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ChexSystems

ChexSystems
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Used by over 9,000 banks and in over 100,000 physical bank locations throughout the United States, ChexSystems is a third party company that provides banks a simple, effective, and consistent way in which to pre-screen individuals that want to establish a relationship with their bank.

Even though ChexSystems itself is much more than this, at its simplest and most widely understood level, ChexSystems is merely a list of individuals who have had their bank accounts closed by a ChexSystems member institution with cause within the previous five years. When a person is on the ChexSystems list, opening or maintaining a bank account without the help of inside information and professional advice and assistance, as is available on this website, is difficult if not impossible.

Understanding ChexSystems

what is chexsystemsChexSystems, officially known as Chex Systems Inc, is a corporation that is wholly owned by eFunds Inc., who is then owned by Fidelity Information Services, a Fortune 500 company that provides integrated data solutions to financial institutions worldwide. The products, services, and depth of information that ChexSystems can provide to a ChexSystems member bank is beyond the immediate concern of most consumers. While in-depth knowledge and study of ChexSystems is available on this website, what follows is a cursory review of the most common and immediately relevant concerns of the typical consumer.

For most it is enough to know that ChexSystems is a nationwide company that aggregates data from its member institutions across the United States in order to provide a scoring system to these member banks in order for them to determine if they should allow an individual to open an account. This scoring system for the majority of the member institutions ranks each new account applicant and places them within one of three levels: an approval to open an account, advice to seek more information, or a directive to not open an account.

Why Do Banks Use ChexSystems?

Banks use ChexSystems because there is sufficient data that proves beyond any statistical variance that a bank that opens an account for someone with a ChexSystems record is much more likely to take a monetary loss on that account than if they opened an account for an individual not on ChexSystems. This is not necessarily an apples to apples comparison because of course, those that are on ChexSystems already have in one way or another obvious trouble managing a bank account or their personal finances. One could ask the question that just because a higher percentage of those with ChexSystems records will create a monetary loss to the institution, how much greater is that chance relative to the group that does not have a ChexSystems record?

While that statistic is not made public by ChexSystems nor its member institutions, there is substantial anecdotal confirmation from bank loss specialists that tips the scales against those with a record. In fact, most have argued that any account opened for an individual with a record is likely to create a monetary loss for the bank. The bank loss specialists explain the predominance of ChexSystems use across the United States and the strict adherence to banning all of those with a ChexSystems record from opening an account. Though no single predictive mechanism can be 100% accurate, the statistical correlation between those with ChexSystems records and future bank monetary losses in undeniable.

Are These Actual Losses To The Bank?

Even though any type of ChexSystems record will stop a person from being allowed to open an account with a ChexSystems member institution, some consumer advocates for ChexSystems leniency have argued the very nature of the supposed loss the institution took that placed the person on ChexSystems in the first place. They have also stipulated that there is a core difference between a loss that is based on fraud versus a loss that is based on a negative balance due to uncollected service charge, non-sufficient funds, or overdraft fees. Never has there been statistical proof correlating different types of ChexSystems records, covered later in this article, and specific types of bank losses.

It is entirely possible for a person to have repeated overdraft fees in the $30-$50 range per occurrence, with a maximum of 10 charged per evening, for debit card purchases that amount to only a few dollars. Take for example, a debit for a fast food meal that appears for $5 and yet the account has a $3 balance due to a service charge for the account of $10 that the customer forgot to record. That $5 debit creates an non-sufficient funds charge of $50 and the bank returns the debit. The next day the account is again debited $5 and another $50 charge occurs and again the debit is returned. The account is now negative $97. If this customer then plans to make a $50-$75 deposit to cover some automatic debits that are going to hit their account for a total of $20-$30, they will be surprised to find that their small deposit will not cover the outstanding overdraft let alone the new expected debits. If they are on a fixed income and all they have is the $50-$75, those new debits will hit their account forcing it into a negative balance amounting to hundreds of dollars. This person, if they cannot pull together enough extra money to cure the negative balance, will find themselves on ChexSystems, have their account closed, and not be able to open another account for five years. This type of example happens every day at every bank location across the United States.

