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Squeezing the Fraud Balloon
A number of our posts over the last year have discussed the U.S. migration to EMV (chip) cards. As we've mentioned, one of the primary motivations for the migration has been the ease with which fraudsters in our magnetic-stripe environment can create counterfeit payment cards. Other posts have mentioned that ubiquitous tenant of the criminal world—the person always on the lookout for the weakest link or the easiest target. And that criminal does not close up shop and go away in the chip-card world. There is clear evidence from other countries that criminals, after an EMV migration, look for, and find, other targets of opportunity—just as when you squeeze a balloon, you're constricting the middle, but both ends simultaneously expand.
One major area that criminals target post-EMV is online commerce, an activity referred to as card-not-present (CNP) fraud. However, criminals also target two other areas, according to speakers at the recent 2015 BAI Payments Connect conference: checks and account applications. Well before the EMV card liability shift occurs in the United States (October 1, 2015), a number of financial institutions have reported a marked increase in counterfeit checks and duplicate-item fraud, usually by way of the mobile deposit capture service. In many cases, the fraud takes place on accounts that have been open for more than six months, long enough to allow the criminal to have established an apparent pattern of "normalcy," although there are reports of newly opened accounts being used as well.
Canadian financial institutions report that fraudulent applications for credit and checking accounts have increased as much as 300 percent since that country's EMV liability shift. Criminals are opening checking accounts to perpetrate overall identity theft fraud as well as to create conduits for future counterfeit check or kiting fraud. And they're submitting fraudulent credit applications to purchase automobiles or other merchandise that they can then sell easily.
The time to examine and improve your fraud detection capabilities across all the channels customers use is now. Financial institutions should already be evaluating their check acceptance processes and account activity parameters to spot problem accounts early. Likewise, financial institutions should make sure their KYC, or know-your-customer, processes and tools are adequate to handle the additional threat that the credit and account application channel may experience. Be proactive to prevent the fraud in the first place while ensuring you have the proper detection capabilities to react quickly to potential fraudulent attempts. If we want to constrict the balloon of fraud, we're going to have to constrict the whole thing with consistent, equal pressure.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed