Study Finds ‘Pervasive And Increasing’ Fraud in Payments

A survey released this week by a major trade association for corporate treasury officials raises an alarm about fraud in check and electronic payments and points to vulnerabilities in newer transaction channels, such as the Internet. “Payments fraud last year was pervasive and increasing,” says a report from the Association for Payments Professionals, which in January surveyed more than 3,000 of its members about their payments-fraud experience. The Bethesda, Md.-based AFP found that 72% of its 414 respondents had been victims of actual or attempted fraud in 2006, up from 68% in a 2005 survey. The January survey was underwritten by EPN, a unit of The Clearing House Payments Co. LLC. Electronic payments turn out to be significantly safer than paper, the survey finds, though payments flowing through the automated clearing house and the card networks are subject increasing fraud attacks, particularly in transactions on the Internet and over the phone. Nearly all respondents said they had been the target of actual or attempted check fraud in 2006, while 35% reported fraud activity in ACH debits. Seventeen percent said they had seen attempted or actual fraud with consumer credit cards. Of those who reported fraud activity with cards, consumer credit cards accounted for by far the most response (82%), with signature debit cards registering 18%, stored-value cards 7%, and PIN debit cards 4%. Indeed, checks processed as images are proving to be much safer than their paper cousins. “Of those organizations that experienced check fraud, only 15% reported check image fraud,” says the report. “On the other hand, although over one-third of respondents use remote deposit, there were no reported incidents of fraud associated with this service.” Still, electronic systems are subject to quirks that open the door to increased fraud, the study finds. With the ACH, for example, some fraud occurs when criminals represent as ACH transactions checks that companies had rejected as fraudulent. “Twenty percent of organizations that were victims of attempted or actual ACH fraud in 2006 report that fraudulent checks were converted to ACH debits and presented against their accounts,” the AFP study says. “Most of these organizations indicate that this type of fraud has increased over the past year.” Indeed, the report is mildly critical of financial institutions' siloed approach to handling check and ACH transactions. “If banks were to link their check and ACH systems, the chances of ACH fraud resulting from check payments might be significantly reduced,” it says. The ACH is sustaining significant attacks in its telephone and Internet e-check channels, as well. “These channels offer increased opportunity for payments fraud,” the report says. Of those respondents that accept consumer payments via the phone or over the Internet and also reported ACH fraud, some 44% said they received fraudulent ACH instructions from their Internet channel; 45% said the same about the phone channel. Similarly, the organizations responding to the AFP survey are sustaining fraud losses from card-not-present transactions. Liability for these transactions is cited by 64% of those respondents that sustained losses because of card fraud as the primary reason for the loss. Delays in filing chargebacks comes in second, at 25%. “Organizations that suffer financial losses from card payments do so primarily because they are 'card-not-present' merchants,” notes the report. Interestingly, in light of a recent string of hacker intrusions into merchant data bases, none of the respondents reported fraud stemming from a card-data breach.