Portals and Rails, 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 Portals and Rails and look forward to collaborating with you.
Federal Reserve Web Sites
Other Bank Regulatory Sites
October 17, 2011
As payments system evolves, "funny" money is still no laughing matter
Counterfeit money in the United States has been in circulation since colonial America. During the Revolutionary War, counterfeiting of Continental American money became so rampant that the currency became worthless. Hence, the phrase "not worth a Continental" was born. Counterfeiting continued after the country's independence from the British, so the government established the U.S. Secret Service in 1865 to suppress it. It was only later that the agency was also tasked with the highly visible and publicized mission of protecting national leaders, most notably the president, and visiting foreign leaders.
Since the establishment of the Secret Service, payment types have advanced from paper bills to checks and card-based payments. Alongside the advancement of our nation's payment methods, the security features of each payment type are evolving to combat attempts at counterfeiting. Yet today, 111 years after the Secret Service was established, counterfeiting remains a threat to the U.S. payments system. This blog examines the security technological advances currently deployed and those in development to fight counterfeiting schemes in consumer payments.
In 1865, approximately one-third of all currency in circulation was counterfeit. Today, counterfeit currency is estimated to represent only 3/100ths of 1 percent of total currency—yet the crime of counterfeiting currency remains popular. According to its Fiscal Year 2010 Annual Report, the Secret Service made more than 3,000 domestic and international arrests for counterfeiting offenses in 2010, resulting in the removal of more than $261 million in counterfeit currency from circulation. This amount is an increase of more than 150 percent from the 2008 level of $103 million. Continued advancements in computer and printing technologies aid counterfeiters in producing hard-to-detect counterfeit bills. It is also important to note that counterfeit bills do not have to be perfect. These bills just need to be good enough for the counterfeiters to exchange once to another party to be deemed successful.
To mitigate the production of counterfeit currency and to help detect it, the U.S. Department of the Treasury constantly enhances paper currency's security features. Newer features such as color-shifting ink, watermarks, and security threads have made paper currency more difficult for criminals to counterfeit accurately.
Much like paper currency, checks became an important payment instrument in the United States following the Revolutionary War. And as is the case with paper currency, checks are also a common target for counterfeiters. Even as check usage continues to decline, check fraud continues to increase and remains one of the largest threats to businesses today, according to the 2011 AFP Payments Fraud and Control Survey: Report of Survey Results. Also according to this report, the counterfeiting of nonpayroll checks using an organization's MICR line data remains the most widely used technique to commit check fraud.
Since the first credit card was introduced in the United States in 1958, card-enabled debit and credit payments have become many consumers' preferred payment methods. But just as payments migrated from paper to electronic methods such as debit and credit cards, counterfeiting fraud schemes have shifted from paper as well. Today's payments fraud-related headlines are flooded with stories of card-skimming schemes to produce counterfeit cards. Fraudsters are using skimming devices on point-of-sale (POS) terminals and at ATMs to capture card numbers. As my colleague Cynthia Merritt previously discussed in an earlier post, these skimming devices are becoming more sophisticated. According to Verizon's 2011 Data Breach Investigations Report, tampering of ATMs and POS terminals accounted for 98 percent of physical data breaches in 2010. The report notes that these tampering attacks, which have been occurring for years, are on the rise.
Despite the continued evolution of payment types and their corresponding security features, counterfeiters persist in finding ways to harm the payments system, regardless of payment type. Although the industry can and should strive to eliminate the success of counterfeiters, history shows us that the task is all but impossible. It will be very interesting to see the effect that new security enhancements as they develop will have on counterfeiting trends in the United States. For me, I am eagerly anticipating the effect that dynamic data chip-enabled transactions will have on the skimming and counterfeiting of payment cards should the industry adopt the technology.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference As payments system evolves, "funny" money is still no laughing matter:
- Consumer Prepaid Protections May Be Catching Up with Prepaid Use
- Virtual Currency Environment Still Fluid after Latest Rulings
- ISO 20022 in the United States: What, When, Why, and How?
- Let's Talk Tokens, Part III: What Problem Does Tokenization Solve?
- Mobile Biometrics: Ready or Not, Here They Come
- Starting Off on the Right Note with Mobile Enrollment
- Let's Talk Token, Part II: Distinguishing Attributes
- New ACH Return Rate Threshold on the Horizon
- Let’s Talk Token: Authenticating Payments
- Seeking a Successful Biometric Solution
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud