November 7, 2018

Credit Card “Fallback” Fraud Declines Significantly as Banks Implement New Policies

(New York, NY):  After EMV chip cards rolled out in 2015, fraudsters were quick to find and exploit loopholes. Their method of choice? Fallback fraud, a low-tech workaround that bypasses protections against counterfeit card use. To perpetrate this fraud type, criminals tamper with the card’s chip or the card reader itself, causing technical issues and rendering enhanced security features obsolete.

The method of attack can be as simple as placing clear film over the chip, inserting the card upside down, or creating counterfeit cards with blank or intentionally damaged hardware.

Despite this unsophisticated approach, fallback fraud works. In 2017, fallback fraud made up more than 20% of counterfeit fraud and 4.5% of total credit card fraud, according to data from Auriemma Group’s Card Fraud Control Benchmark Study. Fraud was rising even as fallback transactions – including legitimate transactions – made up less than 2% of overall purchase authorizations.

“Fallback fraud is typically a problem in markets first adopting EMV,” said Ira Goldman, Senior Director of Auriemma’s Fraud Control Roundtables. “But in the US market, it’s still an ongoing issue more than three years after the EMV liability shift.”

To counter fallback fraud, banks increased the monitoring of high-risk transactions and merchants. Since the EMV implementation, 75% of banks rolled out new policies to decline authorization of high-dollar fallback purchases, while others have focused their strategies on merchants with abnormally high fallback fraud rates.

An Auriemma analysis of 2018 fraud data shows that these mitigation efforts have been effective. In Q2, fallback fraud made up just 11.5% of counterfeit fraud and 3.2% of total credit card fraud, declines of 45% and 30% year-over-year.

As with any fraud strategy, banks must be mindful of false-positives that can create a negative cardholder experience. Differentiating fraudsters from legitimate customers using a defective card or terminal is critical. However, banks that have implemented new policies to thwart fallbacks report minimal disruption to the customer experience and are monitoring customer complaints for any signs of dissatisfaction.  Additionally, chip fallback transactions and fallback declines are waning. In fact, fallback transactions and declines fell 12.6% and 20% year-over-year.

Despite the elevated levels of fallback fraud, EMV is having the desired effect of reducing counterfeit card use at the physical point of sale. Counterfeit fraud claims have declined for several consecutive quarters and are down significantly from their peak in early 2016, according to Auriemma. And counterfeit card use will only continue to decline as the EMV acceptance market grows.

“Banks are constantly confronted with evolving tactics by fraudsters,” Goldman said. “The decline in fallback fraud is yet another example of the payments industry mobilizing to thwart new threats and protect their customers.”


About Auriemma Fraud Control Roundtables

Auriemma runs a series of information sharing and benchmarking groups for executives in fraud strategy and operations. Spanning credit card, debit card, and consumer banking, Auriemma’s fraud control roundtables combine executive meetings, industry-leading operational benchmarking, and peer group surveys to help participants identify vulnerabilities and optimize fraud management strategies. For information on membership, contact Ira Goldman at 212-323-7000.

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