Is
Fraud Really That Bad?
Yes.
Fraud is so bad it actually has its own holiday—an entire week.
(National Consumer Protection Week this year was February 14-18.)
However, you might be surprised that check fraud is much less than
credit card fraud, in spite of the fact that many sources suggest
otherwise.
Overall
Fraud
According
to Deborah Williams of Meridien Research, fraud peaked at 1.9% of
transactions in 1992 and is now at .9%. While other types of fraud
may be continuing to rise, “payments” fraud is under attack by
a number of organizations in the U.S., and there are signs of
success.
Check
Fraud
Figures
from TeleCheck state that annual losses from check fraud are more
than $6 billion. That figure accounts only for the amount lost,
not the amount incurred to thwart check fraud, such as collection
fees, processing costs, etc. And, check fraud is continuing to
grow; it grew 11% last year. According to the Nilson
Report,
merchants took in more than $13 billion in bad checks in 1996,
which was 18% greater than the year before. According to Ernst
& Young, more than 500 million checks are forged annually,
with losses totaling more than $10 billion.
The
American Bankers Association found that in 1997 one half of all
financial institutions suffered financial losses due to check
fraud. 289,000 cases of fraud totaled $512 million—that’s 12
times what was lost to bank robberies that year—and that is just
the successful fraud. Attempted check fraud at banks in 1997 was
$1 billion.
Some
are quick to point out that the 289,000 cases in 1997 was a
decrease from the 399,300 cases in 1995. However, the reduction
may be due to banks reporting “cases” in 1997 vs. “items”
in the 1996 survey, but no one is sure. Average gross losses per
case rose from $1,220 in 1995 to $1,775 in 1997, according to Dick
Clausen, chairman of the ABA Deposit Account Fraud Committee, but
the amount passed back to retailers is unclear.
Fraud
at large banks grew 38.2% between 1995 and 1997, about 17.5% a
year. Seventy-two percent of super regional/money center banks
said they spent more than $1 million in 1997 on check fraud
related expenses, and that does not
include the actual losses. Those expenses range from $10,000 to
more than $1 million.
In
a presentation at the EC2000 conference in February 2000, Hank
Farrar, CEO of SVPCo, stated that bounced checks for 1999 totaled
258 million checks, valued at $18.9 billion. Check fraud losses to
banks is estimated to be $1.3 billion for 1999. Losses to payees
are approximately $12 billion.
According
to a presentation by Carreker-Antinori at the 1998 BAI conference,
check fraud is expected to reach $37 billion by 2005. The average
loss by a national bank with assets of $150 billion is $10 to $40
million. The average loss by regional banks (those with $30
billion in assets) is between $1 and $6 million.
While
many of these points are valid, it is also important to note that
while the frequency of fraud, as well as the dollar value, is up,
check fraud in relation to the value of checks and the number of
checks processed is not. In fact, the overall rate of check fraud
loss is less than 2 basis points, or two-hundredths of 1 percent.
In
addition, many of the fraud calculations include dishonored checks
as part of the “fraud” number, when it should be excluded, or
at least reduced, for the collected portion. Annually, slightly
more than 1% of all checks are dishonored, but half of these are
ultimately recovered, making payments by check one of the
nation’s lowest cost payment methods, in spite of fraud.
And
finally, for some perspective, bankcard fraud may well be as high
as 10 to 20 basis points, 5 to 10 times the level of check fraud.
Credit
Card Fraud
By
now you have probably heard about the New York department store
cashier who used her personal Palm Pilot to swipe customers’
credit cards and steal the numbers. This may be part of the reason
that 11% of consumers feel that traditional retail store
transactions are risky.
Chain Store Age
also reported that Visa and MasterCard suffer approximately $1
billion annually due to fraud. Private label cards experience
about $250 million in losses. But, credit card fraud is not just
about chargebacks. Credit card fraud of all types adds up to
billions of dollars in lost revenue. Specifically, $270 million
for lost/stolen cards, $220 million for false applications, and
$190 million for cards that were issued but never received.
Online
Fraud
The
same Chain Store Age
survey that found that 11% of consumers feel traditional
transactions are risky (see above) found that 34% of consumers
consider online transactions “very risky.”
A
survey conducted by CyberSource backs up those fears. The survey
reported that 4.6 to 7.8% of attempted transactions for physical
products are fraudulent, while 14.4 to 23.5% of transactions for
digital products are fraudulent (http://currents.net:
80/magazine/national/1803/estp1803.html). In fact, consumers lost
over $3.2 million to Internet fraud last year in incident reports
to the National Consumers League’s Internet Fraud Watch. The
organization reports a 38% increase in Internet fraud complaints
in 1999, with an average consumer loss of as much as $580 (www.nclnet.org).
A
report released by Gartner Group, Inc. (Limiting Credit Card Fraud
and Chargebacks on the Internet) has found that the average
chargeback rate for Internet transactions with a credit card is
15%, and can be as high as 30% for merchants delivering digital
products immediately at the time of purchase. The rate for POS
transactions is about 1% (www.gartner.com). Merchants that do not
address the potential growth in costs associated with Internet
fraud and chargebacks will face losses that will threaten the
viability of their E-business,” observes Gartner Group analyst
Ken Kerr. “While a fraud detection system is essential for
accurate credit card verification, a high number of chargebacks on
Internet purchases are the result of customer disputes, not
fraud.”
What
Now?
So,
fraud is increasing, we’ve established that, and it is likely to
be even greater in the eWorld than the physical world. Now what do
we do? Well, we can’t stop consumers from purchasing and we
can’t get them to change their payment methods of choice,
regardless of the security problems with their choice. The Survey
of Retail Payment Systems found that consumers expect to increase
their use of payment methods. “ . . . 13% expected to write
checks more often. . . . 10% of consumers expected credit-card
usage to increase in the future.”
It
is uncertain whether consumers can be convinced to switch to an
alternate payment method that may have better fraud controls. It
is even uncertain whether the cost of such a change wouldn’t
out-weigh the fraud. Regardless, it is vital that the merchant
understand fraud is a dynamic dilemma—there will always be
fraud, and criminals are continually creating more advanced
techniques to commit fraud. To reduce losses, merchants must be
dedicated to continually updating their detection and prevention
methods, or trusting a service provider to do it for them.
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