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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February 22, 2021
New Year, New Fraud
Over the last few years, we've discussed friendly fraud in a number of Take On Payments posts. Friendly fraud occurs when an authorized payment cardholder, or someone they know, purchases goods or services and then disputes the transaction through the chargeback process to have the payment to the merchant canceled. From the merchants' perspective, there is nothing "friendly" about this, so they often refer to it as "chargeback" fraud. The actual losses from friendly fraud are difficult to measure, but it's estimated to cost merchants nearly 2 percent of their annual revenue.
With the surge in ecommerce transactions resulting from changing payment habits caused by the COVID-19 pandemic, we assume that friendly fraud—as well as other types of online payment fraud, including the emerging "refund fraud"—has significantly increased. Refund fraud is similar to friendly fraud in that a legitimate cardholder completes a transaction using legitimate credentials. However, in this refund fraud, the cardholder makes the transaction fully intending to use the merchant's refund policies, rather than file a chargeback, to be reimbursed or to receive an additional product. This also differs from refund abuse, where the cardholder purchases and uses a product—often clothing or tools—and then returns it.
Refund fraud by individual cardholders has existed for decades, but more recently a network of professional refund fraudsters has emerged. Using the Dark Web and other nefarious communications forums, professional refund fraudsters seek accomplices and share tips with each other on how to manipulate a merchant's refund policies and customer service representatives. They recruit willing cardholder accomplices with the promise that in exchange for a fee, the cardholder can make large-dollar purchases, get refunded for these purchases, and still keep them. To earn the fee, the fraudster contacts the merchant's customer service personnel and, using their knowledge of the merchant's refund policies while impersonating the cardholder, demands a refund. The fraudster claims that the product never arrived or was damaged, or insists they returned the defective product. The cardholder often pays the fraudster's fee with cryptocurrency.
Like chargeback fraud, refund fraud is difficult to detect since a legitimate cardholder initiates it and generally targets a merchant only once to avoid establishing a pattern of refund requests with the merchant. CardNotPresent.com recently produced an educational webinar on this type of fraud detailing the processes that fraudsters use and discussing how merchants can improve their defenses. The involvement of the organized criminal element is further evidence that merchants and card issuers must always be vigilant.
February 16, 2021
Federal Reserve Payments Study Finds Increase in Low-Dollar-Value Card Payments
In a February 2020 post, I reminded myself—and you—that we shouldn't use ourselves for survey research. Isn't it pleasing, though, when the data line up with our personal experience and the anecdotes we are reading and hearing about?
That's the case with some of the data from the Federal Reserve Payments Study (FRPS) released in late October.
The study found that the number of general-purpose card payments for less than $5 grew 16 percent a year from 2015 to 2018, exceeding the 9 percent annual growth rate for all transactions on these cards, which include nonprepaid debit cards, general-purpose prepaid cards, and general-purpose credit cards. This higher growth is, in part, an indication of a continuation of cards replacing small-value cash payments over the period.
The chart below depicts data gathered from general-purpose card networks, showing that from 2012 to 2018, the growth in the number of card payments of less than $15—a category likely to see a lot of cash replacement—was faster than the growth of card payments of higher values.
Although the increase is less pronounced than for the smallest-value category, I chose "less than $15" for the comparison to align with research by Atlanta Fed senior policy adviser and economist Oz Shy who, using consumer payments survey data, has found it is likely consumers will choose cash for such small-value payments. (See his paper "How Currency Denomination and the ATM Affect the Way We Pay.") The data from the FRPS show that general-purpose card payments of less than $15 grew a total of 83 percent over the period compared with a total growth of just 46 percent for higher-value payments. (If you like, you can download the detailed data from the FRPS and arrange the value bins as you prefer.)
These data show what we know from personal experience: we are using cards more and more for micropurchases and have been for a while now. But we can also see the effect of this behavior at the high end of the dollar-value distribution: in 2018, 30 percent of general-purpose card payments were for $50 or more. That's a drop from 35 percent in 2012. Micropayments for less than $5 still have a ways to go, though: they make up just about 12 percent of card payments by number.
To learn more about these data on your own, check out the detailed data release of the 2019 Federal Reserve Payments Study.
February 8, 2021
An Update on Business Credit Card Use
From 2015 to 2018, payments made by businesses using general-purpose credit cards grew almost 25 percent by value year over year, according to the Federal Reserve Payments Study (FRPS). What drove such strong growth? An increase in the number of U.S. businesses over that time? An increase in corporate travel? The convenience and familiarity of using a card? What about businesses waking up to a way to reduce the costs of products and services, through loyalty programs allowing them to earn points or cash back dollars?
It's common to associate business credit cards with travel to visit a customer or to attend a convention. And smaller businesses may use cards in lieu of a traditional line of credit to buy goods and services and then pay over time. Credit cards also are a way to “make accounts payable a revenue producer,” one expert recently commented to me. A retailer I spoke with estimates that its annual rebate due to sharing interchange fees with its card issuer is well into six figures—in effect, a vendor discount you can't get directly from the vendor.
