Transaction Volume is Rising, But So are Debit Fraud Losses

  The debit card industry is experiencing two types of growth, one good, the other bad. More consumers are using debit cards to pay for purchases, but debit card fraud is rising, according to the Pulse EFT Association.
  Debit card fraud losses in 2005 - the latest figures available-totaled $662 million, up 21% from $546 million in 2004, according to Pulse's "2007 Debit Issuer Study." In 2005, PIN-debit fraud at ATMs was $364 million, up 6% from $345 million in 2004.
  Signature-debit losses were up 28%, to $247 million in 2005 from $193 million in 2004, according to Pulse.
  PIN-debit fraud at the point of sale, though relatively small, grew 163%, to $21 million in 2005 from $8 million the previous year.
  Thieves are becoming more savvy, as demonstrated by a recent PIN-debit terminal breach at a Stop & Shop in Coventry, R.I. Coventry police arrested four individuals in February after the supermarket's owner reported that thieves tampered with a payment terminal and stole card information that included PINs.
  Most issuers agree that the nature of fraud is shifting as criminal tactics become increasingly sophisticated. Initially, issuers worried about phishing attacks. Now merchant data breaches have expanded the scope of debit fraud.
  And repeated data breaches are taking a toll on card issuers. A survey by America's Community Bankers found that data breaches have forced 91% of its more than 1,000 member institutions to reissue cards, the majority of which are debit cards.
  Seventy-one percent said they had to reissue cards three or more times over the past 24 months. To fight fraud, issuers are implementing neural-network technology to look for unusual transaction activity, and some are beginning to score PIN - and signature - debit transactions to protect against evolving fraud tactics, Pulse says.
  Pulse's study is an update of a similar report the network released in December 2005. In the study, the network commissioned Dove Consulting to survey 55 large banks, community banks and credit unions that collectively issue more than 62.3 million debit cards.
  VOLUME ALSO UP
  While fraud losses are up, transaction volume continues to rise as well, though the growth is slowing. Pulse says that survey participants' overall debit card transaction volume grew 18% in 2006. This year, the growth rate is expected to drop to 16.8%.
  "Debit has been growing very rapidly, and the reason banks are less bullish this year is because it is harder to sustain the large growth rates of the past," says Tony Hayes, Dove vice president and the study's lead researcher.
  The issuers reported average debit card transaction growth of 20.3% for signature debit in 2006, primarily because of sweepstakes, rewards and issuers promoting the product, Hayes says.
  Transaction growth for PIN debit last year was 15.7%, and Hayes says PIN debit is expected to grow faster than signature debit because more retailers are installing PIN pads and promoting PIN-debit usage.
  Active cardholders-those who used their card at least once during the past month to make a purchase-used their cards an average of 16.1 times per month at the point of sale in 2006, 5.5 times by entering their PINs and 10.1 times using their signatures, the Pulse survey found.
  One reason for debit's growth, the research found, is that banks and credit unions last year achieved an average debit card penetration rate of 72% of checking accounts eligible for cards.
  But activation rates still are not as high as the industry would like. Card usage would increase more if activation rates improved, says Cindy G. Ballard, Pulse executive vice president. In 2006, 56% of debit cardholders activated their cards.
  "There is room to grow," she says. "Cardholders already have the cards in their wallets. They have to activate them and use them."
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