Debit Card Account Takeover and Online Fraud, Side Effects of EMV, on the Rise

(New York, NY) Fraudsters are exploiting a closing window of opportunity to counterfeit debit cards – and turning to alternative methods of attack – as the US transitions to EMV, Auriemma Group said today.

Counterfeit card use is still the largest source of fraud and financial loss for issuers, representing more than half of total claims by dollar amount according to the consultancy’s Debit Fraud Benchmark Study. But that same study shows that shifts in activity to other categories – a long-anticipated side effect of EMV – are beginning to materialize: card-not-present (CNP) fraud, which includes online and mobile attacks, grew by 20 percent quarter-over-quarter in Q2, while account takeover (ATO) fraud, a smaller category with relatively low incident rates, jumped 280 percent.

“While EMV will alleviate card-present fraud, it will also accelerate the migration of fraudulent activity toward other channels and types of attack,” said Ira Goldman, Director of Auriemma’s Card Fraud Control Roundtable.

Protections built into EMV reduce the risk of counterfeit card use at the physical point of sale (POS), giving rise to emerging threats as fraudsters adjust their tactics. This trend is likely to gain momentum as the volume of “chip-on-chip” transactions increases. These transactions, involving EMV cards used at compatible terminals, currently account for less than 5 percent of all debit card purchases, but will increase significantly throughout 2016 as more retailers upgrade their POS systems and more chip cards come into circulation. As EMV infrastructure expands in coverage, and POS fraud becomes less feasible, fraudsters will focus their efforts on other vulnerabilities in the payments ecosystem, including e-commerce and m-commerce channels. Chip cards provide an additional layer of authentication at POS, but do not protect against fraudulent transactions using compromised cardholder data online. Issuers are investing in CNP fraud mitigation technologies including risk-based authentication and transaction alerts. In addition to CNP fraud, financial institutions are on alert for increasing check, deposit, and wire transfer schemes.

Fraudsters will also target personal data on an increasing scale to commit ATO fraud, a form of identity theft. These incidents are already growing in severity and levels of financial loss. According to Auriemma’s Debit Fraud Benchmark Study, debit card ATO activity increased sharply in the second quarter of 2015, rising 81 percent by dollar amount on a per-claim basis.

The industry is investing heavily in fraud prevention and risk management controls in response to rising ATO activity. Issuers are strengthening identity authentication through the use of biometrics, particularly in the online and call center channels where takeover attempts are concentrated, and more closely analyzing account management for indications of fraud. Additionally, issuers are employing call analysis and fraud detection technologies to identify potential malicious activity.

There is also increasing focus at the industry level on data security and anti-fraud solutions such as tokenization and end-to-end encryption, which mask sensitive cardholder data.

“Financial institutions are making significant investments to shore up their counter-measures and mitigate fraud attacks,” Goldman said. “These investments should be ongoing as the potential of new threats are identified. Staying a step ahead of fraudsters is imperative for fraud control strategists.”

About the Debit Fraud Benchmark Study

Auriemma conducts industry-leading operational fraud benchmarking in the US and UK. More than 30 issuers representing 93% of the top US banks currently participate. The Debit Fraud Benchmark Study, established in 2013, tracks key metrics related to debit card issuers’ fraud queue management, account strategy, and loss and recovery rates on a monthly and quarterly basis.

About Auriemma Consulting Group

Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information, contact Tom LaMagna at (212) 323-7000.