Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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December 22, 2016
Why U.S. Card Fraud Is Now Present and Accounted For
Last year, I wrote a post called "Why Is the U.S. Card-Present Fraud Breakout Not Present?" in which I discussed the lack of publicly available information on the distribution of U.S. card fraud by type. I'm happy to report that more detailed data on card fraud in the United States is now present and accounted for in the Initial Data Release (IDR) of the 2016 Federal Reserve Payments Study.
As is common in other countries, card fraud can be categorized as follows across person-present and remote payment channels:
- Counterfeit card: Fraud is perpetrated using an altered or cloned card.
- Lost or stolen card: Fraud is undertaken using a lost or stolen card.
- Card issued but not received: A newly issued card in transit to a card holder is intercepted and used to commit fraud.
- Fraudulent application: A new card is issued based on a fake identity or on someone else's identity.
- Other: "Other" fraud includes account takeover and other types of fraud not covered above.
- Fraudulent use of account number: Fraud is perpetrated without using a physical card.
An extract from the fraud section of the IDR shows breakouts for card fraud by type across five countries.
As reflected in the numbers, the United States continues to be by roughly an order of magnitude a continuing and persistent target for card counterfeiters using stolen card data compared to other countries that have adopted much earlier counterfeiting controls using EMV (chip) cards. Use of chips makes in-person card fraud more difficult, because of built-in technology to thwart the creation of counterfeit chip cards. As adoption of chips for cards and terminals improves in the United States, fraud using stolen card data is likely to shift from person-present to remote channels as has already occurred in other developed countries. My colleague, Doug King, discusses these issues in detail in an interview conducted last year.
Look for other Take On Payments posts that highlight additional key findings from the 2016 payments study.
By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
December 12, 2016
Making Sense of Dollars, Part II
The first of this two-part post took us back to the '60s and a BBC clip that assumed we'd be a cashless society by now, given it was the dawn of the digital age. A half-century later, we're hardly closer to being cashless, and those who predicted an end to cash have been replaced by those who argue that going cashless or to less cash is "for the best." This post recaps oft-cited reasons for abandoning cash, amending them with counterpoints. I trust market determinations more than I do the wisdom of the well-intended, and the free market seems to be in complete disagreement with those who assert we'd all be better off without cash.
- Cash is expensive as a cost of acceptance for merchants.
I've talked to many retailers—large and small—who prefer cash because they say it saves them money, especially when compared to credit cards. But what do they know? Many studies show that cash is neither universally nor unanimously the most expensive payment method. Indeed, there seems to be more evidence than not that cash is among the least expensive payment alternatives.
- Cash makes tax evasion pervasive.
First, tax evaders have options; cash is not their only tool. Second, tax evasion seems correlated to high taxes (see the National Bureau of Economic Research working papers 6903 and 8551; there are others). Reading further, I find tax evasion is less about opportunity (afforded by cash, for instance) and more about bad tax policy. A revolt was ignited and a great country was born amidst the perception that taxes were too high and unjust. Eliminating cash would not likely have stopped that rebellion, and it's unlikely to fix today's problem.
- Cash complicates monetary policy.
Cash can only complicate monetary policy when those making the policy want to use negative interest rates to achieve desired ends. To date, there is little to no evidence that this policy path is effective; certainly it's no panacea. That makes it premature if not fully misguided to decry cash. Even if the policy proves useful, eliminating bills may or may not make it more difficult for savers to hoard. I assert they'll find a way.
- Cash encourages crime because it's too effective (too liquid, too widely used, "too anonymous").
By that thinking, once cash is eliminated, we'll need to determine what to do about oxygen and water as there is overwhelming evidence that malefactors use these things to good effect as well. The point is, cash works well for the unjust but also for the just. It accounts for 40 percent of all transactions, as measured by the Boston Fed's survey of consumer payment choice. Here the anti-cash crowd backs off the cry of "cashless," running out a "less cash" compromise. Large notes, some say, are used far more often for illegal activities than not, and the proof seems to be TV shows, movies, and pop culture. Seriously. Don't we have to do better than that before dispensing with a primary bloodline for commerce? There is no denying that the untraceable nature of cash frustrates crime fighting; it also frustrates surveillance against the just. Those who value liberty are likely to continue to value the option to spend anonymously.
There is at least one official push to rid society of cash, and its sponsors include card networks, who would stand to benefit were cash to disappear. Anyway, legislating safety that overpromises and hides the harm it can do holds considerable risk.
By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed
December 5, 2016
Making Sense of Dollars, Part I
A 1969 short on the BBC's Tomorrow's World made bold predictions about where computers would take banking. If you haven't seen the clip, I encourage it. It's fascinating, especially if you bear in mind that at the time, computers were still more the stuff of science fiction than reality while banking was staid and stubbornly unchanging. In the barely four minute segment, a card was "dipped" (not to mention authorized with a PIN) and a check was shunned—presuming its disfavor in the face of auto-charging and other electronic payment options. The obsolescence of paper filing systems was projected and branch/conventional banking was guaranteed to diminish if not utterly fade away. Among all the prescient predictions, they tossed in this throwaway: "If cash is to become the first major casualty of the computer revolution,…" Oops.
Amid relentless predictions of its demise, folding money remains. Prognosticators have left off predicting cash's downfall since its resilience has repeatedly put to lie such ideas. Instead, folks have taken to advocating against it. Even there, anti-cash champions seem willing, for now, to settle for us just agreeing to "less cash" rather than forcing us to go "cashless" in a lurch. Listed below are the main arguments of anti-cash advocates:
- Paper-based transactions are inefficient, making cash expensive as a cost of acceptance for merchants. While I see this argument less often than the others below, it pops up enough to earn a place on the list.
- Cash makes tax evasion pervasive and simple. For businesses that are cash intensive, it's difficult to verify sales and income. In some of the articles I've read, tax evasion deserves its place among the most heinous of crimes. It's stealing, no arguing about that, but for this post's purpose, the main point is that cash is at the heart of tax evasion…or so I've heard.
- The latest evil that cash has foisted off on the unsuspecting is it complicates monetary policy. Cutting interest rates below zero is made difficult by the existence of cash because savers can withdraw and hold cash outside of the banking system. This hinders if not fully defeats the purpose of taking interest rates into negative territory.
- I've saved the biggest for last: cash enables and encourages crime like racketeering, drug and human trafficking, terrorism, to name the headliners. Paper money underpins the vilest criminal enterprises because, among other things, it defines liquidity, is almost universally accepted, and provides absolute anonymity.
So there it is. Case closed, yes? Well, let's not say that quite yet. If you're interested in the other side, you will have to wait until next week's post. I rarely see the counterpoints other than for them to be mentioned and dismissed. Critical thinkers may be interested in seeing both sides before deciding the fate of cash.
By Julius Weyman, vice president, Retail Payments Risk Forum at the Atlanta Fed
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