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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October 15, 2019
The Range of Un-Friendly Fraud
My colleague Doug King recently penned a call to action in a Take On Payments post on friendly fraud. That post was the first we'd written about this issue in more than four years. But the feedback we received about the post echoed our concern that these disputes are becoming more frequent and expanding into new scenarios that clearly indicate that, at least to the merchant community, this type of fraud is anything but friendly.
Further research into this problem indicates a range of reasons for a cardholder to dispute a transaction. The spectrum runs from a well-intentioned misunderstanding to a premeditated effort to avoid paying for the goods or services. Below are some common friendly fraud scenarios.
Merchant description or error: A cardholder may be confused when a company descriptor in the transaction detail does not match the company name they are familiar with, so disputes a legitimate transaction. Sometimes this happens, as Doug described in his post, if a parent company name is used rather than the d/b/a name, which frequently occurs with online international transactions. Or sometimes the final transaction amount differs from the amount the cardholder thought he or she was supposed to pay because, for example, there was a miscalculation of sales tax or delivery charges. In most cases, the cardholder, upon seeing all the transaction details, remembers the transaction and withdraws the dispute.
Family usage: Family members sometimes use another family member's payment card without permission. For example, a child might use a parent's card to purchase online gaming credits or features, or a sibling might purchase gasoline, clothing, or something else. With ecommerce transactions, many merchants resort to "electronic fingerprinting" of the device used in the transaction to capture the device ID, IP address, and other details for further documentation. Hopefully, with this additional information provided to the cardholder, the cardholder will do some detective work to determine if the transaction should be honored.
Refunds or buyer's remorse: A cardholder with second thoughts about a nonrefundable purchase might deny that they made the transaction—perhaps a store's return policy deadline has passed or the cardholder just doesn't want the trouble of going through the refund process. To help combat this type of chargeback, the card brands all have "compelling evidence" chargeback documentation rules. These rules allow the merchant to provide additional documentation for certain disputes proving that the cardholder either participated in the transaction, actually received the goods or services, or benefited from the transaction. Merchants must be selective about which of these disputes to contest, depending on the transaction amount, the availability of supplemental evidence, and resource costs to collect and provide such evidence.
Criminal theft: A cardholder who understands the chargeback regulations may use them against a merchant, having purchased an item or service with no intention of making payment. The cardholder may falsely claim that goods were never delivered. Some colleagues and I recently spoke with a business owner who operates several casual dining restaurants. Because of a technology interoperability issue with the restaurant management software, the restaurant has not been able to implement EMV chip readers. The owner said that some patrons became aware of the absence of these readers and spread the word to others, to the point that the losses have become significant. Because of the EMV chip liability shift rules, the owner is considered noncompliant and has no defense against the chargebacks.
All these types of friendly fraud are almost impossible to detect upfront, especially those toward the more benign end of the range. For a merchant, having reasonable return policies and fully disclosing them and hiring exceptional customer service representatives will take them a long way with some of the disputes. But to defend themselves from the determined criminal, merchants' or card issuers' only recourse may be keeping a file listing cardholder accounts suspected of repeated friendly fraud claims.
What techniques do you think are most effective in combatting friendly fraud?
April 29, 2019
In early April in Boston, I happened by the annual conference and competition of the Massachusetts School Bank Association (MSBA). Two hundred eighty-four students from 30 high schools competed in three segments: product design, marketing, and a quiz show that covered financial literacy topics. The MSBA is an association of schools with financial literacy programs and financial institutions that operate educational branch offices in schools.
I learned that next-gen security is firmly within the sights of the next gen of Massachusetts bankers. The conference theme of “personal financial security” played out in each segment. It was clear that the organizers—high school teachers and executives at financial institutions—had the financial safety of the next gen firmly in view:
- The trivia contest consisted of general banking and personal finance questions including questions related to identity theft awareness, financial fraud, and financial cybersecurity.
- The marketing challenge tackled the need to educate customers about security and, according to the prompt, "the need to use good security practices and tools to protect [customers] from identity theft and/or fraudulent use of their accounts."
- In product design, the winning team from Taunton High School designed an app to help students determine if they were more or less likely to be victims of identity theft.
I chatted with students from Chelsea High School about their app: "Are you smarter than a fraudster?" Teaching others is a good way to learn yourself, and these young people were on top of best practices for protecting their payments cards (don't give out info in email or on the phone), preventing identity theft (shred documents), and keeping email safe (don't click on links from unknown parties).
When they aren't designing apps, the Chelsea students work as interns at the Chelsea High School branch of Metro Credit Union.
What is your bank doing to educate the next gen of security ninjas?
January 7, 2019
A New You: Synthetic Identity Fraud
With the start of the new year, you may have resolved to make a change in your life. Maybe you've even gone so far as to pledge to become a "new you." But someone may have already claimed that "new you," stealing your credentials and using them to create a new identity. Identity theft is a growing problem, resulting in millions of dollars in damage around the world. And now there is a modern twist to this old and costly problem: synthetic identity fraud. Panelists at a forum convened by the Government Accountability Office (GAO) define this problem as a "crime in which perpetrators combine real and/or fictitious information, such as Social Security numbers and names, to create identities with which they may defraud financial institutions, government agencies, or individuals." (Read forum highlights on the GAO website.) According to the U.S. Federal Trade Commission, synthetic identity fraud is the "fastest growing and hardest to detect" form of identity theft.
This graphic from the GAO illustrates how this type of identity fraud differs from what we have traditionally defined as identity theft.
As this image shows, in traditional identity fraud, the criminal pretends to be another (real) person and uses his or her accounts. In synthetic identity fraud, the criminal establishes a new identity using a person's real details (such as social security number), combining this information with fictitious information to create a new credit record.
The challenge for the payments industry is determining whether an identity is planted or legitimate. For example, parents with excellent credit histories sometimes add their children to their existing credit accounts to give their children the benefit of their positive financial behavior. This action allows the children to kick-start their own credit records. Similarly, a criminal could plant a synthetic identity in an existing credit account and from there build a credit history for this identity. (In many cases, the criminal works for years on building a strong credit history for that false identity before "cashing out" and inflicting financial damages on a large scale.)
So what can consumers do to protect themselves? Here are some simple ways to make it harder for a thief to steal your personal information:
- Shred documents containing personal information.
- Do not provide your social security number to businesses unless you absolutely have to.
- Use tools that monitor credit and identity usage.
- Freeze your credit account as well as that of any of your minor children.
- Check your accounts regularly to ensure that all transactions are legitimate and report any suspicious activity immediately.
Staying informed about synthetic identity fraud tactics and taking these steps to protect yourself can help you get one step closer to (preventing) "a new you."
By Catherine Thaliath, project management expert in the Retail Payments Risk Forum at the Atlanta Fed
October 29, 2018
Remote Card Fraud: A Growing Concern
Where's the money in card payments? Despite all we hear about e-commerce and other kinds of remote payments, in-person payments remain strong. The total dollar value of in-person card payments exceeded the total dollar value of remote payments in both 2015 and 2016. In-person payments were 56 percent of all card payments by value in 2016, and 58 percent in 2015. By number, the race is not even close: 78 percent of card payments were in person in 2016.
Looking at change from 2015 to 2016, however, another story could be emerging. When we consider the growth in the value of card payments, remote payments grew by 11 percent from 2015 to 2016, compared to about 3 percent growth by value for in-person card payments. By number, in-person card payments increased 5 percent and remote by 17 percent.
It wasn't only remote payments that grew from 2015 to 2016—so did remote fraud. In fact, it grew faster than remote payments did overall. Remote fraud by value grew more than three times faster than the value of remote payments—35 percent compared to 11 percent. By number, remote fraud grew about twice as fast—32 percent compared to 17 percent.
In contrast to the mix of remote and in-person card payments overall, where in-person payments still are the majority, fraudulent remote card payments were more than half of all fraudulent card payments by both value and number in 2016.
These data suggest that remote card payments fraud is likely to be of increasing concern for the U.S. payments system going forward. Additional data are included in the report at www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
To learn more about payments fraud, you can sign up for the Talk About Payments webinar on November 1 at 11 a.m. (ET). This webinar is open to the public but you must register in advance to participate.
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
October 22, 2018
Three Views of Noncash Payments Fraud
Despite what we might gather from the headlines, payments fraud is a small fraction of the value of all payments.In 2015, by value, it was only about 1/200 of 1 percent of noncash payment transactions. The pie chart shows what a tiny slice of the pie that payments fraud is.
This view of the value of payments fraud in 2015 is one of three views that today's post will offer, using data from a recently released payments fraud report.
The report, based on data from the Federal Reserve Payments Study, quantifies noncash payments fraud by value and number in 2012 and 2015 and provides information that can help inform efforts to prevent and detect payments fraud. Data include detail on different payment instruments and transaction types.
Fraud value is defined in the report to be the value of unauthorized third-party payments that were cleared and settled, before any chargebacks, returns, or recoveries. It does not include the costs of any prevention, detection, or remediation methods. The report covers noncash payments used for everyday consumer and business transactions, including automated clearinghouse (ACH), check, and card payments. (Wires are excluded.)
