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DALLASFED
VOLUME 1, ISSUE 2
AUGUST 31, 2012

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CALENDAR OF EVENTS
September 13–14
Economic Roundtable
Abilene, TX

September 18
Economic Roundtable
Junction, TX

September 25
Dialogue with the Dallas Fed
Howard Payne University

October 9
Corporate Payments
Council Meeting
Dallas, TX

October 16
Community Depository
Institutions Advisory Council
Meeting
Dallas, TX

October 23–24
Economic Roundtable
Waco, TX

November 1
CEO Forum with
Richard Fisher
Houston, TX

November 7
Economic Insights:
Conversations with the
Dallas Fed
Webcast

November 8
Dialogue with the Dallas Fed
University of Texas at Tyler

November 15
Dialogue with the Dallas Fed
University of Texas at Permian
Basin

November 15–16
Economic Roundtable
Midland, TX
For more information about
these events, email FIRM at
Dallas_Fed_Firm@dal.frb.org.

Financial Insights
FIRM • FINANCIAL INSTITUTION RELATIONSHIP MANAGEMENT

Payments Fraud: A Clear and Present
Danger
by Matt Davies

H

ow concerned are organizations about risks related to payments fraud? Which payment
methods have the highest concentration of fraud attempts and losses? What are the most
effective controls and procedures used to mitigate payments fraud risk? And what are the
main barriers to further reducing payments fraud?
To answer these and other questions, the Federal Reserve Bank of Dallas conducted a survey
in April 2012 on payments-related fraud experienced by organizations in the Eleventh Federal
Reserve District (Texas, northern Louisiana and southern New Mexico). This essay briefly
describes our survey methodology and previews some of the research results derived from
survey respondents. (The full “2012 Payments Fraud Survey Summary of Results” is available at
www.dallasfed.org.)
Overall, we found that payments-related fraud remains a major concern for financial
institutions (both banks and credit unions) and corporations of all sizes. Most problematic is
fraud that affects checks and debit cards because these are the payment types that were most
often attacked by fraud schemes and that sustained the highest losses. While actual losses
reported due to payments fraud are relatively small, they are still undesirable and require
implementation of new internal controls, as well as organizational actions to mitigate payments
fraud risk. Many fraud prevention efforts can be expensive and time consuming; respondents
reported that the lack of staff resources is the primary barrier to new payments fraud mitigation
efforts.
Financial institutions and non-financial services organizations were asked to respond to
an online survey about payments fraud experiences and methods used to reduce fraud risk.
In addition to a list of financial institution contacts maintained by the Financial Institution
Relationship Management (FIRM) Department at the Dallas Fed, the following organizations
also sent the survey to their members: SWACHA—The Electronic Payments Resource; the
Austin, Dallas and Fort Worth Associations for Financial Professionals (AFP); and the Houston
and San Antonio Treasury Management Associations (TMA).
The survey covered transactions involving cash, check, debit and credit cards, automated
clearinghouse (ACH) and wire transfers. We received 139 responses to the survey in the
Eleventh Federal Reserve District, with 120 (86 percent) in the financial services industry—
almost all of them financial institutions (FIs)—and 19 (14 percent) non-financial institution
organizations or corporations headquartered in the Eleventh Federal Reserve District.1
Only two of the FI respondents (1.7 percent) reported no payments fraud attempts for 2011; that
figure was four for all other organizations (20 percent). Respondents were asked to choose up
to three payment types that had the highest number of fraud attempts. As shown in Chart 1, of
FI respondents, 83.6 percent chose signature debit card as having the highest number of fraud
attempts, followed by check (49.1 percent) and PIN debit (45.7 percent). Check fraud attempts
were the highest among non-FI organizations at 65 percent, with credit card attempts second at
35 percent.

