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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May 8, 2017
Calculating Fraud: Part 1
When analyzing payments fraud rates, we have to consider what is being measured and compared. Should we measure fraud attempts that might have been thwarted—fraud that penetrated the system but might not necessarily have resulted in a loss—or fraud losses? Whatever the measure, it is important that the definition of what is included in the numerator and denominator be consistent to properly represent a fraud rate.
In calculating a fraud rate based on value or number, a fraud tally is needed in the numerator and a comparison payment tally in the denominator. The formula works out as follows:
Fraud Rate = Numerator
Where, for any given period of time
Numerator = Value, or number of fraudulent payments across the payments under consideration,
Denominator = Value, or number of payments under consideration.
This post offers a process for tallying payments for the denominator. Part 2 of this series will focus on tallying the numerator, basing its approach on the process that the Federal Reserve Payments Study 2016 used. That process includes fraud that initially cleared and settled, not attempts, and does not exclude losses subsequently recovered.
The Fed’s 2016 payments study offers a method for whittling down all payment transactions to a subset of transactions suitable for calculating a fraud rate. Below is an extract, with clarifying commentary, from one of the study’s questionnaires, which asked card networks for both the value and number of payments.
At first blush, totals for value or number under questions 1, 2, 3, and 4 could conceivably be used to provide a comparison tally for fraud. However, we should rule out the total from question 1 since the definition includes declined authorizations, making it unnecessarily broad. Question 2, "total authorized transactions," has the disadvantage of including pre-authorization only (authorized but not settled). While some of these transactions could have been initiated as part of a fraud attempt, they were never settled and consequently posed no opportunity for the fraudster to take off with ill-gotten gains. On balance, the preferred measure for payments is the result of question 3, which measures "net, authorized, and settled transactions." Unlike "net, purchased transactions" under question 4, this measure has the benefit of not excluding some of the fraud captured by chargebacks under question 3b.1. Other types of fraud are not covered under chargebacks, including when card issuers elect to absorb losses on low-value payments to avoid the costs of submitting a chargeback.
We could follow a similar process for tallying payments for ACH and checks, with adjustments to account for potential fraud resulting from the lack of an authorization system like that for cards, which requests authorization from the paying bank.
Part 2 of this series, which covers the process for calculating the numerator, will appear in June.
By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
March 27, 2017
Don't Forget the Check
As the data in the recently released Federal Reserve Payments Study show, the decline of check usage continues—albeit at a slower rate than what past studies found. Despite the rapid decline in volume on the consumer side over the last 15 years, the check remains a key payment instrument for business customers. According to the study, in 2015, consumers and businesses wrote more than 19 billion checks representing $27.3 trillion.
While the share of the number of checks (12 percent) is dwarfed by the number of other noncash payments (debit/credit/prepaid card and ACH), which continue to grow, the check remains a key target of criminals. For that reason, we need to maintain, if not enhance, risk monitoring. Criminals use the check both to conduct fraudulent transactions and to launder money. The Financial Crimes Enforcement Network reports that the number of Suspicious Activity Reports (SAR) involving checks continues to increase. That number has grown more than 141 percent since 2013, as the chart shows. Also, checks are 71 percent of the total—by far the most common payment type of all the SAR categories.
In addition, the Association for Financial Professionals notes in its 2016 Payments Fraud and Control Survey that checks remain the most targeted payment method. Seventy-one percent of the 627 responding companies reported successful or attempted check fraud on their business accounts in 2015. The survey also found that checks accounted for the largest dollar amount of loss of all the payment methods, including wire transfers. On a positive note, the percentage of companies actually suffering a financial loss from check fraud declined from 57 percent in 2013 to 43 percent in 2015.
Checks remain a target since they are so easy to counterfeit or alter compared to electronic items. While much of the risk management effort focuses on electronic payments, be sure not to forget about the paper check. It is obvious the crooks haven't.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
May 23, 2016
What Would Happen If the Lights Went Out for a Long, Long Time?
In 1859, a massive geomagnetic solar storm known as the Carrington Event caused extensive damage to telegraph systems and other nascent electrical devices worldwide. Telegraph lines sparked and telegraph operators could send and receive messages without the use of electric batteries. The Northern Lights lit up the sky in all of North America. Though not widely reported, on July 23, 2012 a massive cloud of solar material similar in magnitude to the Carrington storm erupted off the sun's surface, radiating out at 7.5 million miles per hour. Fortunately the impact of the solar storm missed Earth by nine days because of the Earth's orbit position.
