(March 5, 2009) Among its many damaging effects, financial fraud threatens the growth of online payments and banking and could drive consumers away from banks and toward electronic payment systems they perceive as more secure, such as PayPal. Those are some of the conclusions in a new report from technology research and consulting firm Gartner Inc. about data breaches and financial crimes.

The report, based on surveys of 5,000 adults, estimates about 7.5% of U.S. adults lost money to some form of financial fraud in 2008. Gartner’s results add to a growing body of evidence that fraud costs banks customers, not just dollars. Victims of electronic- checking and/or savings-account transfer fraud in 2008 were nearly five times more likely to change banks because of security concerns, when compared with the average consumer, according to Gartner. About twice as many of the victims curtailed online money transfers and bill payment used in online banking.

Specifically, 59% of all respondents who had security concerns and 57% of fraud victims who had changed their behavior because of security concerns reported changing their online shopping behavior. Some 59% of the overall group and 51% of victims said they changed their online-payment behavior, and 41% and 39%, respectively, reported changing their online-banking behavior.

“They stopped transferring money or they wouldn’t transfer,” Gartner analyst and report author Avivah Litan tells Digital Transactions News. “They’d stop bill payment, or they wouldn’t do it [at all]. It mainly affected transactions that move money out of their account.”

Those with security concerns and fraud victims especially see eBay Inc.’s PayPal payment service as a safe electronic-payments haven. “The main effect on payments behavior was they would use PayPal more,” says Litan. “PayPal is one of the favorite payment mechanisms out there in part because it’s perceived to be secure.”

Fraud involving credit and debit/ATM cards was the method most actively used by crooks to steal money, claiming 36% more victims in 2008 than other types of fraud, according to Gartner. New-account fraud, in which a thief steals identity information to open a new account, occurs less frequently than payment card fraud, though Gartner estimates that up to half of all new-account frauds involve synthetic identities, which means many cases go unreported.

Asked about how financial fraud happened, 19% of victims cited a data breach at a retailer, government agency, or other third party as the source; 16% said their wallet or purse was stolen; and 13% claimed to be victims of phishing or other online scams apart from Internet auction fraud, which 9% cited.

New-account fraud resulted in an average loss of $1,097 per incident and an average recovery of $461. Corresponding figures for abuse of an existing credit card account were $929 and $799, and $712 and $548 for debit card fraud. Although government regulations and payment card network and bank policies essentially guarantee consumers complete or nearly complete recovery of fraud losses, the leading reason consumers did not recover funds in cases of credit and debit card fraud was that they fell for a scam and believed there was no one from whom to recover the stolen credit or funds, Gartner says.

Check forgeries resulted in an average loss of $566 and recoveries of only $272, while other incidents of savings- and checking-account fraud resulted in losses of $485 on average and recoveries of $262.

Gartner based its findings on September 2008 responses from 3,985 online consumers and 1,003 adults surveyed by telephone. The margin of error for questions answered by all online respondents was plus or minus 1.5% at the 95% confidence level. For items answered by all phone-based respondents, the margin of error was plus or minus 3.1% at the 95% confidence level. Margins of error were higher for questions not answered by everyone in the sample groups.