Small Banks No Longer Immune to Payments Fraud, Stats Show

Attempted check fraud declined in 2008 for the first time in years, but overall check-fraud losses continued to climb while debit card fraud hit small banks especially hard, according to new statistics from the American Bankers Association on demand-deposit-account fraud. A preview of the latest ABA report was presented on Wednesday at a banking conference in Orlando, Fla., organized by the Bank Administration Institute. Total attempted check fraud came to $11.4 billion in 2008, down from $12.2 billion in 2006, the last time the ABA conducted its bi-annual study of DDA fraud. “That's the first time that has happened since the survey started in 1997,” noted Thomas Haller, vice president for fraud detection at M&I Support Services Corp. and one of three presenters of the data at the BAI's PaymentsConnect Conference & Expo. Attempted fraud, however, remains well above the $5.5 billion recorded in 2003, according to the ABA figures. Actual check-fraud losses are a different story. They rose to $1.02 billion in 2008 from $969 million in 2006. Total number of cases, meanwhile, jumped to 761,000 from 561,000. Check fraud as measured by the ABA includes both fraudulent deposits and bogus withdrawals. Debit card fraud, meanwhile, is hitting community banks particularly hard. While 61% of financial institutions with under $500 million in assets reported losses in this category in 2006, that proportion jumped to 92% two years later. Indeed, small banks appear to be victimized far worse than larger institutions. As a proportion of overall signature-debit sales, community banks saw their fraud losses soar to11.9 basis points in 2008 from 3.5 basis points just two years earlier. At super-regional and money-center institutions, however, these losses dipped to 5.4 basis points from 6.9. While 94% of banks overall reported debit-fraud losses in 2008, up from 74% in 2006, the panel said fraudsters are especially targeting smaller institutions, which lack many of the defensive technologies larger banks have deployed. These criminals are “taking the path of least resistance,” Teresa Cheek, senior vice president for operations at Arvest Bank, and another presenter on the panel, told Digital Transactions News. Jane Yao, managing director for benchmarking and survey research at the ABA, also spoke during the session. Nor are PIN debit cards as secure as they once were. Banks are seeing increasing fraud on fake PIN debit cards made by criminals after data breaches, the panel said. “Counterfeit cards are hitting us hard,” Cheek told the audience. Fraud in online banking is also going up dramatically, the ABA numbers show. Some 28% of banks reported losses in this channel in 2008, compared with 19% two years earlier. Again, small banks are seeing the most dramatic increases, with 9% reporting online fraud in 2008, up from just 1% in 2006. Much of this fraud results from criminals gulling customers with e-mails that appear to come from the bank, a trusted source. Instead, the e-mails either plant malware on customers' PCs or give them links to bogus sites. “This is going to be a battleground,” Haller told the audience. “We have real issues at stake of trust and loyalty.”