One report estimates that a Carrington-level storm today could result in power outages affecting as many as 20–40 million Americans for a duration ranging from 16 days to two years at an economic cost of up to 2.5 trillion dollars. A research paper in Space Weather estimated the odds of a Carrington-level storm at about 12 percent over the next 10 years. Early warning of such a storm is possible since satellites can detect impending storms and have the potential to provide a minimum one-day warning before it hits Earth.
So what would happen if the lights went out in much of the United States because of such a cataclysmic event? One could anticipate serious disruption of electronic payments such as ACH, cards, and wire transfers in the affected areas and beyond. What would one do to facilitate commerce in such an emergency? Well, cash and, to a lesser degree, checks could come to the fore. Use of checks would be problematic given the electronification of checks, high risk of fraud, and overdrawn accounts if banking systems are not up and running. Cash would have fewer problems if it were on hand to distribute to the affected population. Perhaps cash accompanied by ration books could be used to mitigate hoarding.
For a low-probability extreme-impact event that results in cash becoming the only way, among existing payment instruments, for commerce to take place, what contingency plans are in place to ensure that consumers and businesses can obtain cash? Since the contingency systems we have in place to handle a future Hurricane Katrina or Hurricane Sandy are likely not sufficient for an extreme event of nationwide scale, some of the issues that need to be resolved include:
- How does one ensure that sufficient cash is on hand during an emergency?
- How is cash going to be distributed and accounted for along the supply chain with ATMs and bank offices and their core systems inoperable due to no electricity?
Addressing these questions and others involves a monumental effort, and I don't have a ready answer. Fortunately, cash solves the problem for small-scale, low-value payments during a long-term power outage. That is, during the immediate, in-person exchange, it is an instrument that doesn't require electricity, communication networks, or computers.
This and other major calamities have always made me concerned about the push in some quarters for a full transition to electronic payments at the expense of payments less reliant on electricity and our communication networks. As an engineer by training, it is in my nature to wonder what can go awry if failsafe systems aren't in place when the unexpected happens.
With the possibility of a catastrophic event in our lifetime, would you rather have cash in hand or a card/mobile app? As for me, I'm going to the bank to cash out my accounts and then on to the hardware store to buy a gas-powered electric generator. Just kidding, though I think serious consideration and appreciation is needed for the contingency aspects of cash when things invariably go awry.
By Steven Cordray, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
October 19, 2015
The governments in countries such as Sweden and Nigeria may have taken initial steps to move to a "cashless" nation, but here in the United States, there is no question that cash is still king. It remains the most-used retail payment instrument, especially for low-value payments. This finding from the Fed's Cash Product Office (CPO) was welcome news to a group of independent (nonfinancial institution) ATM operators that I had the pleasure of addressing last month at their annual conference. The primary business of these entrepreneurs is getting cash into the hands of consumers through their terminals located in a variety of malls and merchandise, food, and beverage stores. Of the estimated 400,000–425, 000 ATMs and cash dispensers operating in the United States, approximately 60 percent are owned by these nonfinancial institutions.
One of the CPO's main missions is maintaining a supply of currency and coin to meet demand in both normal times and special situations such as natural disasters, when other forms of payment might be unavailable. As a critical part of accomplishing that mission, the CPO constantly evaluates research to determine how cash use is changing in this country. One of the main sources of research is the Fed's Diary of Consumer Payment Choice (DCPC). Data collection was last fielded in 2012, but is being conducted again now. To collect the data, the DCPC asks a representative national sample of about 2,500 individuals to record all their financial transactions over a rolling three-day period. In addition to recording the transaction and demographic information, respondents were also asked to indicate their top preferred payment method and their second preferred method of payment in instances when their top choice is not available.
Some of the major findings of that study include:
- Debit and credit cards represent the stated primary payment choice, at 64 percent, but 30 percent of the consumers stated their primary payment preference was cash.
- Cash serves as the backup payment method for all segments, reflecting its importance in our overall payment infrastructure.
- Interestingly, although 3 percent of the consumers said their preferred payment method was checks, they actually used cash twice as often as writing checks.
- Reflecting the tendency for people to use cash for small-value payments, cash payments represented 40 percent of the number of payments made by the survey participants but only 14 percent of the total value of the payments.
- Cash clearly dominates the small-value segment under $10.
- Cash was the payment method used in two-thirds of person-to-person (P2P) payments.
- The use of cash in P2P transactions is different from other cash transactions; P2P transactions are two-thirds higher in value ($35 versus $21) than other types of expenditures.
- While 51 percent of the adults in the 18–34-year-old age group indicated that debit cards are their most preferred payment method, cash followed closely at 40 percent for the 18–24 year olds and 31 percent for the 25–34 age groups. Will the 2015 results show a departure from this finding?
It is clear that the United States is a long way from becoming a cashless society despite the predictions of many over the last twenty years. The 2015 results will provide important information as to how cash continues to be used by the general population and the emerging millennials segment in particular.
So is there cash in your wallet? I bet there is and will be for quite some time.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 6, 2015
Growing, Growing, Gone!
As we've blogged before, check writing has been steadily declining as electronic payments have grown. For example, the number of checks written in 2012 was 21 billion, down from 27.8 billion in 2009, according to the 2013 Federal Reserve Payments Study. We may be writing fewer checks than ever, but more than anything, we want the convenience of depositing our checks with mobile devices. A 2013 survey by ath Power Consulting found that mobile remote deposit capture (mRDC) is the "most sought-after mobile banking feature" among consumers. And financial institutions are answering this demand. According to 2014 surveys from Federal Reserve Banks (the Dallas Fed's, for example), about 48 percent of responding institutions are currently offering mobile capture and another 41 percent are planning to offer it within the next two years.
With mRDC in such demand, solutions providers and financial institutions should be investing in risk management strategies. But if check writing is a declining business, will mRDC risk management investments end up on the disabled list? Financial institutions must look at the potential losses and how they occur, evaluate the means to minimize these, and carefully weigh these factors against the dwindling check industry.
The mRDC channel faces two primary loss challenges: fraudulent items and duplicate check presentment. A fraudulent item might be an altered, forged, or counterfeit check; it can also be an intentional duplicate presentment. The other challenge occurs when a customer unintentionally presents a deposited item a second time. Research and anecdotal evidence suggest many duplicate presentments result from customer errors. These represent a growing customer education need. Financial institutions must find room in the allocated lineup and spending cap for fraud and duplicate detection enhancements.
Handling duplicate check presentments landed an all-star position on the agenda at most payments operation conferences this past year. Duplicate check presentments mean returns and adjustments, which in turn mean time and money for the financial institutions. When duplicate presentment involves more than one bank of first deposit, losses are often sustained from misunderstanding holder-in-due-course rights and return-versus-adjustment processes. Financial institutions often need to reconstruct what happened, analyze the facts, and possibly consult legal counsel.
But rather than handling these risks with expensive roster moves, considering the declining use of checks, financial institutions can meet the threat at the origin, through customer education and enforcement policies. Financial institutions that offer mRDC can make disclosed stipulations. For example, they can require that the original check be destroyed after confirmation, or that checks have a specific restrictive endorsement that includes "for mobile deposit only." Ultimately, if a consumer deposits a check twice, financial institutions can charge a fee or suspend service. In general, customers want to avoid fines, so they tend to play within the rules when fines are looming. If training customers is a home run in mitigation, then the grand slam is having detection systems that support the stipulations and rules put into place.
By Jessica J. Trundley, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
June 9, 2014
Magic 8 Ball, Will We Ever Be Cashless?
Predictions of a cashless society have been broadcast sporadically throughout the decades. It became a popular concept in the United States in 1965 when Thomas J. Watson Jr., CEO of IBM, said, "In our lifetime, we may see electronic transactions virtually eliminate the need for cash." Watson believed, or hoped, that the newly released IBM mainframe computers would revolutionize financial transaction processing and make carrying cash unnecessary. Later that decade, the concept was expanded to a checkless/cashless society, with some predicting that both payment forms would be extinct by the 1980s.
Despite consumers' growing use of cards and the emergence of the ACH system, the cashless society concept took a bit of a detour during the 1980s and 1990s—ATMs and shared EFT networks proliferated, both offering tremendous convenience and making it very easy to distribute currency. When card-based point-of-sale (POS) programs also emerged, they offered an alternative to currency and checks, while also increasing the convenience of currency by allowing cash-back transactions. This expansion of currency convenience took place even as consumers were being warned of the dangers of coin and currency—the germs, the cocaine residue, the increased chance of robbery, and so on. Certainly this was a more intense negative campaign than the spontaneous combustion danger my mother warned me about when I was young. I'd received some birthday money that I was anxious to spend, and she declared that the money was "burning a hole in your pocket."
