Latest debit card fraud schemes

Industry initiatives, technology, and global legislation, part two

By Robert E. Holtfreter, Ph.D., CPA, Educator Associate

In the last year, fraudsters have stolen data from thousands of debit cardholders through merchants' and service providers' faulty data security systems and then cleaned out victims' bank accounts. In part 2, we discuss industry initiatives, latest preventive technology, proposed legislation, and recommendations. 

Sam was in a hurry. In two hours, he was hopping a jet to see a client in Los Angeles and he needed to run some errands. He slipped into an office supply store and bought a couple of notebooks, pens, batteries, and a bunch of headaches. Sam had used his debit card and PIN at the store counter, which some able hackers promptly stole to make fake cards. By the end of the day, Sam was in L.A. and his bank account totaled zero.*

Cardholders, banks, merchants, and service providers (card processors) are hurt financially and are frustrated with the recent debit card fraud and related identity theft that has occurred throughout the world because of breaches in data security systems of merchants and service providers.

Cardholders become victims of debit card fraud and identity theft when they find out that fraudsters have stolen their card data, including the PINs, and subsequently produce counterfeit debit cards, which the crooks use to wipe out their bank accounts. Because debit cards are normally tied to a checking account, a cardholder often will have to pay fees to merchants and banks for checks that bounced after a fraudster wiped out his account. According to the Public Interest Research Group (PIRG), the cardholder might incur late fees or have a black mark on his credit report because of overdrafts due to a fraudulent debit.1  

Fortunately, the U.S. Federal Deposit Insurance Corporation says that most banks won't hold a consumer responsible for unauthorized transactions if he notifies the institution in a timely manner.2 Banks cover most if not all of the cardholder losses due to fraud. But investigating suspicious activity relating to their cardholders and uncovering the fraudulent use of customer debit cards is a costly and time-consuming problem.

A debit card can be used with or without the PIN. When it's used with the PIN, it's an "online" transaction. When it's used without the PIN, it's an "offline" transaction, which is similar to using a credit card because a signature is required to complete the transaction in both cases. According to the Public Interest Research Group, banks make more money and face lower risks when a consumer uses an offline debit card. Also, banks make more money when a consumer uses a debit (or credit) card instead of a check. The bank gets a fee, or merchant discount, from the merchant who accepts the card, the bank saves money on check-clearing costs, and there's less float time (the time it takes for a check to clear). The bank receives a percentage fee of up to 2 percent of every offline transaction amount compared to a flat fee of 7 1/2 to 10 cents for each online transaction with a PIN."3 Fees that banks charge to cardholders to extract cash at ATM are also a major source of revenue.

If a significant number of consumers cut up their debit cards because of the recent massive debit card fraud and switch to writing checks or using cash to conduct business, then banks will incur additional costs associated with more bounced checks. And they'll lose some of their lucrative revenues charged to merchants for the use of their cards and from consumers who formerly used their cards to extract cash from ATMs.




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