Fraud – Single Message vs. Dual Message
Both the Federal Reserve, through their reports on Regulation ii, and the Nilson Report track fraud and its costs on a year-over-year basis, and with the latest releases some stark trends have arisen. For debit payments, there are two types of networks that help process each transaction: domestic and global networks. (Global Networks, such as Visa or Mastercard, process transactions with a dual message, where a signature is used to authorize the payment. Local networks, however, process single message transactions, where a PIN is entered at the Point of Sale. These transactions are referred to as signature debit and PIN debit, respectively.)
Dual-message transactions, such as credit card payments, are often supported by global card networks including Visa and Mastercard. Conversely, single-message transactions are supported by domestic debit networks such as Interlink, Pulse, Star, or Accel.
Since 2011, domestic debit has by and large been the more secure method of payment, with 3 cents less lost per transaction to fraud than global networks according to the most recent Federal Reserve report. This gap widened from 2017-2019 to nearly 5 cents per transaction. It is also important to note that domestic debit losses decreased from 2017-2019, showing that the method is becoming more secure, while global debit becomes riskier on a per transaction basis.
Figure 1. Debit Card Fraud – Losses per Transaction
Fraud and the Shift to Online
One of the underlying reasons for the growing differential in fraud rates could be the ongoing shift to online spending, where global networks are much more prominent. This is because the ability to route down domestic networks is normally restricted to when a PIN can be entered, which is not possible online. (PINless debit, an innovation that allows single message networks to route transactions without PIN entry, is currently somewhat restricted in the supply chain and therefore is not as prominent as PIN debit.) While this does help explain the trend, it exposes another issue with the rising costs of fraud: the majority of card not present (CNP) fraud losses fall onto the merchant. Merchants are liable for most fraudulent transactions online and are the most affected by an increase in CNP fraud, because of many reasons, such as the fact that EMV chip technology is not available online (Source: Federal Reserve Reg II reports, 2011-2019.)
Figure 2. CNP Fraud Losses (Source: Federal Reserve Reg II reports, 2011-2019)
Therefore, merchants are incurring significant costs from fraud in the CNP environment, but as the graph illustrates, largely for global debit transactions. Fed data suggests local debit transactions, although not as prominent as global, remain nearly risk-free regarding fraud in the ecommerce environment.
Global Card Networks vs. U.S. Domestic Card Networks
The Nilson Report tells a very similar story to the Fed’s Regulation ii report regarding fraud between card networks but extends the research to credit transactions as well. Global networks lose nearly 4 times the value to fraud than domestic networks do. This trend has been consistent from 2015-2019 and affirms that domestic networks are much more secure than global networks, regardless of which channel the transactions are occurring in.
Figure 3. Average Fraud Losses by Network
Over the past decade, fraud has grown and online, and the Fed report gives a clear indication of the sources of that fraud. The Data – in line with the Nilson Report – strongly suggest dual-message transactions are more prone to fraud than single-message. This trend is exacerbated online, where global networks are more prominent and fraud rates are higher generally. Fraud rates can vary significantly between merchants, so it’s important for retailers to understand how their fraud rates compare, and to remain vigilant in the optimization of their supply chain as their commerce moves online.