While the central banking authorities of some countries such as Sweden and Nigeria have announced a goal of moving to a less-cash society, consumers in the United States are seemingly moving in the opposite direction, as evidenced by some recent San Francisco Fed research. Researchers examined the data from the 2012 Diary of Consumer Payment Choice (DCPC) study by the Boston, Richmond, and San Francisco Federal Reserve Banks. The San Francisco Fed research included these key findings
- Cash remains the most-used form of payment, accounting for 40 percent of payment transactions.
- Cash is generally used for lower-value transactions. The average value of a cash transaction was only $21, compared with $168 for checks and $44 for debit cards.
- Cash is used most often in gift and P2P (or "person-to-person") transfers, with food and personal care supply purchases second (see the chart).
- Contrary to the conventional wisdom of millennials' love for all things electronic, 40 percent of 18–24 year olds prefer cash over all other payment methods—the highest percentage of any age group.
Yes, card, ACH, and other electronic transactions are continuing to increase and gain larger shares of the overall consumer transaction mix while check usage remains in a steady decline. Despite the dire outlook for checks, my colleague Doug King pointed out in a recent post that check usage among P2P users actually increased, according to the latest Fed payments study. My Magic 8 ball is predicting that coin and currency are going to be around for quite some time. What does yours say?
By David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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March 3, 2014
An Efficient Mobile P2P Payment: The Paper Check
Having had the chance to spend some time reviewing the 2013 Federal Reserve Payments Study, I was struck by the lasting power of the check in the consumer-to-consumer (or P2P) space. Although overall check usage has declined (checks written by businesses and by consumers to businesses have all declined significantly), check usage in the P2P space increased between 2006 and 2009 and was stable from 2009 to 2012. And this has occurred when the number of bank and nonbank mobile P2P payment solutions that have entered the marketplace or matured during the past few years.
As a parent of two young children, I have acquired ample experience in the P2P payments space—that is, in paying babysitters. As a self-proclaimed payments geek, I am always interested in learning how the babysitter prefers to be paid. Cash remains king with most, at least the high school-aged ones. We have one college-aged sitter who likes being paid through a nonbank P2P payment provider. And most recently, another college-aged sitter wanted to be paid by check, which really caught me off guard. She informed me that she uses her mobile banking app to process her checks through mobile remote deposit capture (RDC) and that she prefers having access to the funds through her debit card over cash. The amazing thing that has struck me from these weekly transactions is the efficiency of this P2P payment transaction.
If the babysitter makes the mobile deposit before 9 p.m. (ET), she has access to the funds the following day. If after 9 p.m. , the funds are available to her in two days. On my end, the transaction appears in my banking activity the morning following the deposit. Talk about efficient—fast and inexpensive (no fees paid by either of us)!
Obviously, the efficiency of this transaction would have been diminished were this not a face-to-face transaction. And maybe that is where the true value of online or mobile P2P payments comes into play. However, the resilient check and mobile RDC banking application worked really well in this face-to-face setting. According to a recent report, mobile RDC was offered by approximately 20 percent of U.S. banks in 2013, up from 7 percent at the end of 2012. As more financial institutions roll out the offering in the upcoming year, maybe it will be the case that the old paper check is here to stay and will flourish in the P2P payments space. And based on my experience, that might not be a bad thing!
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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June 24, 2013
The Forgotten Check
The paper check—remember those things that came 25 to a packet along with a vinyl cover? You could get them in basic solid colors, with floral designs, monogrammed, or even with your favorite sports team or your pet's picture. You would have to actually sit and write out all that information and even had to record the amount you needed twice, once in figures and once spelled out. (Does "fifty" have an "e" or not?) If you had the style that contained a duplicate to help you remember checks you’ve written to record in the register, you had to press down hard and put the divider in so the duplicate on the next check wouldn’t pick up the writing. It's no wonder that, when electronic bill payment and other alternative payment methods came along, they were so widely and quickly accepted.
Over the last three decades, there has been an ever-decreasing use of checks, especially by consumers. Aided by the advent of Check 21, image capture, and ACH conversion, volumes have decreased to the point that by 2010, the Federal Reserve System had consolidated its 45 check processing centers to a single operation at the Atlanta Fed. Still, despite the rapid decline in volume on the consumer side, the check remains a key payment instrument for commercial customers.
