What Is the True Cost of Fraud?

September 19, 2014 at 9:06 am 2 comments

How much is cyber theft costing us? The question is crucial because, to simple country lawyers like me, we are facing the electronic equivalent of a man-made Ebola virus. Is it possible that fraud is a manageable cost of doing business? I don’t think so, but I’m afraid many policy makers, merchants and large financial institutions might.

One place to look for the answer is in the Fed’s biannual report on the cost of debit card interchange costs mandated by the Durbin Amendment. The latest installment was issued September 18th.  Fraud resulted in $1.57 billion in losses in 2013. Furthermore: “. . . the majority of fraud losses were absorbed by issuers and merchants (61 percent and 36 percent respectively); cardholders absorbed only 3 percent of losses.”

Most importantly, the cost of fraud is rising.  “Although overall fraud losses as a percentage of transaction value did not change much between 2011 and 2013, there were substantial changes in the incidence of fraud, as well as in average losses per fraudulent transaction.”

But since overall transaction costs are going down, the Fed won’t be proposing a change to the existing cap, which is currently 21 cents plus 5 basis points multiplied by the value of the transaction, plus a 1-cent fraud-prevention adjustment, for institutions that take mandated fraud prevention measures.

Something doesn’t quite past the smell test. In the same week, Home Depot concludes that a mere 56 million consumers had their credit and debit card information stolen by malware imbedded onto its card readers, the Federal Reserve concludes that there is no need to recommend raising the cap on interchange fees for institutions with $10 billion or more in assets.   We may have one of those situations where economists can tell us the price of fraud but not its true cost. Remember the cap just applies to institutions with $10 billion or more in assets.

Why should credit unions care? Because, while cyber fraud may be an acceptable cost of doing business for the big guys who can absorb the costs, it’s not for your smaller institution. Furthermore, the Fed can’t monetize consumer anger and mistrust. Your average consumer is going to get fed up sooner or later. They will turn to the larger, more sophisticated institutions that they believe are better able to protect them – a trend that will be accelerated by our good friends at Apple.

Entry filed under: Compliance, General, Regulatory, technology. Tags: , , .

NYS: Dot I’s and cross T’s when collecting Zombie Debt When does a bank aid terrorism?

2 Comments Add your own

  • 1. The Bitcoin Rat ♪ ♫ (@BitcoinRat)  |  September 21, 2014 at 11:25 am

    Good analysis of the massive problem businesses are facing ( Charge-backs and fees together keep consumer prices higher than they need to be ) .
    The @BitcoinRat is just a little surprised that you didnt highlight the fact that credit card transactions are ‘pull’ mechanisms , which means that crooks having your card details can literally empty your bank account within seconds, and whilst the average card holder MAY get his money back eventually, that can sometimes take months and he rarely gets charges refunded if , in the meantime, he has to go into his overdraft limit to fund living expenses. (as recently happened to me after an illegal withdrawal )
    bitcoin on the other hand is a ‘push’ mechanism for payments, doesnt disclose account details risking fraud, and is non-chargeback for Merchants.
    Within the next 18 months major charging payment platforms will base their business on the blockchain protocol, with almost no fraud risk and more efficient, frictionless money transfers.
    just saying ….

  • 2. Melaine  |  January 23, 2015 at 12:27 pm

    You’re so interesting! I do not believe I’ve read something like
    that before. So wonderful to find another person with a few unique
    thoughts on this subject. Seriously.. thanks for starting this up.
    This web site is something that is needed on the web, someone with a bit of originality!


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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