Fraud in the Payment Industry

Fraud attacks targeting financial institutions are at an all-time high. Total global payment-card fraud losses amounted to $14 billion in 2013, up 19% from the prior year, with the United States accounting for 51% of it.

Fraud is a growing, constantly evolving problem for the payments industry, and the fleeing of customers towards mobile payment solutions has generated a new wave of attacks from fraudsters. As always, as new payment technologies are introduced and new security techniques are implemented, criminals look for weak points to exploit in the newly established system.

Last year was no different. 2014 was very difficult for merchants. Several massive data breaches flooded the black market with forged cards. Combined with the whole market’s venture into the mobile payment and alternative financial services, 2014 left the merchants with a 0,68% average loss of revenue. Costs incurred were also on the rise, with each dollar of fraud costing merchants $3.08, compared to $2.79 last year.

Although online merchants are recovering well from the recession, mostly because of a $30 billion increase in online spending, the biggest US players are still hurt by rising fraud losses and associated costs. International merchants, however, have escaped the worst consequences as fraud costs have remained mostly stable this year. Nevertheless, fraud loss as a percentage of revenue has nearly doubled for this segment.

Fraudulent activities affect every link in the chain: the cardholder, the bank and the merchant. Nevertheless, cardholders are the most protected and least impacted party. They have no liability on fraudulent credit card purchases and only limited liability on malicious debit card transactions, if the contact with authorities is established in time.

Furthermore, EMV protects users at the POS with a highly secure “chip-and-PIN” authentication, but the physical card must be present for this technology to be applied. The trend of skimming and in-store card fraud is on the decline. However, consumer trends tend to change. The growth of card-not-present (CNP) transactions online has brought the industry into the unknown once again, and as a result global fraud losses are once again on the rise.

The reason behind this course is clear: the whole world is going mobile, and mobile payments clearly follow this trend with more than $431 billion in transactions by the end of the year. Mobile represents both a great opportunity and a great risk. Much like organizations, fraudsters see the mobile channel as carrying great potential. Still, less than one third of merchants track this type of fraud although all the big players in the field are increasingly doing so.

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