Despite physical security enhancements such as watermarks and holographs and services such as positive pay to detect unauthorized checks, the low-technology aspects of the paper check make it an appealing target to the less-sophisticated criminal. With knowledge of the routing-transit number and account number, criminals can quickly create a counterfeit check displaying high-quality graphics. Since signatures are generally checked only on a random basis and on extremely large dollar items by the drawee bank due to bulk filing process, passing "bad paper" at a number of locations in a short period of time can result in sizeable losses. Based on the Financial Crimes Enforcement Network's 2012 SAR [Suspicious Activity Report] Activity Review—By the Numbers, the number of check-fraud SARs increased 6 percent over 2011 and represented the largest category of fraud-related SARs in 2012.
While much of the risk management effort these days is focused on electronic payments, be sure not to forget about the paper check. It is obvious the crooks haven't.
By Dave Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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April 2, 2012
What defines an efficient market?
"There was an active debate on whether the Reserve Banks should be involved in card-based systems, but we concluded that card systems were not something that the Reserve Banks needed to become operationally involved in. [We concluded] that the private sector was developing these systems appropriately on their own, and that it didn't need public sector intervention." (From Louise Roseman's keynote address at the November 2011 Retail Payments Risk Forum conference, "The Role of Government in Payments Risk and Fraud.)
I recently re-watched video clips from Louise Roseman's keynote address at our November 2011 Retail Payments Risk Forum conference. In these clips, Roseman, who is the director of Reserve Bank operations and payment systems at the Board of Governors, explained that the Fed occasionally, but not always, provides payments services. She mentioned that when credit cards started to appear, the Fed debated whether or not they had a role in that market. However, the Fed determined that the market was functioning well enough on its own and that intervention was not justified.
Roseman discussed a contrasting example of when the Fed did intervene in a market: check clearing in the 1910s. In the 20th century, paper checks had to be physically presented at the bank they were drawn on in order to clear. While this process was easy for checks drawn on and deposited at banks located in the same major city, it was much more difficult for checks that had to travel inter-city or were drawn on country banks. To process these out-of-town checks, banks had to manage multiple correspondent relationships. Across banks and clearinghouses, this meant frequent handling and duplication of effort. And when a receiving bank did not have a correspondent relationship with the paying bank, these checks did not clear at par—that is, paying banks charged presentment fees for settling checks with noncorrespondents.
To minimize presentment fees, banks would sometimes send checks on a circuitous route. What follows is a real example of one check's meanderings. (This journey is documented in Clearing Houses and Credit Instruments, a 1911 publication of the National Monetary Commission.) Woodward Brothers of Sag Harbor, NY, wrote a check for $43.56 from its account at the Peconic Bank to Berry, Lohman, and Rasch of Hoboken, NJ. The check was deposited at the Second National Bank of Hoboken. The Second National Bank of Hoboken sent the check to Harvey Fisk and Sons, of New York, who sent the check to the Globe National Bank of Boston, who sent it to the First National Bank of Tonawanda (on the far western border of New York). From Tonawanda, the check made its way to the National Exchange Bank of Albany, was forwarded to the First National Bank of Port Jefferson, went on to the Far Rockaway Bank, and ended up going back to the Big Apple at Chase National Bank. From Chase, the check went to Queens County Bank of Brooklyn, and finally back to the Peconic Bank of Sag Harbor!
At the time, many bankers pushed for the Fed to provide check clearing to reduce these inefficiencies. The Fed obliged, which resulted in savings to the whole market and all checks clearing at par.
Check clearing is just one example of a payment system in which the Fed could improve the overall efficiency of clearing and settlement processes. Are there other markets for which we could replicate this success? What defines an efficiently functioning market?
By Jennifer C. Windh, a senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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May 2, 2011
The check's in the mail, but it might be fraudulent
Amid the constant hubbub of emerging fraud schemes, research shows us that criminals are rational consumers of the nth degree. They instinctively move to the path of least resistance. While the exciting and glamorous fraud topics today involve wire fraud, account takeovers, ID theft, and skimming, the results of the Association for Financial Professionals' (AFP) annual corporate fraud survey remind us that the most fraud vulnerable instrument available today is the paper check. Why? Because check fraud is a decidedly low-tech practice whose ingredients include a bit of thievery, a good copying machine, and possibly, but not necessarily, some magnetic ink.
