Take On Payments

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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

June 29, 2015


The More Things Change, the More They Stay the Same

As I write this blog on the screened porch of a North Alabama lake house, the cicadas are constantly buzzing in the background. I am fascinated by the life cycle of this species—namely, the emergence of the periodical cicadas from belowground every 13 to 17 years. This life cycle got me thinking how the world has changed since the last time the 17-year cicadas emerged. And while in this neck of the woods, some things have changed—new houses have been built and personal watercraft are now constantly buzzing on the lake—some things have remained the same. The nearest grocery store is still 30 minutes away and the iced tea is as sweet as it ever was. Is this mixed scenario really any different for payment card fraud?

Certainly a lot has changed in card payments during the last 17 or so years. We've witnessed the enormous growth of debit card transactions, the continued growth of credit card transactions, the emergence of the e-commerce and mobile payments channels, and the almost global adoption of the EMV (chip) card. As card payment usage has evolved, so has the fraud landscape. Lost and stolen card fraud fell out of vogue while counterfeit card fraud took off only to see stolen card fraud re-emerge when the issuance of EMV cards in most markets thwarted counterfeit card fraud. Point-of-sale (POS) fraud is occurring less often across the globe because of EMV and PIN verification, driving the fraudsters to the Internet to commit card-not-present (CNP) fraud.

But what hasn't changed is the global rate of fraud. An article in the August 2013 Nilson Report estimated that the annual cost of card fraud worldwide in 2012 was 5.2 cents for every $100 spent, resulting in $11.27 billion in losses. This figure compares to Nilson's estimate of fraud losses in 1998, which ran approximately 4.8 cents for every $100 spent and resulted in a little less than $2 billion of fraud. Perhaps a fraud rate in the 5 basis points range is the industry-wide acceptable rate, but with billions of dollars being invested to mitigate fraud, I would like to think that over time the rate would be reduced (though I must admit that I am not sure what the acceptable rate should be).

Maybe this speaks to the tenacity of the card fraudsters. As we in the Retail Payments Risk Forum have often stressed, once one door is fortified, the fraudsters find another door to enter. And if we could dive deeper within the figures, I am certain that is what we would find, according to various estimates of fraud and anecdotal evidence. For example, the emergence of EMV and the use of PIN verification instead of signature verification have reduced POS fraud. Today, CNP fraud rates are significantly higher than POS fraud rates and many industry risk efforts are focused on mitigating CNP fraud.

When the cicadas reappear, undoubtedly the payment card usage and fraud landscape will look different. Perhaps mobile payments will have taken off and the use of biometrics as a method of verification will be commonplace. I feel confident that in 17 years the industry will make substantial strides in reducing e-commerce CNP fraud rates—but also that new areas of fraud will appear. Is the industry prepared to fight the next generation of fraud or will it just continue to Band-Aid the past? Should we expect a 5 basis points rate of fraud when the cicadas emerge in another 17 years? I'd like to think the rate will be lower. At a minimum, hopefully, it will remain as consistent as the sweet iced tea in this neck of the woods.

Photo of Douglas A. King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed


June 29, 2015 in cards, chip-and-pin, EMV, fraud, innovation, mobile payments | Permalink | Comments (0)

June 22, 2015


The Current Tokenization Landscape in the United States

Last fall, Take on Payments featured a three-post series on tokenization. The first post introduced the technology regarding payment credentials and noted that merchant-centric tokenization solutions came to the market in the mid-2000s, driven by the Payment Card Industry Data Security Standard (PCI-DSS) requiring merchants to protect cardholder data. The second post examined some of the distinguishing attributes of payment token solutions in mobile wallets that were developed to replace the payment card's primary account number (PAN) with a token so the presence of the cardholder's PAN would be minimized or eliminated in the payment's data transmissions. The final post examined the challenges of payment tokenization and discussed its effect on payment risk over the short term.

Working with the Mobile Payments Industry Workgroup (MPIW), the Federal Reserve Bank of Boston's Payments Strategies group and the Federal Reserve Bank of Atlanta's Retail Payment Risk Forum just released a comprehensive white paper on the current tokenization landscape in the United States. Based on our research and interviews with more than 30 payment stakeholders, the white paper provides an overview of the U.S. payment tokenization landscape for mobile and digital commerce (versus physical card payments), describes the interoperability of different tokenization systems, and examines the status of these 30 stakeholders' plans to implement to a broader audience of industry stakeholders, policymakers, and regulators.

The paper discusses the many benefits, challenges, gaps, and opportunities of tokenization from the perspectives of the major industry stakeholder groups, while acknowledging that there is not always full agreement on current approaches or underlying details. The goal in authoring this paper is to encourage further collaboration among the stakeholders to resolve differences to the mutual satisfaction of stakeholders in the industry and to provide what is best for consumers.

