Fallback Fraud Falls as Card Issuers Ramp Up Their Monitoring

Fallback fraud, an offshoot of the counterfeit fraud that EMV chip cards are meant to reduce, declined over the past year, according to new findings from Auriemma Consulting Group.

Fallback fraud refers to fraud resulting from would-be EMV payments resorting to the credit or debit card’s back-up magnetic stripe because of a problem with the chip. Such transactions typically occur when the fraudster damages the chip, covers it with clear film, or otherwise renders it inoperable, forcing the point-of-sale terminal to read the card’s mag stripe, which likely has been counterfeited. Incorrect insertion of an EMV card into a POS terminal occasionally initiates a fallback transaction, too.

In 2017, fallback fraud made up more than 20% of counterfeit fraud and 4.5% of total credit card fraud, according New York City-based ACG’s recently released Card Fraud Control Benchmark Study. Fraud was rising even as fallback transactions, including legitimate transactions, made up less than 2% of overall purchase authorizations, ACG reported last week.

But in 2018’s second quarter, fallback fraud made up just 11.5% of counterfeit fraud and 3.2% of total credit card fraud, respective declines of 45% and 30% year-over-year, according to ACG.

Auriemma gets its data from its quarterly Fraud Control Roundtables with representatives of 34 financial institutions, including 14 of the 15 largest U.S. credit card issuers, according to Ira Goldman, senior director of the Roundtables operation. The firm also collects fraud data from issuers through monthly and quarterly surveys.

Fallback fraud is an activity that typically comes and goes fairly quickly after a nation converts to EMV chip card payments, but it has stuck around longer than usual in the United States, ACG said. But issuers are getting smarter about identifying and thwarting it, according to Goldman.

“They’re looking at dollar amounts, they’re looking at velocity thresholds [the number of transactions in a given time period], any sort of prior fallback activity on the same account,” Goldman tells Digital Transactions News.

Fraudsters often try to get the most bang for their buck by trying to buy TVs and other consumer electronics goods, thus issuers’ increased emphasis on dollar limits on fallback transactions. “The fraudster is looking to purchase an expensive item,” says Goldman.

Issuers also are looking more closely at fallback history as they try to sift out fraudulent transactions. “There are legitimate fallback transactions,” he notes.

Banks that have implemented new fallback-fraud policies are reporting minimal disruption to customers, according to Auriemma. Fallback transactions and declines fell 12.6% and 20% year-over-year, the firm reported.