Corporate experiences with check fraud
The AFP's study tabulated survey results from around 400 public, private, nonprofit, and government organizations across a wide range of sizes. Over 70 percent of the respondents reported that they had been the victim of fraud in 2010. Of those, 93 percent reported fraud involving checks, compared to 25 percent with ACH debit fraud and 23 percent with consumer card fraud. Moreover, of the fraudulent methods used, checks also experienced the highest rate of increase, with 30 percent of organizations reporting an increase in check fraud. And check fraud accounted for 53 percent of the reporting organizations’ financial losses. Interestingly, while actual fraud losses were deemed to be modest in total dollar terms, 84 percent of the respondents had made efforts to protect themselves against check fraud by implementing positive pay controls on their corporate accounts; 53 percent had implemented payee positive pay.
Bank experiences with check fraud
The corporate responses synchronized well with the results of the American Bankers Association's (ABA) last deposit account fraud survey in 2009. At that time, 80 percent of respondent banks reported check fraud losses totaling over $1 billion, which is 23 percent higher than losses experienced with debit/ATM cards. Interestingly, there seems to be little evidence in the ABA report or elsewhere to indicate that check fraud stems from abuse of new technology. At the outset of the implementation of the Check 21 legislation, many industry pundits forecasted that losses would climb as a result of widespread implementation of remote deposit capture (RDC) technology, but it appears such has not been the case. In fact, several large banks, emboldened by the experiences of pioneers such as USAA, have even extended remote capture into the homes of their depositors who are armed with the latest in RDC technology—the smart phone.
Yet, there are growing concerns within the industry that the "gild may be off the lily," as the bad guys learn more about the opportunities. A friend and Sunday school classmate of mine who works for a large national bank reported to me that they had been beset over the past few weeks with an interesting scheme involving new account fraud and checks. Individuals have been opening new accounts and obtaining a debit/ATM card at the outset. After making a modest deposit of good funds to open the account, the new customer then used their ATM card to deposit several counterfeit checks at ATM locations. Per the bank’s policy, some or all funds were made available to the customer immediately (depending on the dollar amount of the check). The customer took advantage of that fact, withdrew the maximum amount possible the next day, before the return deadlines, and then walked away (well, one actually complained because not all funds were made available, but that’s another story, involving criminal indignation).
The unit cost of fraud and fee revenue deliberations
The upshot of all this is that there is a lesson to be learned. Just because we see checks as a diminishing-use instrument doesn't mean we should let our guard down whether we are a consumer, a corporation, or a bank. In tough economic times, a billion-dollar loss to the banking industry is still an expensive ticket. Having just wrapped up the Federal Reserve's 2010 Retail Payments Study, I was interested in exploring fraud from a slightly different angle by looking at the average fraud per check written in the United States. While not all industry surveys align perfectly with respect to samples, time frames, response levels, and so forth, they are close enough to produce some interesting observations. Further, such a calculation might help us understand what the actual "fraud tax" is on checks as banks consider future check service fee issues.
The 2009 ABA study estimated that 760,955 cases of check fraud took place in the 2008 reporting year, with actual losses estimated at $1.024 billion. Compare these numbers to 561,306 cases and $969 million in the 2006 study and 616,469 cases and $677 million in the 2003 study. The concurrent Fed payments studies in 2004, 2007, and 2010 estimated the number of checks written in the United States at 37.6, 33.1, and 27.8 billion, respectively. Doing the math reveals that the per-item cost of fraud losses has gone from $.018 to $.029 to $.036 (unadjusted for inflation). Said differently, the unit cost of fraud for every check written has doubled in six years to 3.6 cents per item even as aggregate check volume has fallen by 26 percent. By the way, this figure represents the costs of fraud losses, not the total cost of fraud management for the check world.
In summary, while the industry debates the issue of the cost of fraud management in the Durbin debit card interchange regulation, perhaps similar scrutiny should be applied to the cost of fraud management in the check world as check volume diminishes. Somewhere out there is an opportunity to adopt an overall fraud management fee strategy as yet another arrow in the quiver of strategically leading customers to payments choices that make sense for the bottom line of a bank.
By Rich Oliver, executive vice president of the Atlanta Fed and director of the Retail Payments Risk Forum
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- May 2017
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- December 2016
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- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
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- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud