US fraud losses rising on debit cards – falling on credit cards

US fraud levels are rising across all payment card products, according to First Annapolis’ semi-annual survey of major card issuers, but changes in fraud write-offs vary by product.

Survey results¹ show that reported cases of payment-card fraud for credit, signature debit, and PIN/ATM debit all increased significantly from 2015 to 2016 writes Casey Merolla, Senior Manager, Stephen Kiene, Manager, and Laura Levy, Analyst, all specializing in Payment Strategy and Innovation at First Annapolis.

Average credit fraud rose from 21.2 bps on purchase volume to 24.5 bps, while signature debit fraud rose from 14.4 bps to 16.9 bps, and PIN/ATM fraud rose from 10.3 bps to 10.9 bps (see Figure 1).

Figure 1: Gross Fraud Benchmarking (basis points on applicable volume)

Source: First Annapolis Issuer Survey (2016).

Despite the rise in total reported fraud (gross fraud), issuers have incurred lower fraud loss rates (net fraud) on credit cards due to higher recovery rates—which increased from 33% in 2015 to 43% in Q1 2016.

While average net losses for credit declined 1.4 bps, net losses increased 0.7 bps for signature debit and 1.4 bps for PIN/ATM debit (see Figure 2). The increases in debit and ATM loss rates are likely attributable to i) delayed adoption of EMV relative to credit, and ii) the lack of an EMV liability shift for ATM transactions, which recently went into effect this month for Mastercard (and won’t go in effect for Visa until October 2017).

PIN and ATM fraud are particularly concerning, as ATM skimming and PIN theft incidents have become more widespread in the US.

Figure 2: Net Loss Benchmarking (basis points on applicable volume)

Source: First Annapolis Issuer Survey (2016).

While total fraud is on the rise, the distribution of fraud has remained relatively constant. In both 2015 and Q1 2016, counterfeit fraud was the most common fraud type, representing approximately half of all gross reported fraud, with Card-Not-Present (CNP) the second-most common (approximately 40% of gross reported fraud).  Lost/stolen fraud and other types of fraud claims combine for the remaining 10% of fraud cases, similar to prior periods. While we expect a shift from counterfeit to CNP activity as a larger percentage of POS terminals are enabled for EMV, this shift has not been observed to date.

We also asked issuers about their EMV issuance and operating metrics. As of Q2 2016, sampled issuers had converted an average of 88% of their active credit accounts and 43% of their active debit portfolios to EMV. Several issuers reported upgrading their back-office claims systems in anticipation of higher fraud chargeback volume following the network liability shift in October 2015.

Going forward, we expect individual issuer fraud experience to vary widely based on EMV issuance and operational effectiveness. An efficient fraud management operation remains the first line of defense against fraudulent card activity and it will continue to be important for FIs to execute the basics of fraud monitoring and detection well.

¹ Findings are based on July 2016 survey responses from 7 major credit issuers averaging $5 billion in annual purchase volume and 8 major debit issuers averaging $10 billion in annual purchase volume.

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