Here's the next view of payments fraud by value: most payments fraud is by card. Slightly more than three-quarters of noncash payments fraud by value are credit card, debit card (prepaid and non-prepaid), and ATM withdrawal fraud; almost half is credit card fraud. The second chart shows that by value, ACH fraud is 14 percent of noncash payments fraud and check fraud is 8.6 percent.
Finally, fraud rates by value for cards increased from 2012 to 2015 while fraud rates for check payments decreased and fraud rates for ACH stayed flat. That rate increase for cards means that the value of fraudulent card payments grew faster than the dollar-value growth overall, which is concerning. Indeed, card fraud by value grew more than three times faster than the growth in card payments and ATM withdrawals by value—64 percent compared to 21 percent. ACH fraud grew more in line with the growth rate in ACH payments, with fraud by value increasing 11 percent compared to a 13 percent increase in the value of total ACH payments.
You can find additional data in the report at https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm.
To learn more about the payments fraud report, join our next Talk About Payments webinar on November 1 at 11 a.m. (ET). The webinar is open to the public but you must register in advance to participate. (Registration is free.) Once registered, you will receive a confirmation email with login and call-in information. Also, be sure to check back next Monday for another Take On Payments post about the report.
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
August 13, 2018
Protecting Our Senior Citizens from Financial Abuse
By all accounts, elder financial abuse appears to be a multi-billion-dollar problem. A 2011 New York State study found that, for every documented case of elder financial exploitation, more than 43 other cases went unreported. A 2015 report from True Link Financial estimates that nearly $17 billion is lost to financial exploitation, defined as the use of misleading or confusing language, often in conjunction with social pressure and tactics, to obtain a senior’s consent to take his or her money. According to the same report, another $6.7 billion is lost to caregiver abuse, which is deceit or theft by someone who has a trusting relationship with the victim, such as a family member, paid caregiver, attorney, or financial manager.
Over the last several months, Risk Forum members have had several conversations with boards and members of different regional payment associations. The topic of elder financial abuse and exploitation came up often. It has been over seven years since Take On Payments last explored the topic, so we are overdue for a post on the subject given both the interest from some of our constituents and new legislation around elder financial abuse recently signed into law.
With an aging baby boomer population representing the fasting growing segment of the population, awareness of the magnitude of elder financial abuse and an understanding of ways to identify and prevent it are critical to the well-being of our senior citizens. And that is exactly the intent of the Senior SAFE Act that on May 24 was passed by Congress and signed into law under Section 303 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. Briefly, the act extends immunity from liability to certain individuals employed at financial institutions (and other covered entities) who, in good faith and with reasonable care, disclose the suspected exploitation of a senior citizen to a regulatory or law enforcement agency. The employing financial institutions are also immune from liability with respect to disclosures that these employees make. Before they were afforded immunity, banks and other financial-related institutions had privacy-violation concerns over disclosing financial information to other authorities. The new immunities are contingent on the financial institution developing and conducting employee training related to suspected financial exploitation of a senior citizen. The act also includes guidance regarding the content, timing, and record-keeping requirements of the training.
Massive underreporting of elder financial abuse and exploitation makes it difficult to estimate the amount of money lost. While the law does not require financial institutions to report suspected financial abuse and exploitation, it definitely encourages them to create employee educational programs by offering immunity. And those who know the Risk Forum well know that we are strong advocates of education. Elder financial abuse is a growing problem that must be tackled. How is this law changing your approach to reporting suspected cases of elder financial abuse and related employee education?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
August 6, 2018
The FBI Is on the Case
I recently took advantage of a job shadow program in our Information Security Department (ISD). I joked with our chief information security officer that I was ready to "ride along" with his detectives for our own version of the television drama series Crime Scene Investigations (better known as CSI).
All jokes aside, I enjoyed working with ISD as part of the team rather than as an auditor, a role I have played in the past. We spent a good part of the day walking through layered security programs, vulnerability management, and data loss prevention. Underneath these efforts is an important principle for threat management: you can't defend against what you don't know.
Threat investigations absolutely must uncover, enumerate, and prioritize threats in a timely manner. Digging into each vulnerability hinges on information sharing through adaptable reporting mechanisms that allow ISD to react quickly. ISD also greatly depends on knowledge of high-level threat trends and what could be at stake.
It turns out that many payments professionals and law enforcement agencies also spend a large part of their time investigating threats in the payments system. After my job shadowing, I realized even more how important it is for our payments detectives to have access to efficient, modern information-sharing and threat-reporting tools to understand specific threat trends and loss potential.
