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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.

Take On Payments

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.

Graph-one

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.

Graph-two

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.

Photo of Claire Greene By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

 

October 29, 2018 in cards, consumer fraud, debit cards, fraud, identity theft, mobile payments, online retail, payments study | Permalink

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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:

  • Nonpayment/Nondelivery
  • Personal data breach
  • Phishing

The top three crime types with the highest reported losses were:

  • Business email compromise
  • Confidence/Romance fraud
  • Nonpayment/Nondelivery

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.

Photo of Jessica Washington By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

August 6, 2018 in consumer fraud, consumer protection, cybercrime, cybersecurity, data security, fraud, identity theft, risk management | Permalink

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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.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

July 6, 2018 in consumer fraud, cybercrime, cybersecurity, fraud, identity theft, innovation, online banking fraud, privacy | Permalink

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May 14, 2018


Is My Identity Still Mine?

I'm sure you've seen the famous cartoon by Peter Steiner published in the New Yorker in 1993. That cartoon alluded to the anonymity of internet users. Twenty-five years later, do you think it's still true? Or is the cartoon by Kaamran Hafeez that appeared in the February 23, 2015, issue of the New Yorker more realistic? Is online anonymity a thing of the past?

Cartoon-image

Having just returned from three days at the Connect: ID conference in Washington, DC, my personal perspective is that numerous key elements of my identity are already shared with thousands of others—businesses, governmental agencies, friends, business colleagues, and, unfortunately, criminals—and the numbers are growing. Some of this information I have voluntarily provided through my posts on various social media sites, but hopefully is available only to "friends." Other bits of my personal life have been captured by various governmental agencies—my property tax and voter registration records, for example. The websites I visit on the internet are tracked by various companies to customize advertisements sent to me. Despite the adamant disavowals of the manufacturers of voice assistant devices, rumors persist that some of the devices used in homes do more than just listen for a mention of their "wake up" name. And, of course, there is the 800-pound gorilla to consider: the numerous data breaches that retailers, financial institutions, health care providers, credit reporting agencies, and governmental agencies have experienced over the last five years.

The conference exhibit hall was filled with almost a hundred vendors who concentrated on this identity security issue. There were hardware manufacturers selling biometric capture devices of fingers, palms, hands, eyes, and faces. Others focused on customer authentication by marrying validation of a government-issued document such as a driver's license to live facial recognition. Remote identification and authentication of end users is becoming more and more common with our virtual storefronts and businesses, but is also becoming more challenging as the fraudsters look for ways to defeat the technology or overall process in some way.

I have yet to have my identity stolen or compromised, but notice I said "yet," and I have probably just jinxed myself. Unfortunately, I believe my identity is no longer just mine and is out there for the taking despite my personal efforts to minimize the availability of personal information. Do you agree?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

May 14, 2018 in cybercrime, data security, fraud, identity theft, privacy | Permalink

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January 22, 2018


Business Email Compromise Is a Growing Threat

In April 2016, I wrote about the work of the FBI’s Internet Crime Center (IC3) and the rise of reported cases of business email compromise (BEC) attempts. BEC involves what looks like a legitimate email from another employee or customer requesting a transfer of funds. Since I wrote that post, BEC attempts—both successful and prevented—have continued to increase dramatically. The latest figures from the IC3 website show that from January 2016 through June 2017, BEC attempts totaled $223 million, with losses at $148 million. BEC scams are also attracting a wider variety of criminals, including individuals, small gangs, and professional groups.

At first, the fraudsters primarily targeted financial institutions and businesses dealing in frequent and large-value transfers, such as law firms handling real estate or trust account transactions. But as fraudsters have proliferated, they've begun targeting companies of all sizes. Last May, the FBI issued another BEC alert, which includes useful descriptions of BEC scenarios based on actual cases.

The BEC attempt is usually not the start of the criminal activity but rather the culmination of an extended effort that began with the criminal hacking a business's financial records. The hack may have occurred when an employee opened an email with a bogus attachment or link that loaded malware on the computer, or when the criminal purchased a user's credentials off the dark web. Once the fraudster has accomplished the intrusion, a period of information gathering begins. The fraudster obtains current accounts payable records, wire transfer transactions, and transfer procedures, and may also comb social media for information that could be useful. Perhaps a targeted company official will be out of town attending a conference, or on vacation and difficult to contact.

BEC attempts generally have the following common elements:

  • It is a funds transfer request.
  • The request is based on a routine event or legitimate transaction.
  • The bank account where the transfer is to be sent is new or has been modified in some way from previous transactions, or the requested method of payment is different.
  • The request often carries a sense of urgency—late fees or breach of a contract are threatened—to encourage bypassing of controls.

To avoid falling into this trap, it is imperative that businesses have strong funds transfer controls that are monitored to ensure compliance. Also, businesses should have a continuing program of internal education (and perhaps testing) for all employees involved in funds transfer requests. The FBI suggests that the best control is to verify transactions through a second, independent means, similar to two-factor authentication.

There are several actions a business can take if it becomes a victim of BEC:

  • Immediately contact the receiving financial institution to see if the funds can be frozen.
  • Notify all relevant employees of the attack—multiple employees are often targeted.
  • Contact the FBI or the Secret Service.
  • Conduct an internal investigation to determine the point of compromise, and then take the necessary corrective action.

Finally, financial institutions with customer education programs should consider providing business customers with materials regarding this threat.

We are interested in hearing from you about your experiences with BEC and preventive practices. Criminals are constantly changing their attack methods and sharing information is a valuable way to help develop best practices.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

January 22, 2018 in banks and banking, data security, fraud, malware | Permalink

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January 16, 2018


Not Just a Card-Not-Present Problem

In 2012, I published a paper that looked at trends in card fraud in several countries that had adopted or were in the later stages of adopting EMV chip cards. The United States is now in the process of adopting EMV, so I am refreshing that paper with an eye towards fraud trends in what are now mature EMV markets. Payments experts know that card-not-present (CNP) fraud will continue to pose challenges that EMV chip cards do not solve, but are there other challenges lurking in these markets that the U.S. payments industry should note?

Although I'm still gathering data, one particular data point from the United Kingdom—lost and stolen fraud—already has me intrigued. In 2016, losses from this type of fraud stood at more than £96 million (about $130 million), up from more than £44 million (about $60 million) in 2010, a 117 percent increase. In 2010, lost and stolen fraud accounted for 12 percent of overall card fraud in that country. By the end of 2016, it had become 16 percent of card fraud. It is now the second leading type of fraud in the United Kingdom, though it still falls far behind CNP fraud, which accounts for 70 percent.

Remember that in the United Kingdom, PIN usage was adopted to mitigate lost and stolen card fraud at the same time that EMV chip cards were implemented. Yet lost and stolen card fraud is up significantly. According to Financial Fraud Action UK, fraudsters are getting their hands on the PINs—a static data element—through distraction tactics and scams. Other factors, such as the proliferation of contactless transactions and those that have no cardholder verification method, could also be drivers of this fraud, as could an increase of reports of lost or stolen fraud that is actually first-party, or "friendly," fraud. EMV has proven to be an effective tool to authenticate cards, but authenticating an individual using a card, even in a card-present environment, remains a challenge.

The lost and stolen fraud figures out of the United Kingdom lead me to believe that cardholder authentication isn't just a CNP problem. Furthermore, the decades-old PIN solution for the card-present environment is now showing signs of weakness. At the same time, to reduce customer friction, many card networks are eliminating signature verification and relying on data analytics to authenticate transactions. Is this a perfect storm for lost and stolen card fraud? Is it the foreshadowing of the emergence of biometrics, or some lesser known technology? Or will I find that this problem is isolated and should not worry us in the United States?

