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CardHub.com Study: Which Type of Card Best Protects Consumers from Fraud?

CardHub.com today released its 2013 Consumer Fraud Liability Study, which determined the extent to which people are vulnerable to monetary loss resulting from unauthorized credit card, debit card, prepaid card, and ATM transactions.

More specifically, the study – which was based on a survey of VISA, MasterCard, American Express, Discover, and a number of major store card issuers as well as federal law and online marketing materials – answered the following three important questions:


1. When are consumers liable for fraud?
2. Which payment vehicles best protect consumers from fraud liability?
3. What is required of consumers in order to benefit from fraud liability safeguards?
A sampling of the study’s main findings can be found below, along with insights from Card Hub CEO and former Capital One senior director Odysseas Papadimitriou. Card Hub’s tips for how consumers can minimize the potential for fraudulent losses follow thereafter.
• Credit cards offer the best fraud liability protection for consumers, as all four major card networks provide $0 liability guarantees for unauthorized credit card transactions.

Odysseas Papadimitriou (OP): “A credit card is the safest type of payment vehicle for people to use for two reasons. First, card network liability policies are simply more advantageous to the consumer when it comes to credit card transactions than transactions involving debit cards, prepaid cards, or ATM cards. Credit cards also make fraud easier to deal with given the inherent way in which they work. You see, with a credit card you have up to 25 days to pay your bill once your monthly statement becomes available (assuming you aren’t revolving a balance). It’s therefore likely that you’ll notice and report suspicious charges before you actually have to put any of your own money toward them. With a debit card, on the other hand, money gets removed from your account at the time a purchase is made. That means you’ll not only have to try to recoup your lost funds, but you may also inadvertently bounce a few checks in the meantime if you aren’t keeping a watchful eye on your account activity. Plus, you also have to consider the psychological trauma, if you will, that comes with unexpectedly finding your bank account empty.”

• Liability for unauthorized debit card transactions depends on whether a signature or PIN is used to verify the transaction. Consumers enjoy more substantial protections when they sign for a purchase as opposed to using their PIN.

o Consumers are NOT liable for signature debit card transactions, regardless of card network.

o Reloadable prepaid cards offer the same fraud liability protections as traditional debit cards.

o Liability for a Visa PIN debit card transaction depends on whether VISA or an unaffiliated PIN network processes the transaction, but there is NO WAY for cardholders to determine how a given transaction will be processed. More specifically, cardholders will either enjoy $0 liability if a transaction is processed by VISA or get no additional coverage beyond what is available via federal law if it processed by a third-party network. In certain cases, the latter situation could result in the cardholder assuming full liability for the unauthorized transaction.

o MasterCard does not offer added liability protection for unauthorized PIN debit card transactions. If it cannot be proven that the cardholder furnished the PIN, liability is limited by federal law to $50 if the fraud is reported within two business days and $500 if reported within 60 days (no limit thereafter).///

o Discover is the only card network that extends its $0 liability guarantee to all PIN debit card transactions (American Express does not offer debit-based PIN transactions).
(OP): “It’s important to note that while only about 59% of all debit card transactions are verified by signature, 85% of all the fraudulent debit card transactions are ‘verified’ in this manner. This, of course, begs the question of why are card networks therefore promoting signature verification with their consumer liability policies. Consumer liability for fraudulent debit card transactions that are ‘verified’ by signature is much lower than that for transactions involving the use of a PIN, you see. The answer is the Durbin Amendment. It restricted the swipe fees for PIN transactions more than that it did those for signature transactions. In other words, banks are willing to risk added fraud liability in order to maximize revenue.”
• Discover and American Express cardholders are NOT liable for unauthorized ATM transactions. VISA and MasterCard do not offer added liability protection for ATM transactions, although a card’s respective issuer might.

(OP): “Discover and American Express really set themselves apart when it comes to liability for unauthorized ATM use, but to be fair it’s much easier for them to do so given their tiny share of the ATM market. Nevertheless, while VISA and MasterCard fall back on federal law and supplemental protections offered at the discretion of issuing banks, Discover and Amex give their customers one less thing to worry about and thereby further enhance their reputations for superior customer service.”

• Discover and American Express offer the best fraud liability protection across payment types, as they are the only major card networks whose $0 fraud liability guarantees apply to credit card transactions, signature debit card transactions, PIN debit card transactions, and ATM transactions. (American Express does not offer debit-based PIN transactions).