The first question is, did the bank actually take a loss, a true loss of hundreds of dollars or was it that the bank was charging hundreds of dollars for a situation that cost them pennies to process? Is this person then a risk to the new bank for a loss and if so, what type of loss? A paperwork loss similar to the one described above caused by a record keeping error or a true economic loss where the person involves themselves in an illegal act, such as depositing fraudulent checks, in order to create a loss to the bank?

Yet the punishment is the same. A ChexSystems record and losing the ability to open an account for five years.

This is the issue that every retail bank employee faces every day. They cannot differentiate between those that will create a true malicious loss and those that simply do not manage money well. Consider that when a person comes into a bank they are an unknown summation of qualities, once the bank account is opened the bank is in an immediate position to take an economic loss from its association with that individual. The single barrier to entry the bank has in opening the account is ChexSystems, therefore if ChexSystems can significantly mitigate the risk of loss by providing a scoring system, then a bank would be welcoming losses every time they opened the doors for business. This single risk management safeguard is highly effective and has saved banking institutions a statistically provable amount of money reaching into the millions of dollars per year.

Who Gets a Chex Systems Record?

Beyond the question of what ChexSystems is, most want to know who exactly gets a ChexSystems “record”? To begin, a Chex Systems record much like a criminal record is a negative thing to have registered against a persons name. It signifies that a bank has either taken a loss or was at material risk for taking a monetary loss from the actions of the person with the record. In other words, the individual with the record proactively put the bank at risk for a loss or actually caused the bank to take an actual loss. These losses could have been for a variety of reasons and ChexSystems has several specific categories of records, and they are as follows: non-sufficient funds activity, depositing uncollected items, excessive overdraft activity, ATM/Debit card abuse, or undisclosed. Each of these record types carry their own stigma with “undisclosed” being the “catch-all” for the multitudes of other reasons banks choose to report individual to ChexSystems.

While some of the listed reasons for a record are somewhat self explanatory, such as non-sufficient funds activity which usually refers to a person indiscriminately bouncing checks and likely having had their account closed for a negative balance due to the fees for those “bounced’ checks. There are others that seem somewhat self-explanatory, such as “depositing uncollectable” items though it is a little mysterious for those that have not been involved in banking. This type of record is reported if a person repeatedly deposits checks from others that bounce and come back to the bank as “not collectible”. This is reported because banks take severe losses when they mistakenly and in good faith credit a customer’s account from a deposit only to find out days later, after the customer has withdrawn the money, the deposited item was not collectible. This then creates a negative balance in the customers account, which, if not resolved leads to a ChexSystems record. This record is also used for those that repeatedly deposit non-collectable items, and even though they make good on the deposit, the fact that they put the bank at “risk of loss” they may be reported to ChexSystems.

The ChexSystems Process

A person is said to have a ChexSystems “record” if that individual has been reported to ChexSystems by a ChexSystems member institution as one with a recent history of mishandling a checking account in such a way that the reporting institution lost money or was at significant risk for losing money. It also identifies those who have had their bank accounts closed by intentional action on behalf of the reporting bank for unpaid outstanding checks and debits, account and ATM abuse, outstanding debits, fraud, depositing fraudulent items, etc. and it identifies those that have a proven track record of abusing checking accounts. These ChexSystems records are in fact very difficult to explain away and more often than not result in an account being denied.

chexsystems sample report

Although not widely known, ChexSystems is actually a suite of services that offer banks identity theft protection as well as a cross reference database that helps to identify red flags on new customer information that has been provided by the prospective customer to the new account employee. Red flags are identified through a complex database system where ChexSystems instantaneously cross references and processes validation tests against the prospect’s address, telephone number, social security number, and date of birth. Discrepancies are reported to the bank employee as red-flags. These red-flags can be reviewed and waived by the new accounts personnel if a satisfactory answer is given to resolve the discrepancy. This power in the hands of the bank employee may lie with the front line employee or with their supervisor or manager, but do not mistake the ChexSystems reports of discrepancies with the actual report of a ChexSystems “matching record”. A matching record is much more difficult and more often than not impossible to overcome in attaining an account.