FIRM • Financial Institution Relationship Management
Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201

DALLASFED
Chart

1

Payment Types with Highest Number of Fraud Attempts
(percent of respondents)

Percent
90

}

80

DALLAS FED RESOURCES
Economic Updates
Regional—“Regional
Economic Growth
Decelerates”
National—“Recent
Weakness Sets Pace For
Uncertain Second Half”
International—“Global
Growth Prospects Lower
on Continued Euro-Area
Uncertainty”

Southwest Economy
“Oil Boom in Eagle Ford
Shale Brings New Wealth to
South Texas”

e-Perspectives
“At a Crossroads: Finding a
Path to Affordable SmallDollar Lending in Texas”

Economic Letter
“China’s Slowdown May Be
Worse Than Official Data
Suggest”

Financial Insights
“2012 Payments Fraud
Survey Summary of Results”
“Branding the Great
Recession”

Find other resources on the
Dallas Fed website at
www.dallasfed.org.

70
60
50
40
30
20
10
0

0
Debit–
Signature

Checks

Debit–
PIN

Credit
Cards

ACH
Debits

Financial institutions

Wire

No
Fraud

Non-financial institutions

ACH
Credits

Cash

Prepaid
Cards

Total

Nearly 45 percent of respondents experienced increased fraud losses in 2011 over 2010, while
approximately 38 percent indicated their financial losses due to fraud had stayed the same, and
nearly 17 percent reported that they had decreased.
For the organizations that experienced fraud losses, over 74 percent estimated losses at 0.5
percent or less of their annual revenue. Nearly 63 percent of all respondents selected the lowest
range of loss, or less than 0.3 percent of annual revenues. These data suggest that losses due to
payments fraud are relatively small and well controlled.
The survey also solicited information regarding payments fraud mitigation. Respondents were
asked about their use of—and the effectiveness of—various fraud mitigation methods and
tools. Questions were asked regarding authentication methods, transaction screening and risk
management approaches, internal controls and use of risk mitigation services offered by FIs.
Chart 2 summarizes the response data on risk mitigation services offered by FIs, and Chart 3
summarizes their use by non-FI respondents.
As shown in the charts, a large majority of FI respondents are offering services such as online
statements to their corporate customers and have implemented multifactor authentication
requirements for the initiation of payments—many of the latter likely the result of the Federal
Financial Institution Examination Council’s (FFIEC) guidance and supplemental guidance on
multifactor authentication. However, as one moves down the list of service offerings to more
complex products, such as positive pay/reverse positive pay and payee positive pay (for both
check and ACH), the percentage of financial institution respondents offering those services
decreases significantly. This may be indicative of the fact that many FIs either cannot or do not
offer these more sophisticated services or do not have a commercial customer base that has
yet expressed a need for them (for example, banks with smaller commercial clients, or credit
unions).
The survey also asked respondents to report on barriers to further reduction of payments fraud.
Most identified a version of “cost,” citing the lack of staff resources, implementation costs and
lack of compelling business case as the main barriers.
Finally, as far as regulatory changes are concerned, most respondents indicated that they would
like to see increased penalties and prosecutions for fraud. Topping the list for FI respondents
was placing more responsibility for fraud mitigation with—and shifting liability for fraudulent
card payments to—the entity that initially accepts the card payment.

2

FIRM • Financial Institution Relationship Management
Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201

DALLASFED
Chart

2

Percentage of FI Respondents Offering Risk Mitigation Services

Online information services, e.g., statements
Multifactor authentication to initiate payments

}

Account alert services

ABOUT FINANCIAL
INSIGHTS AND FIRM
Financial Insights is
published periodically by
FIRM – Financial Institution
Relationship Management –
to share timely economic
topics of interest with
financial institutions.

Account masking services
ACH debit blocks
Card alert services for commercial/corporate cards
ACH debit filters
Check positive pay/reverse positive pay
ACH positive pay
Post no check services
Check payee positive pay
ACH payee positive pay
0

FIRM was organized in 2007
by the Federal Reserve Bank
of Dallas as an outreach
function to maintain mutually
beneficial relationships
with all financial institutions
throughout the Eleventh
Federal Reserve District.
FIRM’s primary purpose
is to improve information
sharing with district financial
institutions so that the
Dallas Fed is better able
to accomplish its mission.
FIRM also maintains the
Dallas Fed’s institutional
knowledge of payments,
engaging with the industry to
understand market dynamics
and advances in payment
processing.