One such tool is the Internet Crime Complaint Center (IC3). The FBI, which is the lead federal agency for investigating cyberattacks, established the center in May 2000 to receive complaints of internet crime. The mission of the IC3 is two-fold: to provide the public with a reliable and convenient reporting mechanism that captures suspected internet-facilitated criminal activity and to develop effective alliances with industry partners. The agency analyzes and disseminates the information, which contributes to law enforcement work and helps keep the public informed.
The annual IC3 report aggregates and highlights data provided by the general public. The IC3 staff analyze the data to identify trends in internet-facilitated crimes and what those trends may represent. This past year, the most prevalent crime types reported by victims were:
- Personal data breach
The top three crime types with the highest reported losses were:
- Business email compromise
- Confidence/Romance fraud
The report includes threat definitions, how these threats relate to payments businesses, what states are at the highest risk for breaches, and what dollar amounts correspond to each crime type. This is one tool available to uncover, enumerate, and prioritize threats to the payment ecosystem. Do you have other system layers in place to help you start your investigations? If you don't know, it might be time for you to take a "ride along" with your detectives.
By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 30, 2018
Are You at Risk from Zombie Credit Cards?
Do you have any infrequently used credit cards hiding in the back of a drawer? Maybe a card you applied for to get a discount on a new washing machine? Or a card you used frequently a few years ago that has been superseded by a newer card with better rewards or a lower interest rate? You know, the kind of card you might think is dead but isn't quite.
I had a card like that in the back of a drawer, until my bank canceled it a few weeks ago. The bank pointed out that I hadn't used the card in years but offered me the opportunity to reactivate.
No, thanks. I don't need the extra exposure of a forgotten card that has long outlived its usefulness. It's enough trouble keeping track of the cards I do use.
When it comes to inactive credit cards, it turns out I'm not alone. The 2016 Federal Reserve Payments Study finds that, of general-purpose credit cards issued to consumers, 42 percent were not used to make at least one purchase a month during 2015. As a percentage share, this is about the same as 2012, when 44 percent of credit cards were not used at least once a month. ("General-purpose" cards use one of the four major credit card networks, while "private-label" cards can be used only at a particular merchant or limited set of merchants.)
In 2015, there were 192 million consumer general-purpose credit cards outstanding and inactive. That's about four inactive credit cards for every five adults in the United States. (The adult U.S. population in 2015 was 247 million.)
Of course, inactive cards are not necessarily abandoned cards, as mine was. Perhaps their owners reserve them for a special purpose, or keep them around for times when particular retailers offer discounts. Perhaps they are backups in case primary cards are compromised. Or perhaps they serve as an emergency credit cushion—a "just-in-case" line of credit.
Nevertheless, these account numbers are out there. Mine could be sitting in the database of a magazine that is automatically renewed every year or maybe attached to an expired membership at a website I don't use anymore. It's good to have that card canceled, to avoid the risk that the card will rack up charges, zombie-like.
So what about those infrequently used cards at your house? Are you holding on to an older card because a longer lifespan card could possibly improve your credit score? If not, today might be a good day to cancel and then cut them up.
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 23, 2018
Learning about Card-Not-Present Fraud Mitigation
Over the last year, I have had the pleasure of working with Fed colleagues and other payments industry experts on one of the Accredited Standards Committee's X9A Financial Industry Standards workgroups in writing a technical report on U.S. card-not-present (CNP) fraud mitigation. You can download the final report (at no cost) from the ANSI (American National Standards Institute) web store.
As this blog and other industry publications have been forecasting for years, the migration to payment cards containing EMV chips may already be resulting in a reduction of counterfeit card fraud and an increase in CNP fraud and other fraudulent activity. This has been the trend in other countries that have gone through the chip card migration, and there was no reason to believe that it would be any different in the United States. The purpose of the technical report was to identify the major types of CNP fraud and present guidelines for mitigating these fraud attacks to the various payments industry stakeholders.
After an initial section identifying the primary stakeholders that CNP fraud affects, the technical report reviews five major CNP transaction scenarios, complete with transaction flow diagrams. The report continues with a detailed section of terms, definitions, and initialisms and acronyms.
The best defense against CNP fraud from an industry standpoint is the protection of data from being breached in the first place. Section 5 of the report reviews the role that data security takes in CNP fraud mitigation. It contains references to other documents providing detailed data protection recommendations.
Criminals will gather personal and payment data in various attacks against those who don't use strong data protection practices, so the next sections deal with the heart of CNP fraud mitigation.