Tokenization in mobile payments is just a very small part of the potential impact that tokenization can have in reducing fraud in the overall payments environment, but it is a start in a payments channel that is expected to grow significantly in the years ahead. We hope that you find the paper informative and feel free to contact us if you have any questions.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 22, 2015 in payments | Permalink | Comments (0)

June 15, 2015


“Customer, You Have the Conn”

Sometimes when you're watching nautical-themed movies, you'll hear the phrase, "I have the conn." The person who speaks this phrase is alerting all those on the vessel that he or she is in control with regard to the vessel's direction and speed. Customers could utter that phrase with regard to their payment vessels—they pretty much have full control in that they make the final choices about their method of payment. They may be restricted by the payment options a merchant offers, but in most cases, if they don't like the options they can shop, or secure services elsewhere.

One of the challenges with payment security that we frequently mention in our posts and speaking engagements is the disincentive that various consumer protection regulations give for consumers to adopt strong security practices. We have all seen or heard of the consumers who write their PINs on their debit cards or set up the PIN 1-2-3-4. In addition, research consistently tells us that consumers often select easily guessed user IDs and passwords—and then often use those same ID/password combinations on multiple sites.

Financial institutions and other payment stakeholders have long worked to develop tools that will encourage customers to be more aware of their financial account activity and contribute to minimizing fraud losses. Account alerts are among the most useful and popular of the tools. When consumers set up account alerts, they can usually specify conditions that will trigger a text message or e-mail. Common alerts are sent when the account balance drops below a set threshold, a debit transaction posts in excess of a specified amount, or an address or phone number change was made on the account. These alerts are beneficial, but they are merely reactive; they report only when a condition has already occurred.

I believe we will soon see a major breakthrough in card security. There are new applications now in testing or in early roll-out phases. These applications will allow customers to be proactive because they will be able to set up a number of filters or controls on their payment cards that will dictate whether a transaction even gets to the point for an authorization decision. For example, if I have a payment card that I use only for gasoline purchases, I can designate my settings to reject transactions coming from other merchant categories. Or I can specify that no international transactions should be allowed. At the extreme end of the control options, I can "turn off" my card, thereby blocking all transactions, and then I can turn it back on when I am ready to use it again. The possible options and filters are almost limitless for this self-service function. Yes, there will be the need for strong customer education, and the choices will require a reasonable limit or the customer will never remember what they set.

If these options are enabled and cardholders are then willing to "take the conn," this new tool could help significantly reduce the number of unauthorized transactions. Critical to the success is whether cardholders will set a reasonable range of parameters based on their normal card usage patterns so they don't get transactions rejected they actually make themselves but still be able to weed out the truly unauthorized transactions. I say "full speed ahead" with such tools. What do you say?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 15, 2015 in consumer protection, data security, innovation | Permalink | Comments (0)

June 08, 2015


Is the Conventional Wisdom about EMV Migration Right?

We're within five months now of the initial EMV (chip) card liability shift for POS transactions. Most people in the industry have held the belief that as the ability to create counterfeit cards is shut down, the criminals will shift their focus primarily to the card-not-present (CNP) environment, where they can continue to use payment card data they take from the magnetic stripe or other data breaches. In fact, my colleagues and I have been broadcasting this message in our presentations and posts for quite some time. Our assessment, along with most other industry experts, was based on the statistics released by banking groups in major countries that had already gone through the EMV migration. The chart illustrates one view of their experiences. It seems to leave no doubt about what we can expect.

Chart_cnp_fraud_losses

But does it mean what we think it means? While the chart clearly shows an increase in the CNP channel in fraud losses, did the ratio of CNP fraud to overall sales increase? Unfortunately, definitive data is not readily available to provide that answer. Using some confidential sources and partial—but significant volumes of—payment data, we were able to determine that during the period from 2010 to 2013, as a percentage of overall sales, CNP fraud in Canada actually held relatively steady. But was that stability created due to the large increases in the recurring billing segment in the CNP environment, which has a relatively low rate of fraud? At this point, we just don't have data granular enough to tell us.

I don't think this means that there isn't a reason to be concerned about CNP fraud as the EMV migration in the United States continues. For one thing, the experience of others is no guarantee that we will experience the same. But perhaps the biggest reason for us not to relax about the issue is that, even if the levels hold flat through our migration, CNP fraud is still quite significant and has a major negative financial impact on merchants and issuers. The 2013 Federal Reserve Payments Study found that CNP fraud by volume is three times that of card-present fraud.

This situation also demonstrates the need to be able to collect detailed and accurate data on fraudulent payments activity. Fraud has been a real challenge in this country because of the large number of payments stakeholders that end up saddled with the loss. The Federal Reserve is interested in working with the industry to develop a process for collecting such information for the benefit of all.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 8, 2015 in chip-and-pin, cybercrime, EMV | Permalink | Comments (0)

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