Credit cards and signature debit cards are the payment methods most susceptible to fraud, the Federal Reserve said Thursday, with bogus transactions sharply higher than the fraud rate for PIN debit, ATMs, checks and electronic checks.
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Among the fraud-prone cards, the risk was highest for online transactions, which had about triple the fraud rate of "card-present" sales at the cash register.
The Fed's triennial report on payments released Thursday included a look at unauthorized transactions for the first time. It counted 31.1 million estimated bogus transactions totaling $6.1 billion in 2012 across all noncash payments studied -- which include checks, electronic checks and ATM use as well as purchase cards.
For general purpose credit cards, there were 3.72 bogus uses per 10,000 "card-present" transactions. Online, the number of fraudulent uses swelled to 11.82 per 10,000 sales.
Transactions by PIN debit and ATM card -- assumed by the study to be all card-present transactions -- had the lowest fraud rates of all card transactions, with slightly less than one incidence per 10,000 transactions.
The figures, coming on the same day that Target announced a massive theft of card data, reinforced the need to monitor accounts for suspicious online transactions. At the same time, it showed that overall fraud rates are relatively low, as measured by the fraud that was spotted and identified by victims. By dollar value, only $1 in $1,000 worth of credit card transactions was unauthorized, including attempted fraud that didn't result in losses.
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Checks and electronic checks had fraud rates below 1 per 10,000 transactions. Risk controls that businesses have set up around check and electronic check payments -- such as online bill pay -- "may have helped avoid losses with these payment types," the Fed report said. Besides, many checks and e-checks "involved regular payments, such as mortgage, insurance, utility and payroll payments, where fraud risk was minimal."
While the fraud protections offered by payment networks are similar for credit and debit cards, the impact of a bogus charge can be different, said Dennis Simmons, president of the Southwestern Automated Clearing House Association, a payment processors' group.
"If a large transaction hits your checking account, you have a more immediate hit," he said. The missing money can throw a wrench into your budget right away and take time to clear up. With a credit card, you have the period before the monthly payment is due to remove bogus charges.
Simmons recommends setting up alerts for online transactions, even relatively small amounts, to spot online fraud. He has done so himself and gets a text message whenever there's an online transaction in his checking account, he said.
The Fed also looked at usage rates for various payment types. Of non-cash payment methods, general-purpose debit cards continued to lead the pack, with 47 billion transactions in 2012 compared to 23.8 billion for credit cards. By value, however, credit cards had the edge, with $2.2 trillion in charges, versus $1.8 trillion on debit cards.
The fastest-growing card payment over the three-year period was prepaid cards, the Fed report said. Looking at both general-purpose and private label cards, prepaid had 9.2 billion transactions in 2012, up from 5.9 billion in 2009.
In the wake of the Durbin Amendment's cap on debit card interchange fees, banks are raising costs for checking accounts, driving some people to prepaid cards instead, said Madeline Aufseeser, an analyst at Aite Group.
"The Durbin amendment was a trigger event for the industry," she said. "Because of the lost revenue on debit, they increased the cost of checking through fees, or a higher minimum balance -- hence, consumers are opting out of checking." At the same time, prepaid cards were becoming a mass market product, she added.
In terms of dollar value, checks and electronic checks -- the preferred way for businesses to move money around -- remain by far the largest payment methods, with $74 trillion of the total $79 trillion in total noncash payments, the Fed study found. The report, the 2013 Federal Reserve Payments Study is based on three surveys of banks and payment processors in 2013.
See previous story: Debit card payments surpass checks, credit cards