Over Half of FI Fraud Losses A Result of Counterfeit Fraud
Heading into the October 2015 EMV liability shift, counterfeit fraud accounted for over half of fraud losses for both credit and debit portfolios. While counterfeit fraud is beginning to be addressed through EMV, FIs will continue to face risks from other sources of card fraud—which are expected to grow as counterfeit fraud rates decline.
In First Annapolis’s most recent Card Fraud Study, published in the February 2016 Navigator, participants reported average fraud losses of 13.1 bps on credit and 7.7 bps on signature debit in the first half of 2015. Recovery rates vary significantly depending on the type of fraud, however, as evidenced by the difference in fraud mix between gross losses and net losses:
- Counterfeit fraud accounts for 47% of issuers’ gross credit fraud, and 50% of gross debit fraud—however, it accounts for 66% of net fraud losses on credit and 51% of net fraud losses on debit.
- Card not present fraud accounts for 39% of issuers’ gross fraud on credit, and 37% of gross fraud on debit—but only 15% and 22% of net fraud losses, respectively.
- Lost/Stolen, account takeover, and other categories account for 13% of gross fraud for both credit and debit, but 18% and 26% of net fraud losses.
Figure 1: 1H 2015 Gross and Net Fraud by Dollar Volume
Surveyed FIs experienced, on average, recovery rates of 46% and 44% on their credit and signature debit portfolios, respectively. These low recovery rates (and resulting net losses), coupled with the potential for a brief period of relief resulting from the liability shift, have driven financial institutions of all sizes to accelerate EMV implementation.
While counterfeit fraud is being addressed through the rollout of EMV, FIs have few solutions to specifically target card not present and other remaining sources of fraud. The industry has been working to improve tools available for card not present transactions, such as network 3-D Secure tools and tokenization, as well as more sophisticated ID verification tools to address account takeover. While new tools and solutions have been developed, a silver bullet has not yet emerged; we expect this to be the next area of focus for the industry.
Until then, an efficient fraud management operation remains the first line of defense against fraudulent card activity. New tools introduced to the market may help support a well-run fraud operation, but it is important for FIs to focus on executing the basics of fraud monitoring and detection well. First Annapolis has assisted several financial institutions in assessing organizational structures, policies, processes, tools, and technology of fraud and claims operations in order to minimize losses and risk while maximizing revenue across all card portfolios.
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First Annapolis completed its 2015 Card Fraud Study in December 2015. Using data from a sample of local, regional, and national financial institutions, the study examined gross fraud, fraud losses, and various fraud metrics from 2014 and the first half of 2015. The lag in reporting is a result of the delay between the time of the fraudulent transaction and the realization of losses. Five credit card portfolios and ten debit card portfolios were used in the study, with a total of ten financial institutions participating; debit and credit portfolios ranged in size from $500 million to $15 billion in total volume.
For more information, please contact Casey Merolla, Senior Manager, email@example.com, specializing in Payments Strategy and Innovation.
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