The following describes the different levels of a ChexSystems analysis as well as the process the bank employee follows when provided with this information.

When a bank searches for ChexSystems verification they provide ChexSystems with the following information on the new account applicant:

  • Name
  • Address
  • Social Security Number
  • Date of Birth

Once ChexSystems processes this information the employee is given a hard decision by ChexSystems on whether or not an account should be opened. The decision will either be approved, denied, or inconclusive. Some ChexSystems clients may also receive decisions with other names such as record, no record, possible match or several other variations on the hard decision.

If Chex Systems finds a record for the applicant on their system they will report to the new account employee the nature of that record. These types of records are most commonly one of the following:

1. Accounts closed by another institution and reason.

  1. Non-sufficient funds activity.
  2. Depositing non collectible items.
  3. ATM abuse.
  4. Debit card abuse.
  5. Money owed or no money owed. This last item will be given in all instances of a found record.

Accounts closed by the inquiring institution with the same reasons listed above. This happens when a bank’s computer system is not sufficient to already have cross referenced the new customer data.

All of the above information is reported to the bank employee. Therefore any explanation that the customer gives to that employee must be consistent with the reason given for the record. The bank employee is not allowed to communicate to the customer the exact reason for their ChexSystems record, they have been provided the information, therefore any discrepancy between the record and the customer’s explanation helps the employee judge if the story is likely true, or possibly a fabrication. Unfortunately, the bank employee is banned by bank rules from communicating that information and is forced to give you the contact information for ChexSystems for further information.

Understanding this is important because a common critique of ChexSystems is that the bank is basing their decision of whether to follow the ChexSystems hard decision or not without having information on why the person was reported. The people that claim this are either uninformed or being dishonest in order to further their anti-ChexSystems cause. ChexSystems does communicate reasons for account closure.

The second screening aspect of ChexSystems occurs after the determination of whether a record has been found. The following information is provided by ChexSystems and it is also used by the bank employee to determine if a person should be allowed to open account:

  1. Other ChexSystems inquires using the same information in the last 90 days. This helps the bank employee know if the person is opening several bank accounts in a brief period of time. Using this information the bank employee may ask about the behavior seeking a reasonable explanation. The reason it is important to the current bank is because bank fraud is oftentimes perpetrated between multiple accounts at different institutions. A person should have a reason for opening multiple accounts across institutions.
  2. Previously reported address information and social security information in the past 90 days. This builds upon the concerns in item “1” above. Multiple accounts opened within a 90 day period across multiple institutions is a red flag. Yes, there are many justifiable circumstances, yet at the same time this is a typical “set-up” for a kiting or fraudulent check writing and deposit scheme.
  3. Issuance date and state of issue for a social security number. This is a simple cross reference check where the employee compares the new account applicant’s date of birth with the year of issuance. Most United States citizens have social security numbers issued when they are young. This is especially true because it is the easiest way for a parent to take an IRS tax deduction for that child on their tax return. There are instances when a social security number is issued at a later age, but this is rare for native born citizens. Certainly if the number was issued prior to the birth date of the applicant, it is a fraudulent number. The state of issuance is oftentimes used within probing questions from the employee to ensure the story, explanations, and answers by the applicant are consistent.
  4. Discrepancies in the same address, name, or social matched with other names, addresses or social security numbers. In this instance the name, address, and social security number are all cross referenced. If there are any differences amongst these three variables they are reported to the employee for further verification. In addition to this there is a cross reference of matching names and addresses that have been used for ChexSystems inquiries over the previous several years. All of this information is provided to the bank employee who is then charged with asking questions to sort out the discrepancies and determine whether or not an account should be opened.
  5. A cross reference of same names with different social security numbers. This cross-reference is not always useful to the bank employee when confronted with a common name, but when names are used that are not as common it is surprising how many times a person who is opening the account for fraudulent reasons is in fact caught with a simple cross reference of unusual names using multiple social security numbers. At times when these are reported through ChexSystems they may have the same address or simply cause the person who is trying to open the fraudulent account to get “caught up in their excuses” leading to confusion and the bank employee refusing to open the account.
  6. A cross reference with same names and different addresses. Similar to number 5 above it is a testament to the lack of creativity of those opening accounts for fraudulent reasons that they do not prepare simple excuses as to why they have several addresses. This cross reference is once again more about catching the fraudulent individual off guard with unexpected questions than it is an exact science of determining a person’s malicious intent. As with all discrepancies, a legitimate person using their own information will have no difficulty in answering questions or explaining discrepancies whereas a person using fraudulent information is ill prepared for probing questions.