- Section 6 identifies the major types of CNP fraud attacks, both attacks that steal data and those that use that data to conduct fraudulent activities.
- Section 7 reviews mitigation tools and approaches to take against such attacks. The section is subdivided into perspectives of various stakeholders, including merchants, merchant acquirers and gateways, issuers and issuer processors, and, finally, payment card networks.
- Section 8 discusses how a stakeholder should identify key fraud performance metrics and then analyze, report, and track those metrics. While stakeholders will have different elements of metrics, they must each go to a sufficient level so the results will provide key insights and predictive indicators.
The report concludes with several annex sections (appendices) covering a variety of subjects related to CNP fraud. Suggestions for the improvement or revision of the technical report are welcome. Please send them to the X9 Committee Secretariat, Accredited Standards Committee X9 Inc., Financial Industry Standards, 275 West Street, Suite 107, Annapolis, MD 21401. I hope you will distribute this document among those in your institution involved with CNP fraud prevention, detection, and response to use as an educational or reference document. I think it will be quite useful.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 6, 2018
Attack of the Smart Refrigerator
We've all heard about refrigerators that automatically order groceries when they sense the current supply is running low or out. These smart refrigerators are what people usually point to when giving an example of an "internet-of-things" (IoT) device. Briefly, an IoT device is a physical device connected to the internet wirelessly that transmits data, sometimes without direct human interaction. I suspect most of you have at least one of these devices already operating in your home or office, whether it's a wireless router, baby monitor, or voice-activated assistant or "smart" lights, thermostats, security systems, or TVs.
Experts are forecasting that IoT device manufacturing will be one of the fastest growing industries over the next decade. Gartner estimates there were more than 8 billion connected IoT devices globally in 2017, with about $2 trillion going toward IoT endpoints and services. In 2020, the number of these devices will increase to more than 20 billion. But what security are manufacturers building into these devices to prevent monitoring or outside manipulation? What prevents someone from hacking into your security system and monitoring the patterns of your house or office or turning on your interior security cameras and invading your privacy? For those devices that can generate financial transactions, what authentication processes will ensure that transactions are legitimate? It's one kind of mistake to order an unneeded gallon of milk, but another one entirely to use that connection to access a home computer to monitor one's online banking transaction activity and capture log-on credentials.
As one would probably suspect, there is no simple or consistent answer to these security questions, but the overall track record of device security has not been a great one. There have been major DDOS attacks against websites using botnets composed of millions of IoT devices. Ransomware attacks have been made against consumers' home security systems and thermostats, forcing consumers to pay the extortionist to get their systems working again.
Some of the high-end devices such as the driverless cars and medical devices have been designed with security controls at the forefront, but most other manufacturers have given little thought to the criminal's ability to use a device to access and control other devices running on the same network. Adding to the problem is that many of these devices do not get software updates, including security patches.
With cybersecurity issues grabbing so many headlines, people are paying more and more attention to the role and impact of IoT devices. The National Institute of Standards and Technology (NIST) has begun efforts to develop security standards for cryptology that can operate within IoT devices. However, NIST estimates it will take two to four years to get the standard out.
In the meantime, the Department of Justice has some recommendations for securing IoT devices, including:
- Research your device to determine security features. Does it have a changeable password? Does the manufacturer deliver security updates?
- After you purchase a device and before you install it, download security updates and reset any default passwords.
- If automatic updates are not provided to registered users, check at least monthly to determine if there are updates and download only from reputable sites.
- Protect your routers and home Wi-Fi networks with firewalls, strong passwords, and security keys.
I see IoT device security as an issue that will continue to grow in importance. In a future post, I will discuss the privacy issues that IoT devices could create.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
- Encouraging Password Hygiene
- Should We Throw in the Towel When It Comes to Data Breach Prevention?
- Looking for Partners in Safer Payments
- The Range of Un-Friendly Fraud
- Payments Webinar October 10: Cash in the 21st Century
- "Insuring" Ransomware Will Continue to Flourish
- Designing Disclosures to Be Read
- Is There a Generation Gap in Cash Use?
- What the Most Convenient Food Tells Us about Payments
- Is Friction in Payments Always Bad?
- November 2019
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- account takeovers
- ATM fraud
- bank supervision
- banking regulations
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- credit cards
- cross-border wires
- data security
- debit cards
- emerging payments
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- identity theft
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- mobile banking
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- Payment Services Directive
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- payments innovation
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- phone fraud
- remotely created checks
- risk management
- Section 1073
- skills gap
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workforce development
- workplace fraud