By value, from 2015 to 2018, payments made by businesses via general-purpose credit cards grew faster than consumer credit card payments, as reported in the detailed data release of the Federal Reserve Payments Study last fall. Let's take a minute to dive deeper into businesses' credit card paying trends. (Private-label fleet cards and prepaid and nonprepaid debit cards are outside the scope of this discussion.)
As you can see in Figure 1, businesses' total value of credit card payments was less than consumers' in all three years. In 2018, for example, just one-third of the value of general-purpose credit card payments was for business payments. This reflects the underlying numbers: in 2018, the U.S. population 18 and older was about 250 million, compared to about 32 million nonemployer and employer businesses. Consumers held 408 million general-purpose credit cards; businesses, 38 million, according to the FRPS.
General-purpose consumer credit card payments also grew strongly by value in the years between 2015 and 2018 and on a higher base: by 7.4 percent year over year. In absolute terms, however, the increases in consumer and business credit payments by value over the three years were very roughly the same: $500 billion for consumers and $600 billion for businesses, reflecting, in part, the higher-value payments that businesses make. The average value of a business credit card payment was $263 in 2018, compared to $70 for consumer credit card payments.
Businesses make most of their card payments with credit cards. They make relatively few payments with non-prepaid debit cards. Of general-purpose business card payments by value, 83 percent are credit card payments.
Looking at the number of general-purpose credit card payments (shown in Figure 2), we see less dramatic growth for business credit card payments on a small base. The number of general-purpose credit card payments by businesses grew 13.2 percent per year on average from 2015 to 2018, after declining between 2012 and 2015. To learn more about these data on your own and to explore businesses' and consumers' use of cards, check out the detailed data release of the 2019 Federal Reserve Payments Study.
February 1, 2021
How Have Our Own Payment Habits Changed?
During our December webinar, Nancy Donahue, Jessica Washington, and I spent a good portion of the time discussing how the COVID-19 environment has changed how consumers shop and pay. In September, I reached out to my fellow Risk Forum colleagues and asked them if they had experienced or noticed any changes in their own shopping and payment habits during this year of the panedmic. While this was far from a scientific survey or sample, I found my colleagues' responses interesting and want to share with you how their payment and shopping practices evolved during the past year.
S: Shopping every weekend was a pastime for me and my best friend and has been for years. Since COVID, we have not set foot into a mall, which consequently cut my spending to $0. I have purchased a few necessary items online such as gifts or medications but have focused solely on paying off debt and saving during this time. Haircuts and styling have also been excluded—those usually occurred every 6 weeks and were my only cash transactions.
C: Grocery shopping has switched to completely online. I used to go to the pet store to buy dog food and treats but once the pandemic started, I switched to a subscription service, where they automatically deliver the food to the house every two months. I used to never buy clothes or shoes online because I wanted to try them on first. I've made some clothing purchases online over the last few months and so far, they've all worked out great. I may never step foot in a shopping mall again even after the pandemic ends! I have been tipping much more at salons and restaurants (with my card because I never have cash on me).
N: I have quit using cash completely and was previously a heavy cash user for daily purchases. I haven't had any folding money for six months. This change in behavior was not the result of COVID concerns per se, but more a lack of need for pocket change when my movements are largely confined between the bedroom, home office, and kitchen. Online shopping has increased exponentially to include groceries and restaurant takeout and all other home goods.
J: A dramatic reduction in gas expenses and card use owing to it. We previously went out to eat only occasionally, but now look for excuses or opportunities to do so. These opportunities aren't numerous as many of our favorite restaurants have limited to no capacity for dine in. We tip heavily when we do eat out, always with folding money.
M: I am shopping less for all categories except food. Grocery and carryout spending have increased. My tipping for restaurant carryout has increased. I try to keep a stash of $5 and $10 bills for the tipping. Prior to COVID, tips were usually included on the card charge.
D: Less frequent in-person grocery store visits and increased online ordering. Also, generous tips to food service personnel at our favorite restaurants where we are doing takeaways.
C: I stopped taking mass transit, so I have been tapping to pay less often. Instead of ordering in person and paying via mobile app (QR scan) at my favorite coffee shop, I have been preordering and tipping in the app. My grocery shopping habits are unchanged as I had been buying groceries online for the past five years.
D: I have been using contactless payments with the digital wallet on my phone substantially more often and am using it wherever it's offered. I have also started to use online shopping and delivery for groceries, although I still find myself making multiple trips to the grocery store each week.
It's pretty obvious that the Risk Forum members are behaving like many of the rest of U.S. consumers, with a major shift from in-person to remote shopping . One area where this is especially true is in grocery shopping. Just as many of us have shifted to (or maintained, for the early adopter among us) buying groceries online, this has been a significant shift for many American households. One survey found that as of June, over one-third of U.S. households had used online ordering to buy some of their groceries. I also love the human touch that my colleagues have shown during this time through actively increasing their tipping to the service individuals who are serving them.