After this entire screening process a customer is allowed or denied a new account. If they are denied they are not given any specific reason for the denial other than that they have been denied due to information provided by ChexSystems. The employee is not allowed to explain the information found or whether the denial was due to a record being found or for the presence of other inconsistencies. The denied customer is simply directed to contact ChexSystems themselves in order to seek further clarification.

How Does an Account Put a Bank at Risk?

Earlier it was said that one of the riskiest transactions a bank can make is when they establish an account relationship with a new customer. For most law abiding customers this fact is not understood and therefore the entire reason and purpose for a program like ChexSystems is not fully understood. The following are just a few simple ways in which a person with malicious intent can create losses for a bank if they can get the bank to allow them to establish an account.

Debit Cards

When a person uses a debit card the amount of the purchase is “pre-authorized” against that card for a specific number of days, this number being contractually established by the credit card processor, this pre-authorization is not debited from the customer account until the credit card processor delivers a full debit to the bank. Therefore the pre authorizations sets aside money from the account balance until the full debit is delivered to the bank and the money withdrawn. The problem is that there are oftentimes when the pre-authorization releases the set aside funds prior to the full debit. When this happens there is a time period where an account holder can withdraw the funds from their account and then when the full debit is the account, the money is not there and the account goes into a negative balance. When this happens sometimes the bank takes the loss and other times the originating debit company takes the loss depending on who was responsible for the late processing. Many criminally minded individuals study when and where these inefficiencies occur, charging thousands of dollars in purchases and withdrawing their bank funds prior to the full debit.

Another example of this is with the purchase of gasoline. When debit cards first became mainstream the gas stations would pre-authorize only $1 against a card. This was to verify the card was good and then the full debit would occur for the actual amount of gas purchased. Using this system a person could fill hundreds of dollars in gas, with only a few dollars in an account. Most gas stations no longer use the $1 pre-authorization system any longer, they now opt for a $40 or $75 pre-authorization depending on the company.

Depositing Non-collectable Items

Most people at one time or another have deposited a check into their bank account only to be told that there will be a hold on the funds of that check for a certain number of days. This hold gives the bank time to collect the amount of the check from the bank the check was written against before it gives access to the depositing account holder. While this type of check hold is a strong protection against a bank loss, there are many times when the hold will release prior to the one bank informing the other that the check will not be paid. This is a process and time-line that many criminals study and use to their advantage. They deposit large checks into one account only to withdraw the funds before the bank discovers the check that was originally deposited was not collectible. This type of fraud requires the criminal to know the specific time-lines of each bank’s procedures, but all banks are exposed to this type of fraud, it only requires the criminal to run a few checks through the system that are collectible until they understand the process.

