Earlier this year the International Security Ligue published its report ‘Fraud in Cash and Electronic Payments: Taxonomy, Estimation and Projections’.
Based on data gathered in a broad range of countries between 2014-18, it provides an interesting and comprehensive classification of payment fraud alternatives, and also offers an estimation of the value of fraud with different cash and card payment options, as well as delving into the increasingly popular options of contactless and cryptocurrency.
The authors of the report – Santiago Carbo-Valverde (Professor of Economics and Finance at the Bangor Business School in the UK and of CUNEF Business School in Madrid, Spain) and Francisco Rodriguez-Fernandez (Professor of Economics at the University of Granada in Spain) – draw an interesting distinction concerning fraud; fraud connected to tax evasion but originating from a legitimate activity (otherwise known as the underground economy), or fraud attached to illegal and non-productive activities.
The analysis provided suggests that payment fraud is a rapidly growing phenomenon, because technological efforts to curtail fraud practices face an even larger and growing variety of fraud innovations. These can be classified in two genres: technological flaws (ie. security gaps of devices/software), and social engineering (ie. limited control of human-machine interactions).
Overall, a significant shift from cash fraud to card-related fraud has also been observed and is projected to continue.
As technology evolves, there is a diversification of payment channels and options. This has been particularly acute in the aftermath of the 2008 financial crisis, when social engineering emerged as a substantial public policy problem.
While technology improves security in certain segments, other risks emerge, and this has been the case with the EMV chip in payment cards. As the EMV chip has been implemented in many countries, a transfer from ‘lost and stolen’ and ‘counterfeit’ fraud to card-not-present (CNP) fraud has been observed.
The data shows that cash related to illegal activities represents less than 25% of the underground economy and this figure has recently been falling substantially.
Meanwhile, other forms of fraud, such as CNP, increased by more than six times between 2014 and 2018 alone.
A degree of decreasing cash fraud matched with increasing card fraud is probably to be expected, given global changes in payments choice over the data collecting period; however, the authors assert that due to low interest rates this was actually a high cash demand period.
As an estimate, fraud with cash has been decreasing 1.7% annually while fraud with cards has been increasing 16.2% annually. If this trend persists, card fraud per transaction would double by 2025, while the illegal economy linked to cash would fall by 10.4%.
As other electronic payment instruments have been growing alongside cash, a significant share of fraud has moved from cash to electronic means of payment. Although not specifically covered in the research, other types of fraud including laundering, sales suppression and transfer fraud are likely to also be of significant and growing value.
As a general conclusion, the analysis suggests that fraud does not constitute an intrinsic characteristic of payment instruments but represents a social problem that needs to be addressed with the appropriate public policies and private efforts.
The International Security Ligue is an association of private security organizations, which was founded in 1934, is registered in Berne, Switzerland and describes its role as defining, establishing and maintaining the highest ethical and professional standards of the private security industry worldwide.