Cardless Transactions Are Driving Debit Growth, A Trend Fraudsters Have Noted

Consumers are making more debit card transactions without the physical card, and fraudsters are taking notice, according to a major study released Thursday.

Transactions such as e-commerce payments, push payments, and peer-to-peer transfers using the accounts backing debit cards, but not the plastic itself, are rising dramatically, according to the 14^th annual Debit Issuer Study from Pulse, a major electronic funds transfer network and a unit of Discover Financial Services. Such cardless transactions soared 24% in 2018 to account for 25% of all debit card transactions, up from 20% the prior year, according to the study, which, as in prior years, was compiled in conjunction with the consulting firm Oliver Wyman. Sixty-three financial institutions representing 44% of the U.S. debit card market by cards issued participated in the study, according to Pulse.

While e-commerce commands the lion’s share of these transactions, newer, mobile-based applications like P2P payments and push transfers are growing fast. They now account for 6% of all cardless debit transactions, the Pulse study finds. The report estimates, indeed, that such transfers added up to about 1.2 billion transactions last year, a wholly new source of growth. Push payments include fast-rising applications such as businesses paying gig workers or other individuals.

But while the study finds that overall debit card fraud continues to drop, criminals have taken notice of the trend toward cardless transactions. Though such payments accounted for 24% of all debit transactions in 2018, they also accounted for fully 69% of fraud claims. That’s up from 66% of fraud claims in 2017, when cardless debit accounted for one-fifth of transactions.

 “We’re working internally, and with others in the payments ecosystem, to employ a range of solutions to help financial institutions identify and block fraud on a broader range of debit transactions,” said Judith McGuire, executive vice president of product management at Houston-based Pulse, in a statement.

Overall, issuers’ average net fraud loss per debit transaction fell in 2018 for the third straight year, dropping to 1.1 cents from 1.3 cents in 2017. Issuers’ average net fraud loss per active card fell about 10% last year to $3.24.

In another finding, contactless debit cards are gaining in popularity among issuers, with 70% responding that they plan to issue contactless cards by the end of next year. Some 10% of issuers already issue at least some contactless cards, while 20% said they have no such plans. Thirteen percent of all debit cards were contactless at the end of 2018. If issuers replace existing cards with contactless technology at the expected rate, up to 60% of all U.S. debit cards will be contactless by the end of 2021, Pulse said.

“Merchant acceptance of contactless cards has increased since the introduction of mobile wallets a few years ago,” said Tony Hayes, a partner at Oliver Wyman and study principal, in a statement. “Many issuers also said they don’t want to risk being left behind when it comes to contactless.”

The overall U.S. debit card market generated an estimated 68.5 billion transactions in 2018, according to the study, up 6.7% from 2017, when the growth rate was 5.3%. The study credits the increasing momentum from cardless transactions for helping to stimulate that growth.