(OP): “People who have Discover and American Express cards in their wallets benefit from something that that VISA and MasterCard users don’t: blanket liability coverage and the peace of mind that comes with it. They know that no matter what type of card they use or transaction they make, the hit for any fraud that may crop up won’t be theirs to take. Since the dangers of fraud are largely psychological, in that the incidence of it is quite low and the chances you’ll personally lose any money are even lower, Discover and Amex have a distinct advantage over the competition in this regard. Still, you can’t escape the fact that there are simply far more VISA and MasterCard cards out there than Discover and American Express cards. In other words, the bottom line is that while it certainly looks good for Discover and Amex to extend themselves more than the other major networks, it’s not really costing them much in the grand scheme of things.”

• With the exception of non-reloadable provisional prepaid cards, consumers do not need to take any proactive steps (such as registration) in order to qualify for fraud liability protection. However, consumers must report fraudulent or suspicious account activity to their card’s issuer in order to benefit.

(OP): “It’s fair for consumers to wonder whether or not they need to enroll in some program or fill out a form in order to qualify for fraud liability protection. Thankfully, that’s not the case. Not really thinking about fraud until it happens, if it happens, doesn’t mean you’re too late. Instead, all you have to do is notify your card’s issuer as soon as possible and you should be fine.”

Tips for Minimizing the Potential for Fraudulent Losses

With the findings from the 2013 Consumer Fraud Liability Study in mind, we at Card Hub recommend the following tips for consumers looking to minimize their vulnerability to losses resulting from unauthorized transactions:
1. Make a credit card your primary spending vehicle: Major card network policy shields all consumers from any fraud liability for unauthorized credit card transactions, and the alternatives are less secure given their debit-based nature and the uneven liability safeguards that apply to them.

2. Regularly review your payment accounts: The best way to ensure minimum fraud liability, regardless of the type of payment vehicle you’re using, is to spot any unauthorized transactions as soon as possible and report them to the respective financial institution that issued your card. In other words, make it a practice to regularly review your account activity (we recommend doing so weekly) and make sure to save your receipts in order to compare them with the transactions that appear on your statement.

3. Sign for debit card transactions, when possible: Though debit card transactions “verified” by signature account for a relatively higher share of all fraudulent debit card transactions than those “verified” by PIN, consumer liability is lower when a signature is used since card networks want to promote such transactions given their increased profitability.

4. Don’t leave room for doubt: Never leave the final amount of a transaction open for interpretation. That means, for example, making sure to always fill in the “Tip” field on a bill, even if you’re only going to write “$0.00.”

5. Safeguard your PIN: When using a card with a Personal Identification Number (PIN), make sure not to tell others what it is, write it down anywhere that a third party could access it, or let bystanders see it when inputting it at the point of sale or ATM.

6. Be careful about whom you share account information with: In addition to making sure that no one but you knows your PIN, there are a few other simple steps that you can do to prevent sensitive financial information from falling into the wrong hands and ultimately putting a dent in your bank account:

o Do not provide financial information to another party unless they are reputable and you reach out to them first, as opposed to them proactively contacting you over the phone or via e-mail.

o Do not send private account information (e.g. your credit card number or online banking password) via e-mail, as it doesn’t tend to be secure.

o Make sure that any website through which you submit a credit card number has an address that starts with “https” and a domain name that matches the name of the site you’re on.

o Shred any documents that contain financial account numbers before throwing them away and make sure to update your address on file with your bank/card issuer if you move.

7. Don’t worry so much: While it’s clear that people are generally quite concerned with the prospect of fraud, the tiny percentage of transactions that it affects and the consumer-friendly liability safeguards that are in place mean that you have very little to worry about, particularly if you take the aforementioned steps to minimize your vulnerability.

Additional information, including a breakdown of the best and worst case fraud scenarios for consumers when using different types of financial products can be found at: http://www.cardhub.com/edu/fraud-liability-study/

Recent Card Hub Studies & Reports:
• Credit & Debit Card Fraud Statistics
• Best Credit Cards for 2013
• 5 Ways to Get Value From Unused Gift Cards
• Q4 Credit Card Landscape Report
• Why You Shouldn’t Worry About Credit Card Surcharges

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