Federal Reserve Released Its Non-cash Payments Fraud Report. Have Chip Cards Helped?

Many consumers prefer to pay for products and services using methods other than cash. How secure are these non-cash payment methods? The Federal Reserve Board (FRB) analyzed the payments landscape within the United States. Its October 2018 report found good and bad news. The good news: non-cash payments fraud is small. The bad news:

• Overall, non-cash payments fraud is growing,
• Card payments fraud drove the growth

Non-Cash Payment Activity And Fraud
Payment Type	2012	2015	Increase (Decrease)
Card payments & ATM withdrawal fraud	$4 billion	$6.5 billion	62.5 percent
Check fraud	$1.1 billion	$710 million	(35) percent
Non-cash payments fraud	$6.1 billion	$8.3 billion	37 percent
Total Non-cash payments	$161.2 trillion	$180.3 trillion	12 percent

The FRB report included:

"... fraud totals and rates for payments processed over general-purpose credit and debit card networks, including non-prepaid and prepaid debit card networks, the automated clearinghouse (ACH) transfer system, and the check clearing system. These payment systems form the core of the noncash payment and settlement systems used to clear and settle everyday payments made by consumers and businesses in the United States. The fraud data were collected as part of Federal Reserve surveys of depository institutions in 2012 and 2015 and payment card networks in 2015 and 2016. The types of fraudulent payments covered in the study are those made by an unauthorized third party."

Data from the card network survey included general-purpose credit and debit (non-prepaid and prepaid) card payments, but did not include ATM withdrawals. The card networks include Visa, MasterCard, Discover and others. Additional findings:

"... the rate of card fraud, by value, was nearly flat from 2015 to 2016, with the rate of in-person card fraud decreasing notably and the rate of remote card fraud increasing significantly..."

The industry defines several categories of card fraud:

1. "Counterfeit card. Fraud is perpetrated using an altered or cloned card;
2. Lost or stolen card. Fraud is undertaken using a legitimate card, but without the cardholder’s consent;
3. Card issued but not received. A newly issued card sent to a cardholder is intercepted and used to commit fraud;
4. Fraudulent application. A new card is issued based on a fake identity or on someone else’s identity;
5. Fraudulent use of account number. Fraud is perpetrated without using a physical card. This type of fraud is typically remote, with the card number being provided through an online web form or a mailed paper form, or given orally over the telephone; and
6. Other. Fraud including fraud from account take-over and any other types of fraud not covered above."

Card Fraud By Category
Fraud Category	2015	2016	Increase/(Decrease)
Fraudulent use of account number	$2.88 billion	$3.46 billion	20 percent
Counterfeit card fraud	$3.05 billion	$2.62 billion	(14) percent
Lost or stolen card fraud	$730 million	$810 million	11 percent
Fraudulent application	$210 million	$360 million	71 percent

The increase in fraudulent application suggests that criminals consider it easy to intercept pre-screened credit and card offers sent via postal mail. It is easy for consumers to opt out of pre-screened credit and card offers. There is also the National Do Not Call Registry. Do both today if you haven't.

The report also covered EMV chip cards, which were introduced to stop counterfeit card fraud. Card networks distributed both chip cards to consumers, and chip-reader terminals to retailers. The banking industry had set an October 1, 2015 deadline to switch to chip cards. The FRB report:

The FRB concluded:

"Card systems brought EMV processing online, and a liability shift, beginning in October 2015, created an incentive for merchants to accept chip cards. By value, the share of non-fraudulent in-person payments made with [chip cards] shifted dramatically between 2015 and 2016, with chip-authenticated payments increasing from 3.2 percent to 26.4 percent. The share of fraudulent in-person payments made with [chip cards] also increased from 4.1 percent in 2015 to 22.8 percent in 2016. As [chip cards] are more secure, this growth in the share of fraudulent in-person chip payments may seem counter-intuitive; however, it reflects the overall increase in use. Note that in 2015, the share of fraudulent in-person payments with [chip cards] (4.1 percent) was greater than the share of non-fraudulent in-person payments with [chip cards] (3.2 percent), a relationship that reversed in 2016."