Credit cards, debit cards and payments fraud
In its report "Payments Fraud: Consumer Considerations," the Federal Reserve Bank of Kansas City examines the ways credit card and debit card payments are both susceptible to, and helpful in preventing, payments fraud. The Fed notes an increase in payments fraud, which it defines as "the use of a payment mechanism by someone other than the individual(s) authorized to use it."
In the document, the Fed notes that fraud is generally conducted through "low tech" methods, such the loss of a wallet or purse, versus more sophisticated fraud such as phishing. However, credit card and debit card users can take a number of steps to prevent themselves from becoming the victim of payments fraud.
According to Javelin Strategy & Research data cited by the Fed, a relatively large number of fraud victims personally knew the person who ripped them off, with the fraudster often being a friend, relative or in-home employee. This fact strengthens the need for consumers to protect information not just during a transaction, but also in their home.
The Fed recommend that the preventive steps consumers need to take with payment methods to battle fraud should take into account both the sources of fraud and "the ease of resolution based on the payment type."
Fraud is typically detected in one of two ways -- through the fconsumer's notification by another party or the consumer's own discovery of the fraud through some due diligence of their own. Outside detection examples include notification by such companies as a bank or credit card issuer, a debt collector or creditor or when the consumer is rejected for credit.
Meanwhile, examples of self detection include when consumers contact a business they had an account with, by monitoring their accounts through the Internet or ATM, by looking over a credit report or by reviewing their accounts via paper statements.
Javelin data suggests that almost half of all identity fraud is detected by the consumer. Therefore, credit card and debit card users should work to protect themselves from fraud as well as to detect possible fraudulent activity.
Credit card payments are one of the safest options for consumers when it comes to issues of fraud. Unlike payment methods such as personal checks, the physical credit card's surface contains little more personal information than the cardholder's name, which on its own is an unlikely source of new account fraud. Also, unlike checks that pass through a number of hands in order to complete the payment clearing process, a credit card generally remains in the consumer's physical possession.
Should credit card fraud take place, the cardholder is protected by zero liability policies that lessen the damage.
Still, credit card fraud remains a major issue for consumers, and at the very least a hassle. The Fed urges credit card users to be on the lookout for skimming, which can take place when a credit card is swiped and the magnetic stripe information is gathered, allowing thieves to copy the card in order to carry out fraudulent transactions. Skimming is of particular concern in restaurants, where the credit card often leaves the consumer's watch for some time.
Additionally, the Fed cautions cardholders to be wary of the main source of existing card fraud, which comes in the form of the credit card's physical theft. The theft of the physical credit card can happen when a purse or wallet is lost or stolen, or taken out of the mail.
Finally, the Fed notes that credit card fraud can begin with online payments. Although little threat exists that the credit card's information will be stolen online, the danger exists that a fraudster will trick the consumer into supplying account and other personal information, such as their Social Security number or passwords.
But there are a number of steps consumers can take to minimize the threat to their credit cards. First, the Fed urges consumers to maintain control of their credit cards at all times. Additionally, cardholders should avoid receiving paper statements which can offer thieves the opportunity to steal information from the mail. Separately, cardholders should monitor their accounts, preferably online, since credit card fraud is often detected by cardholders themselves and frequent monitoring can result in earlier detection of possible fraud.
Furthermore, consumers should keep a list of phone numbers to dial credit card issuers in case of a lost credit card or suspected fraud. And, finally, the Fed recommends that consumers only use their credit card with online merchants they trust, never providing credit card information via e-mail or entering credit card into a website they do not trust. Credit card users should look for a lock icon or an address that begins "https" to ensure the website is secure.
Like credit card payments, debit cards offer consumers speed and convenience. However, like checks and automated clearinghouse (ACH) payments, debit card payments access consumers' checking accounts.
For many consumers, the ability to manage their funds more closely and spend only available funds makes debit card payments preferable to credit card transactions. The possibility for debit card fraud is similar to that of payment by paper checks and ACH (wherein consumers provide a third party with their bank routing transit number and checking or savings account number), although many card issuers now offer debit card users the same zero liability protections provided for credit card transactions.
With debit card transactions, consumers have the choice to authorize payments using either their signature or by entering a PIN. The discovery of recent well-publicized PIN-debit fraud schemes have challenged earlier thought that PIN debit was the more secure method, since it involves authentication.
The Fed explains that consumers should take similar action to prevent debit card fraud as they would with a credit card. In addition, consumers need to take steps to guard their PINs when using a debit card. First, consumers should be on guard against thieves trying to get a look at their PIN, as well as snooping by cameras, so that the debit card's PIN is not seen by others. Also, the Fed recommend that the PIN never be written on the debit card, carried with the debit card, or kept in an unprotected location.
Separately, the Fed warns that in addition to fraud on existing accounts, thieves who get ahold of consumers' personal information can open new credit accounts in the consumer's name. Such new accounts fraud is much tougher to detect, frequently results in much larger fraud amounts, and is much more difficult for consumers to resolve. Regular monitoring of credit reports for unusual accounts or activity can help consumers guard against new accounts fraud.
In closing, the Fed urges consumers to be aware that their own education and interaction with their financial institutions can greatly work to minimize fraud. Consumers can make concerted efforts on their own and along with their banks to lower the chance of suffering from payments fraud by the selection of the methods of payments they use or by protecting their personal information.
If payments fraud does take place, quicker detection by the consumer will result in a less difficult experience and can potentially reduce out-of-pocket losses. While detection options vary among payment types, frequent and thorough monitoring of accounts and credit reports (especially online) has been shown to be a primary way for consumers to detect and stop fraud.
Published: March 30, 2007
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