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

January 16, 2018 in authentication, cards, chip-and-pin, debit cards, EMV, fraud, payments | Permalink

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June 19, 2017


Calculating Fraud: Part 2

Part 1 of this two-part series outlined an approach for whittling down credit card transactions to the value or number of authorized and settled payments as the denominator for calculating a fraud rate. This post reviews the elements needed to quantify the numerator.

To summarize from the previous post, when analyzing credit card fraud rates, you should consider what is being measured and compared. To calculate a fraud rate based on value or number, you need a fraud tally in the numerator and a comparison payment tally in the denominator. The formula works out as follows:

Fraud Rate = Numerator
                      Denominator

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.

Before calculating the numerator value, you must first decide what types of fraud to include in the measurement. One stratification method divides fraud into the following two categories:

  • First-party payments fraud results when a dishonest but seemingly legitimate consumer exploits a merchant or financial institution (FI). That is, the legitimate cardholder authorizes a credit card transaction as part of a scam. One manifestation of this is "friendly fraud," whereby a consumer purchases items online and then falsely claims not to receive the merchandise.
  • Third-party payments fraud occurs when a legitimate cardholder does not authorize goods or services purchased with his or her credit card. Besides the victimized cardholder, the other two parties to the transaction are the fraudster and the unsuspecting merchant or FI.

Sometimes no clear delineation between first-party and third-party fraud exists. For example, a valid cardholder may authorize a payment in collusion with a merchant to commit fraud.

The 2016 Federal Reserve Payments Study used only third-party unauthorized transactions that were cleared and settled in tabulating fraud. The study measured and counted fraud as having occurred regardless of whether a subsequent recovery or chargeback occurred. Survey results had to be adjusted because some card networks report gross fraud while others report net fraud, after recoveries and chargebacks. Furthermore, the study made no effort to determine which party, if any, in the payment chain may ultimately bear the loss. Finally, the study did not measure attempted fraud.

Excluding first-party payments fraud
The study excluded first-party fraud due to the greater ambiguity around identifying and measuring it along with the idea that it is difficult to eliminate, given that controls are relatively limited. One control option would be to place repeat offenders on a negative list that, unfortunately, might not be shared with other parties. As a result of excluding first-party fraud, the study focused on fraud specific to the characteristics of the payment instrument being used.

Paraphrasing from page 30 of the 2013 Federal Reserve Payments Study, first-party fraud, while important, is an account-relationship type of fraud and typically would not be included as unauthorized third-party payments fraud because the card or account holder is by definition authorized to make payments. Consequently, first-party fraud can occur no matter how secure the payment method.

As with tallying payments, you could follow a similar process for tallying fraudulent payments for other types of cards payments, with more questionnaire definitions and wording changes needed for other instruments such as ACH and checks.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

June 19, 2017 in ACH, cards, checks, debit cards, fraud | Permalink

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June 12, 2017


Watching Your Behavior

Customer authentication has been at the core of the Retail Payments Risk Forum's payments risk education efforts from the beginning. We've stressed not only that there are legal and regulatory requirements for certain parties to "know your customer," but also that it is in the best interest of merchants and issuers to be sure that the party on the other end of a given transaction is who he or she claims to be and is authorized to perform that transaction. After all, if you allow a fraudster in, you have to expect that you or someone else will be defrauded. That said, we also know that performing this authentication, especially remotely, has several challenges.

The recently released 2017 Identity Fraud Study from Javelin Strategy & Research estimated that account takeover (ATO) fraud losses in 2016 amounted to $2.3 billion—a 61 percent increase over 2015's losses. (ATO fraud occurs when an unauthorized individual performs fraudulent transactions through a victim's account.) Additionally, new-account fraud on deposit and credit accounts has increased significantly and generated several public warnings from the FBI.

In payments, the balancing act between imposing additional customer authentication requirements and maintaining a positive, low-friction customer experience has always been a challenge. Retailers, especially online merchants, have been reluctant to add authentication modalities in their checkout process for fear that customers will abandon their shopping carts and move their purchase to another merchant with lower security requirements. Some merchants have recently introduced physical biometrics modalities such as fingerprint or facial recognition for online orders through mobile phones. Although these modalities have gained a high acceptance rate, they still require the consumer to actively participate in the authentication process.

Enter behavioral biometrics for online transactions. Behavioral biometrics develops a pattern of a user's unique, identifiable attributes from when the user is online at a merchant's website or using the merchant's proprietary mobile app. Attributes measured include such elements as typing speed, pressure on the keyboard, use of keyboard shortcuts, mouse movement, phone orientation, and screen navigation. Coupled with device fingerprinting for the customer's desktop, laptop, tablet, or mobile phone, behavioral biometrics gives the merchant and issuer a higher level of confidence in the customer's authenticity. Another benefit is that behavioral biometrics is passive—it is performed without the user's involvement, which eliminates additional friction in the overall customer experience. Proponents claim that while it takes several sessions to develop a strong user profile, they can often spot fraudsters' attempts because fraudsters often exhibit certain recognizable traits.

Behavioral biometrics is still fairly new to the market but over the last couple of years, some major online retailers have adopted it as an additional authentication tool. Like any of the physical biometric modalities, no single behavioral authentication methodology is a silver bullet, and multi-factor authentication is still recommended for moderate- and higher-risk transactions.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 12, 2017 in authentication, banks and banking, consumer fraud, fraud, mobile banking, payments | Permalink

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May 22, 2017


The Year(s) of Ransomware

I remember, as a child, despising the neighborhood kid who would always say, "I told you so." Well, let's move ahead some 30-odd years to the WannaCry ransomware attack—I now feel like that despised child. You see, on March 29 of this year, I emailed the following note to my colleagues in the Risk Forum:

Just a few high-level and interesting notes from the conference.… 2017 & 2018 will be the Year of Ransomware (I can elaborate on this when we are all together—pretty fascinating business models developed here).

Too bad I kept my thoughts to our little group here at the Atlanta Fed and didn't get the message out to the masses (or at least to our Take on Payments readers) prior to the WannaCry ransomware attack that began on May 12. So why did I (and still do) think 2017 and 2018 will both be the "Year of Ransomware"?

Those who know me know that I am not a very technical person. I see things more strategically than technically and usually sprint away from conversations that become technical. After viewing a demonstration on how to launch a ransomware attack, I was shocked to learn that hardly any technical expertise is required to pull off an attack. This is all made possible by the "pretty fascinating business models" that I referred to in my note, business models known as Ransomware as a Service (RaaS).

I'd always envisioned that serious technical code writing capabilities would be a requirement for developing the code to send the malicious files involved in ransomware. And while coding is needed, that is where the RaaS comes into play. You pay someone else to create the malicious code, which you then use to launch a ransomware attack. And to make the attack even more successful, there are simple tools available that allow you to not only test the code against the market-leading antivirus software detection programs but also to tweak the code embedded in the malicious file to ensure that none of the antivirus software programs will detect it. Antivirus software protects users only from known malicious code, which is the reason the software must be constantly updated.

With the undetectable code in hand, you can now launch a ransomware attack through either an embedded file or a link within a phishing email or social media post to a legitimate-appearing, but malicious, website. And this costs little or nothing up front! The cost for the RaaS is only realized once a successful attack occurs, with a portion of the collected ransom paid to the RaaS provider.

Which brings me back to why I think ransomware attacks will continue to escalate, leading to 2017 and 2018 becoming "The Year(s) of Ransomware." They are simple to execute, low cost, and proving to be highly lucrative. (According to the FBI, an estimated $209 million was paid in ransom in the first quarter of 2016.) Expect a future blog post on how to plan for and defend against attacks.

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

May 22, 2017 in fraud, malware | Permalink

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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
                     Denominator

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.

Chart-one2

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.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

May 8, 2017 in ACH, checks, debit cards, fraud | Permalink

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