March Madness 2026: Why the End of Federal Paper Checks Will Pressure Banks — and Expose New Risks

A quiet but profound shift is underway in the U.S. payments system. In March 2025, the White House issued a mandate: by the end of FY2025, virtually all federal government payments — including tax refunds — must move off paper checks and onto electronic channels, primarily ACH.

While this is a victory for efficiency, it will drive sudden, uneven increases in ACH volume — and with it, operational, fraud and compliance challenges that many financial institutions (FIs) are underprepared to manage.

Coupled with NACHA’s new ACH Rules, which provides new requirements on RDFI’s for payments made under false pretenses or unauthorized ACH credits, this shift will reshape how banks handle a seasonal surge of payments that is ripe for abuse.

Banks and credit unions need to be ready.

Breakdown by Payment Category

As shown above, federal paper check usage is concentrated in a few key payment categories. The largest share of paper checks is for IRS tax refunds, which constitute roughly half of all federal checks by volume. Most of the remaining checks come from federal benefit payments – primarily Social Security and income-support programs – along with a small fraction from vendor/contractor payments and other miscellaneous disbursements. Below is a breakdown of the major categories of federal payments still made via paper check, and what portion of each category remains paper-based.

Paper vs. Electronic: Overall Proportions

Thanks to decades of effort, the federal government’s payments have become overwhelmingly electronic. In FY2023, about 96.45% of all Treasury-disbursed payments were made by electronic funds transfer (EFT), with only 3.55% paid via paper check. This is a dramatic change from prior generations – for example, in 2000, a much larger percentage of payments were by check, and even as recently as 2010, the Treasury was issuing hundreds of millions of benefit checks annually before the all-electronic mandate took effect. The shift to 96–99% electronic payment has yielded both cost savings and a reduction in fraud: paper checks are 4 times more expensive per payment and 16 times more likely to encounter problems (lost, stolen, fraud) compared to EFT. The median paper check issued by Treasury is also relatively high-value (around $4,861 on average), meaning that even the small percentage of checks account for significant dollar amounts – another reason the government has pushed to convert them to safer digital disbursements. Recent policy moves aim to soon eliminate virtually all federal paper checks. A White House directive (March 2025) instructs that effective September 30, 2025, the federal government will cease issuing paper checks for any payments – including tax refunds, vendor payments, benefits and even agency-to-agency transfers – except in rare emergency or hardship cases. At the same time, incoming payments to the government (like tax payments or fees) will no longer be by check where electronic options exist. This government-wide phase-out indicates that the current ~3.55% of payments via check will drop to near-zero in the next couple of years. In summary, electronic methods now dominate federal transactions, with paper checks forming a small and shrinking proportion of payments – a proportion that is expected to disappear almost entirely once mandated changes take full effect.

ACH Volume: The Coming Tax Season Surge

About 20% of federal tax refunds and over 50% of all federal checks are still issued by paper check — equating to roughly 20–25 million checks per year. Social Security, SSI, VA benefits and federal pensions have already reached near-total electronic payment penetration.

With the new mandate, nearly all remaining check-based refunds will be pushed to ACH. The result will be an ACH volume increase of at least 20–25 million additional high-dollar refund credits, compressed into a short seasonal window (January–May).

For mid-size, and smaller banks in particular, this creates risks:

• Time-based volume concentration: Tax refund ACH volume will spike in just a few weeks, stressing ops teams and risk control systems.
• Rising exposure to refund fraud: Bad actors increasingly exploit ACH refunds to perpetrate synthetic identity fraud, mule activity and account takeovers.
• Customer experience risks: Unexpected holds, delays or reversals will lead to dissatisfaction and social media fallout if banks aren’t prepared to manage both legitimate and suspicious payments gracefully.

The ACH Rule Change:

As ACH volume is set to increase, banks must also comply with NACHA’s new ACH Rule, which will take effect March 2026.

Under the new rule, RDFIs (Receiving Depository Financial Institutions) will face a potential increase of requests to return certain fraudulent or unauthorized consumer ACH credits quickly — and in many cases; while there is not a shift of liability, they may be exposed to legal or state level consumer protection agency risk for refunds to Originators or ODFIs (Originating Depository FIs).

Combined with the federal check mandate, this puts banks in a bind, as they’ll experience:

• Record volumes of first-time ACH tax refunds, many going into “new” or dormant accounts.
• Rising attempts by fraudsters to exploit ACH refund flows — especially via mules and synthetic accounts.
• Increased regulatory accountability, if they fail to identify and stop fraud flows into mule accounts.

In short, more ACH tax refunds, more fraud risk and new rules create a dangerous environment if banks’ monitoring and response processes aren’t prepared.

How Scammers Will Pivot — and Why Banks Must Adapt

Paper checks are slow, traceable and easier to intercept physically. ACH is fast and scalable — and fraud rings know this.

As the remaining 20% of refund checks shift to ACH, expect:

• More “pop-up” mule accounts created ahead of refund season to receive fraudulent refunds.
• More synthetic identities used to claim fake refunds into ACH-accepting accounts.
• More scams targeting consumers — e.g. phishing and social engineering to redirect their refunds to fraudsters’ accounts.

Many banks today have weak or fragmented monitoring for inbound ACH fraud monitoring — often focused on debits and outflows instead. The combination of high-volume, seasonal refund ACH credits and fraudsters’ pivot to this channel will expose gaps fast.

Operational Strain: Beyond Just Fraud

The increase in ACH refund volume will also hit smaller banks operationally:

• Funds availability policies: Pressure to release tax refund ACHs quickly, but with greater fraud uncertainty.
• Customer service overload: Spikes in inquiries about missing, held or reversed refunds.
• Operations and Fraud control stress: Smaller banks may see 2–3x normal ACH inflows during peak refund weeks.

The shift away from checks was inevitable. But few banks have re-engineered their ACH operations — or their fraud monitoring — to handle the intensity of a condensed, higher-risk seasonal ACH flow.

Call to Action for FIs

To stay ahead, FIs must act now by:

• Tuning ACH fraud models specifically for scams and mules
• Strengthening onboarding controls to stop mule accounts ahead of refund season.

• Educating customers about refund scams — prevention will be key as ACH exposes new scam vectors.

Conclusion

The federal check phase-out is a good thing — but it’s not free of consequence. For banks, it will compound potential risks and operational costs. The time to prepare isn’t next tax season — it’s now. ACH will be the last big wave of U.S. government payment modernization — and banks that miss the warning could be impacted.