By Patti Murphy
Electronic payments are growing at a rapid clip; so, too, is electronic payments fraud. These are two key takeaways from a new report from the Federal Reserve Board. While data in the report may be dated, the trends seem clear.
The report, which draws on data from the Federal Reserve Payments Study, reveals that between 2012 and 2015 total noncash payments grew by 12 percent, from $161.2 trillion to $180.3 trillion. Also during that three-year period, the total value of fraud involving noncash payments grew by 37 percent, from $6.1 billion to $8.3 billion. And most of those losses were tied to debit and credit cards, according to Changes in U.S. Payments Fraud from 2012 to 2016: Evidence from the Federal Reserve Payments Study.
The Fed embarks on a massive data collection effort every three years to gauge trends in noncash payments – automated clearing house (ACH), cards and checks – and publishes aggregate estimates in the Federal Reserve Payments Study. The most recent study, published in 2016, draws on 2015 data provided by financial institutions.
In addition to the triennial study, the aggregate data also is used by economists and research analysts at the Fed Board and the Reserve Banks to preparing reports analyzing payment trends. Changes in U.S. Payments Fraud from 2012 to 2016: Evidence from the Federal Reserve Payments Study, the most recent of these reports, was released by the Fed Board in October.
Overall, fraud involving noncash payments amounted to an estimated 45 cents for every $10,000 in payments in 2015; that was up from 38 cents per $10,000 three years earlier. And nearly all the losses came from card transactions. The majority of good transactions (97.6 percent by value) were processed through the ACH and check systems, the report revealed. Those of you who regularly read my columns know I'm a champion of checks. My admiration for the check payment system, however, isn't because I'm old school. (Although I am a baby boomer.) It has much more to do with the technology and other efficiencies that have been introduced to the check system over the past few decades.
Thanks to the rise of image exchanges and remote deposit capture (RDC), most checks today clear as electronic images – better than 99 percent, by the Fed's reckoning. As a result they clear faster than ever before – usually in a day or two, and it's not unheard for RDC or mobile RDC deposits to clear on a same-day basis. This, in turn, allows banks to identify fraudulent items before having to make deposits available for withdrawal.
The impact of those changes on check fraud has been notable: in 2015 banks sustained $710 million in check fraud losses, down from $1.1 billion in 2012. In 2012 check fraud made up 2.8 percent of all fraudulent noncash transactions and 18.2 percent of total dollars lost. By 2015 checks accounted for just 0.9 percent of all fraudulent noncash payments and 8.6 percent of total dollars lost to fraud, according to the Fed's latest analysis.
Another factor contributing to falling check fraud losses is that while consumer check writing is down, businesses continue to write a lot of checks, the Fed report noted. Business, particularly large companies, employ sophisticated fraud detection tools (like positive pay) that allow them to review checks presented to their banks for collection and proactively approve or reject them for payment.
ACH fraud and losses also tumbled between 2012 and 2015. ACH fraud, by value, fell from 17.2 percent of the total noncash fraud pie in 2012 to 14 percent in 2015. ACH fraud fell from 5 percent of all noncash payment fraud in 2012 to 1.3 percent in 2015.
Between 2012 and 2015, credit and debit card fraud grew, both in terms of sheer number of incidents and total losses, and individually each exceeded losses due to either ACH or check fraud. Credit card fraud losses, alone, totaled more than twice the combined value of ACH and check fraud losses, the Fed said.
The Fed's data, which reflects fraud experiences prior to the initial 2016 EMV liability shift, found the highest rates of credit card fraud in 2015 were in card-present transactions: 14.27 basis points by value of losses and 7.32 basis points by number of fraudulent transactions. These represent increases of 5.34 basis points and 3.41 basis points, respectively, over card-present fraud rates in 2012, the Fed said.
The EMV liability shift, which took hold for most merchant categories in October 2016, has prompted a majority of brick-and-mortar merchants to install EMV-compliant terminals lest they be held liable for losses from fraudulent cards. The value and number of card-not-present credit card fraud occurrences stayed relatively constant between 2012 and 2015, the Fed said.
Debit card fraud accounted for the highest rates of card-not-present (CNP) fraud in 2015: 16.31 basis points by value and 16.73 basis points by number. These represented increases of 6.44 basis points and 7.36 basis points, respectively, over CNP fraud rates recorded for debit cards in 2012.
Not surprisingly, fraud rates associated with PIN-authenticated card-present transactions were substantially lower than those not authenticated by PIN: 3.99 basis points by value in 2015 compared to 12.78 basis points for non-PIN transactions. By number, the fraud rate for PIN authenticated card-present transactions was 1.48 basis points compared to 5.27 basis points for those not authenticated by PIN. These transactions were "almost exclusively" debit card payments, the Fed said.
Overall, the average values of fraudulent and non-fraudulent CNP payments in 2015 were close at $95 and $109, respectively, in 2015. In contrast, at $117, the average value of fraudulent card-present transactions in 2015 far exceeded the average of $50 for non-fraudulent transactions initiated in card-present environments.
The Fed's data, combined with emerging market trends, could portend some interesting changes in the card payments space. For example, growing consumer popularity of debit cards (several reports suggest debit cards enjoy top-of-wallet status with an increasing number of consumers) combined with the potential to lower the cost of accepting PIN-authenticated debit card payments could prompt more merchants to consider installing PIN pads.
Not only do federally regulated debit card fees generally undercut credit card interchange rates, PIN debit card payments are less prone to fraud, as the Fed's data shows.
Patti Murphy is senior editor at the Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven
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