Magazine article Independent Banker

Card Fraud's Shifting Risks

Magazine article Independent Banker

Card Fraud's Shifting Risks

Article excerpt

It's a truism of criminal activity of all kinds: If you put stronger locks on the door, thieves will just start coming in through the window instead.

So it is with card fraud. U.S. banks have moved the majority of their credit and debit cards from magnetic stripe to the more secure EMV (Europay-Mastercard-Visa) chip over the past five years. Nine out of 10 cards are predicted to have chips by 2020, according to the Federal Reserve System.

This has cut fraud at brick-and-mortar stores' points-of-sale (POS): Visa reports that in the U.S., counterfeit card fraud has decreased a whopping 70 percent in September 2017 compared to December 2015 at physical retailers that accept chip cards.

But rather than give up, criminals have done what they always do. They've moved on to easier targets. In particular, card-not-present (CNP) transactions, where chips have little impact on security.

According to the 2017 Financial Institution Payments Fraud Mitigation Survey from the Federal Reserve Bank of Minneapolis, released earlier this year, three out of four banks experienced fraud losses in 2016. Almost all debit card issuers (96 percent) faced card fraud losses. And 63 percent of banks reported increased fraud loss for debit cards in 2016 compared to 2015.

Why all the card fraud despite the fast-growing acceptance of chip cards? And what can community banks do about it?

Canaries in the coal mine

This pattern has been seen before. After the United Kingdom introduced EMV chip cards in 2001, card-present fraud dropped by roughly 27 percent between 2007 and 2012, according to a white paper, The U.S. EMV Chip Card Migration: Considerations for Card Issuers, written by Mary J. Hughes, senior payments consultant at the Federal Reserve Bank of Minneapolis.

The white paper looked to other countries' experiences when assessing likely outcomes of the U.S. chip card adoption. In the white paper, Hughes pointed out that several countries had a "spike in CNP fraud when chip cards were introduced because fraud perpetrators turned their attention from card-present counterfeit fraud to the more vulnerable CNP channel. The experience in the U.S. will likely be the same."

Many community banks are see- ing this pattern. At $480 million-asset Athens Federal Community Bank in Athens, Tenn., the migration to EMV chip cards has substantially reduced card-present fraud at merchants who have adopted EMV readers, according to Nicole Gibbs, the bank's vice president and chief banking officer. "However, we continue to see fraud at automated fuel dispensers where reader compliance is not yet required, and on fallback transactions," she says.

In Athens Federal's experience, online fraud has increased, "but not significantly nor more than expected at this point," Gibbs adds. In her estimation, more fraud occurs in CNP transactions for a few reasons, "not solely due to the EMV card transition," she says. "First, online fraud is increasing because online transaction volumes continue to rise. When this volume growth is coupled with the EMV card change throughout the United States, card-not-present fraud inherently increases."

Florida Community Bank in Naples, Fla., started migrating its 30,000 cardholders to chip cards four years ago and saw a subsequent drop in in-person fraud. The chips have had no effect on CNP transactions. Roxanne Mihm, vice president and cross-sell manager, points out, however, that card fraud has typically always been more prevalent in CNP transactions, chip or no chip.

Lynn Acheson, vice president of operations for $214 million-asset Grand Rapids State Bank in Grand Rapids, Minn., has had a similar experience. She says that at her community bank, point-of-sale fraud has decreased significantly compared with the same time period a year ago. "We have not seen an increase in card-not-present fraud at our bank as of yet," Acheson adds. "However, recent publications we have read, as well as training webinars we have attended, all report an increase in CNP trends. …

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