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Evolving Fraud Schemes Keep Pressure on Evolving Payments Instruments

The battle against payments fraud is as old as money. But while some of the latest efforts borrow from scams past, most of today's fraud schemes are as sophisticated as banks' most advanced payments systems. And stopping them is still a challenge.

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Name a payment method and there is probably some scheme to defraud it. Since the Chinese introduced paper money, banks have been concerned about fraud. More than a thousand years later, payments fraud continues to haunt banks, consumers and businesses.

"Fraud is still rampant," comments Paul Sussman, VP with First Manhattan Consulting in New York. "The majority of businesses over $1 million in revenue are going to be exposed to payment fraud, and almost every bank is being hit by fraud today."

From simple "Dumpster diving" to organized crime rings that rely on complex computer programming, fraud scams grow in sophistication to match the evolution of payment forms. "Fraud trends continue to evolve," notes Douglas Twining, director of fraud services for Cleveland-based KeyBank ($99 billion in assets). "The fraud types we've seen for years, such as check fraud, are still in existence and are being tailored to today's world. Check fraud is easy to commit for unsophisticated fraudsters as well as the sophisticated criminals."

In fact, despite the advent of Check 21 and electronic bill pay, check fraud remains the most prevalent form of corporate payments fraud. According to the Association for Financial Professionals' 2009 AFP Payments and Fraud Control Survey, nine out of 10 organizations (91 percent) that experienced attempted or actual payments fraud in 2008 were targeted via check fraud. (ACH debit came in a distant second, at 28 percent, followed by consumer credit/debit cards, at 18 percent, and corporate/commercial cards, at 14 percent.

Iqbal Khan, executive director of New York-based JPMorgan ($2.2 trillion in assets) Treasury Services, which sponsored the AFP survey, says the study revealed an overall increase in fraud activity year over year. He emphasizes, however, that it is important to distinguish between fraud attempts and realized losses. "Remember, it is attempts versus actual fraud," Khan says. "The number of attempts remains strong, but fraud losses are declining because of technology."

But fraud never disappears, suggests Christopher Beier, a senior product manager with Brookfield, Wis.-based Fiserv. It just goes elsewhere.

He points to a Javelin Strategy & Research study that showed a decrease in credit card fraud for 2007. Fraud in non-card accounts (checking and savings), however, were on the rise, from $1,800 per loss in 2007 to $9,800 in 2008, according to Beier. "There's a higher mean fraud cost here," Beier says. "Fraud didn't go away. It just moved."

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