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Table of Contents

Lead Story

Visa and Mastercard at 50: Evolving in evolving market

Patti Murphy


Industry Update

Major Visa, MasterCard settlement voided: Now what?

PCI SSC unveils new tools for small, midsize merchants

Denmark's Nets, BOKIS piloting digital wallet

UK joins backlash against interchange


GS Advisory Board:
The state of mobile today - Part 1

The art of shopping cart conversion

Cliff Teston

Payment technology timeline


Merging lanes on the POS road map

Dale S. Laszig
DSL Direct LLC

Fraud in the payment system: What - me worry?

Brandes Elitch
CrossCheck Inc.

Deaf to new product introductions?

Steven Feldshuh
Merchants' Choice Payment Solutions East


Street SmartsSM:
Time to treat MLSs right

John Tucker
1st Capital Loans LLC

Contract management in the paperless age

Adam Atlas
Attorney at Law

How and why to pursue ISVs

Kelly Cullum
SUR Technology Holdings LLC

Company Profile

New Products

Web-based statement analysis, CRM platform

Clientvine LLC

Flexible, EMV-ready mobile payment solution

Castles Technology Co. Ltd.


Are achievers born or made?


Letter from the editors

Readers Speak

Resource Guide


A Bigger Thing

The Green Sheet Online Edition

July 24, 2016  •  Issue 16:07:02

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Fraud in the payment system: What - me worry?

By Brandes Elitch

CrossCheck is located in Sonoma County or, as we call it, "Wine Country." You would think people would just drink the wine and enjoy it, but no. They all have opinions. Four popular words bandied about are "biodynamic," "organic," "natural" and "sustainable." Sometimes winemakers put these words on their labels; sometimes they don't accurately reflect what's actually in the bottle.

Bottled fraud

Biodynamic wine relies on nature; no chemical fertilizers or other non-natural agents are used to control weeds and molds. In this case, the vineyard should be a self-sustaining farm organism, and it should be treated with only herb and mineral-based preparations. Planting and picking should be timed to specific Earth and Moon celestial "forces." France, Germany, and Australia all have different rules to certify a biodynamic vineyard, but not the United States.

Organic wine is produced from organically farmed grapes and processed in accordance with certified organic standards. Sustainable practices apply to all aspects of grape farming, winery operation and even distribution and sales, as well as the use of water and electricity in making wine. There is no certification for this.

Unlike "industrial" wine, natural wine is made without chemicals, contains little or no sulfur, and uses native yeasts. Now, when winemakers use these terms here, there is no real way to verify the terms are accurately applied to product labels. You might call this "friendly fraud."

Contrast this with famous cases of outright fraud in California winemaking involving Fred Franzia (the founder of Two Buck Chuck) and Delicato Vineyards. In the late 1980s, Delicato was the largest maker of bulk white Zinfandel wine, producing it for many other wineries. Delicato bought grapes from the Bavaro brothers, who harvested Carignane and Valdepena grapes and passed them off as white Zinfandel grapes. Over time, they produced almost 1 million gallons of adulterated wine. Another crook was Fred Franzia, the nephew of Ernest Gallo, who passed off Carignane and Grenache grapes (worth about $196 a ton in 1992) as Cabernet grapes (worth about $387 then).

In the early 1990s, more than 20 civil and criminal lawsuits were brought against Delicato, Franzia and others. All those charged either pleaded guilty or were convicted.

Payment fraud

In the payments industry, fraud has exploded. Every day you read about a new data breach, wire fraud scheme, ATM skimming or POS fraud. This is in addition to the always present chargebacks and friendly fraud in the card-not-present space.

Any card-not-present scenario, which would involve MO/TO and Internet purchases, is fraught with fraud potential in cases where the merchant does not know the buyer, and criminals could be using stolen or invented payment credentials.

A June 2016 Juniper Research LLC report predicted worldwide online fraud will reach $25.6 billion by 2020, up from $10.7 billion in 2015. A recent report from Aite Group LLC forecasted online fraud in the United States alone would grow from $2.8 billion in 2014 to $7.2 billion in 2020. Of particular concern is the use of mobile devices to initiate payments. The RSA Anti-Fraud Command Center reported that about 42 percent of all U.S. e-commerce transactions in 2015 started on mobile devices.

Besides exploiting the mobile channel, fraudsters take advantage of the popularity of gift cards, and store "buy online, pick up in-store" programs. The most prevalent way fraudsters obtain gift cards is to purchase them with stolen credit cards. Digital gift cards have immediate delivery, no physical address requirements and high consumer adoption – a perfect storm. For example, between Black Friday and Christmas 2015, 9.5 percent of all online fraud attempts were on downloadable e-gift cards, according to ACI Worldwide. estimated $950 million was lost to e-gift fraud in 2015. LexisNexis found that for every dollar lost to fraud, it costs merchants about $2.27 in e-commerce and $2.89 in mobile channels. Fraud management techniques can combat this; however, that is beyond this article's scope.

Check fraud

Unlike credit card fraud, it is impossible to accurately measure check fraud. There are approximately 5,260 commercial banks in the United States and about 7,270 credit unions. All of these offer checking accounts. However, just as money center banks are loath to report wire transfer fraud, no banks want to advertise check fraud by their customers, and they are not required to report it.

The FBI estimates losses from check fraud total about $18.7 billion annually. Previous estimates by payments experts suggested total check fraud of around $10 billion, of which roughly 10 percent is borne by the financial institutions (FIs) and the rest by merchants. But, of course, no merchants want to advertise or report check fraud at their stores.

The average fraud scheme lasts 18 months before it is detected. Check fraud is a crime, but local prosecutors only pursue thefts involving large transaction volumes or amounts. The FBI estimated 75 percent of these cases are never prosecuted.

The 2013 American Bankers Association study on deposit account fraud estimated demand deposit account fraud at $1.744 billion, with 54 percent coming from debit card fraud and 37 percent coming from check fraud.

The 2015 Association of Financial Professionals Payment Fraud Survey found the most common types of check fraud are:

Credit card losses

LexisNexis Risk Solutions published a paper called Issuers Confront Application Fraud and Account Takeover in a Post-EMV US. It includes data from a report by Javelin Strategy & Research titled Data Breach Impact Report 2015. Here are some key findings from the report.

Payment concerns by large enterprises

A May 2016 study by Visa Inc.'s CyberSource subsidiary on behalf of the Merchant Risk Council (which has 450 firms in 20 countries) showed managing fraud is the top payment concern of e-commerce merchants. Compounding the issue, MRC merchants support an average of 14.5 payment types, almost twice as many as the 7.6 supported by non-members. These include digital wallets, bank transfers and invoices, gift cards or vouchers, and carrier billing.

In addition to data breaches, large enterprises' payment concerns fall into the following categories:

This overview has highlighted the pervasiveness of fraud in the payments system. As a merchant or processor or ISO, you can no longer assume the "What ‒ me worry?" stance or think this is someone else's problem.

Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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