Identity verification: Thiscan be more difficult if the parties involved do not have a relationship with the bank. The bank invests more time and money in verification, and in the operations of handling the more complex transactions presented by third-party checks.
- Delays: Some banks may allow the check to be deposited, but then put a hold on the funds – possibly for several days – until the check is verified with the issuing bank, and the identities of all involved parties are verified.