10

20

Chart

3

40

50

60

70

Offer by 2014

80

90

100

Don’t offer

Percentage of Non-FIs Using Risk Mitigation Services Offered by FIs

Online information services, e.g., statements
Multifactor authentication to initiate payments
Check positive pay/reverse positive pay
ACH debit blocks
Account alert services
ACH debit filters
Fraud loss prevention services, e.g., insurance
Card alert services for commercial/corporate cards
Check payee positive pay
ACH positive pay
Post no check services
ACH payee positive pay
Account masking services
0

10
Use

FIRM outreach includes
hosting economic roundtable
briefings, moderating CEO
forums hosted by Dallas
Fed senior management,
leading the Dallas Fed’s
Community Depository
Institution Advisory Council
(CDIAC) and Corporate
Payments Council (CPC),
as well as creating relevant
webcast presentations and
this publication. In addition,
the group supports its
constituents by remaining
active with financial trade
associations and through
individual meetings with
financial institutions.

30

Offer

20

30

40

50

Use by 2014

60

70

80

90

100

Don’t use

This survey was conducted jointly with the Federal Reserve Banks of Boston, Minneapolis,
and Richmond, and the Independent Community Bankers of America (ICBA). In general, the
results for the Eleventh Federal Reserve District were in line with those for other participating
entities. As payments-related fraud remains an ongoing concern, we intend to repeat this survey
biennially. This will allow us to analyze trend data on payments fraud and better understand
which payments fraud mitigation efforts and regulatory changes might be most effective in
reducing losses due to payments fraud.
Davies is the director of payments outreach in the Financial Institution Relationship Management
Department at the Federal Reserve Bank of Dallas. Send comments or questions about this article to the
author at matt.davies@dal.frb.org.
NOTE
1
Survey questions varied depending on whether a respondent indicated his or her organization was an FI or a non-FI.
While the number of non-FI respondents to our survey this year is small, it is hoped that number can be increased in the
next survey to provide even more meaningful results.

Contact us at Dallas_Fed_
FIRM@dal.frb.org.

3

FIRM • Financial Institution Relationship Management
Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201

DALLASFED
Noteworthy Items
Richard Fisher’s speech before the Australian American Leadership Dialogue
In this speech, Dallas Fed President Richard Fisher shares his American story: from homeless to
Harvard in one generation.

}

www.dallasfed.org/news/speeches/fisher/2012/fs120709.cfm

MEMBERS OF FIRM
Diane de St. Germain
Vice President
Diane.M.De.St.Germain@dal.frb.org

Tom Siems
Senior Economist &
Director of Economic Outreach

Economic Insights: Conversations with the Dallas Fed webcast on “Celebrating
Friedman: Why Freedom Matters”
Robert Lawson, economics professor at Southern Methodist University, and Thomas Siems, senior
economist and director of economic outreach at the Dallas Fed, reflect on the legacy of Nobel-prizewinning economist Milton Friedman in making the case for freedom and why freedom matters to
people everywhere.
www.dallasfed.org/publications.cfm?tab=1#dallastabs

Tom.Siems@dal.frb.org

Jay Sudderth
Relationship Management
Officer
Jay.Sudderth@dal.frb.org

Chairman Bernanke’s speech to U.S. educators on financial education
In this speech, Federal Reserve Chairman Ben Bernanke encourages teachers to help students
achieve greater financial literacy, not only for their own well-being but also for the economic health
of our nation.
www.federalreserve.gov/newsevents/speech/bernanke20120807a.htm

Steven Boryk
Outreach Representative
Steven.Boryk@dal.frb.org

Matt Davies
Director of Payments Outreach
Matt.Davies@dal.frb.org

Susan Springfield
Outreach Coordinator
Susan.Springfield@dal.frb.org

4

Federal Reserve simplifies reserves administration
The Federal Reserve is implementing changes to the policies, internal processes and technologies
that support the administration of reserve requirements effective Jan. 24, 2013. The new application
to view information for reserve management is Reserves Central—Reserve Account Administration.
All current ReserveCalc subscribers will automatically be granted access to the new application.
Organizations currently without access to the ReserveCalc application are encouraged to complete
the Reserves Central—Reserve Account Administration access request by Oct. 15, 2012.
www.frbservices.org/centralbank/reservescentral/reserves_administration_resource_
center.html

FIRM • Financial Institution Relationship Management
Federal Reserve Bank of Dallas
2200 N. Pearl St., Dallas, TX 75201