The twist on this is when the criminal customer actually deposits large sums of money in checks that either look official or for some other reason the bank teller does not put the amounts on hold. This is oftentimes accomplished with fraudulently printed checks that appear to be from other banks, major companies, large area employers, or from the government. Tellers oftentimes see checks like these and do not place holds on them, if the unscrupulous customer can make a check look like an official check, the teller will not likely place a hold. This is also the case when there is simply a teller error where they fail to place a hold or when the fraudulent customer deposits multiple smaller dollar amount checks. If a customer comes in with 30 checks, all under a couple hundred dollars, the teller may not place a hold yet the total fraudulent deposit can be over $6,000. In this instance the customer comes back later that day or the next day, withdraws all the money from the account and is never seen again.

Selling Account Information

Now imagine what can happen when a legitimate person comes into the bank, opens an account, establishes it for a few months and then sells or “loses” the account information. In this case the “loss” is actually the account holder working in conspiracy with another to commit a crime. The account holder waits for mass fraud to occur and then comes into the bank and states that they had not noticed it before but that they lost their bank account information a few days earlier. Just these few days are long enough for the bank to have already taken a loss. This type of fraud is not uncommon and in fact occurs daily and is oftentimes committed when a “con artist” convinces a person to participate in the scheme with that person not understanding the scrutiny they will be under once the fraud is complete. This specific type of fraud is difficult to catch and yet it does happen and ChexSystems can at least warn a secondary institution and assist them in not exposing themselves to the same type of fraud again.

These are a few very simple ways in which a bank is at risk for losses when they open an account. There are dozens more simple ways that can be added to this list and that is the reason why banks need to put up barriers to entry when allowing new customers access to their institution. The question might be asked, why focus simply on “new customers”? This is because the majority of fraud is perpetrated by customers with account relationships less than 90 days. It is rare for long term customers to intentionally commit fraud, yet it does happen and there are specific procedures to help mitigate long term customer risk at any bank, but this article is specific to the ChexSystems suite of services that specifically helps the bank screen new customers.

ChexSystems Removal & Dispute

The topic ofChexSystems removal can be expounded upon for thousands of words and dozens of pages but most of the information would resolve into a single fact, it is nearly impossible to be removed from ChexSystems. This assumes the record was an actual reflection of a persons true banking behavior. If a person has caused a bank to take a loss, even if it was due to a bounced check service charge where the bank truly did not “lose money”, the record will stand in 99% of the cases, even if litigated. This does not mean that a person should not at least try one time to go through the dispute process. This process is similar to a credit card dispute, is easy to follow, and with all of the financial institution consolidations in recent years, it may be that there is no bank to verify the record and then in fact it can be removed. The following is the process in filing a dispute:

  1. Order a personal ChexSystems Consumer Report
  2. Using the information from the personal Consumer Report in step 1 fill in the blanks on the Consumer Request for Reinvestigation form.
  3. Mail the Request for Reinvestigation form to Consumer Relations, 7805 Hudson Road, Suite 100, Woodbury, MN, 55125 or fax it to 602-659-2197.
  4. ChexSystems will respond within 30 days, by mail.

Surviving While Having a Record

If efforts at removing a record do not work then a person must face facts and the ways in which the banking system operates and make plans to operate outside of the banking institutions that use the Chex Systems program. This is increasingly simple as the internet has made many alternative banking options available and easily accessible to consumers. The options selected depend on the complexity of a person’s finances. For example, if a person is satisfied with online bill pay and a debit card they can have a paycheck directly deposited into a
non-ChexSystems bank and function financially as if they did not have a ChexSystems record. If a person insists on having access to checks, then finding a non-ChexSystems bank is the best alternative. In fact, there are hundreds of banks and credit unions that do not use ChexSystems and therefore there is an alternative. Still others are satisfied with having a debt card only without any online bill pay or access to checks. They key is that there are alternatives that cater to almost any need. These alternatives may not be as easy as signing up with the local mega bank that has thousands of branches and ATM’s, yet they are full service financial institutions that will allow a person to open an account and handle their finances as they please.