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One very easy way to reduce fraud loss

November 28, 2011 by Kevin Christensen — Vice President, Audit, SHAZAM

Fraud prevention is a complex endeavor. There is a litany of methods a financial institution can implement to lower or even stop debit card fraud. However, for many it comes down to what the FI can reasonably afford and how that investment meshes with the losses it has suffered in the recent past.

However, there is one very simple and completely free way community banks and credit unions can reduce fraud losses, which is to lower the daily limits allowed to debit cardholders.

The fact is that some debit card issuers today allow their cardholders to spend as much as $3,000 a day via debit. Most likely this comes from a genuine desire to prioritize cardholder convenience. Understandably, the FI doesn't want to put its cardholders in a position where they are declined for that big-screen TV purchase at Best Buy.

At the same time, that very FI is completely vulnerable to attack. With zero liability rules for recovery via the chargeback process, a community bank or credit union is likely to lose every cent of a fraudulent debit purchase – not to mention the time and cost to stop a fraudster from doing any further damage.

Over time, we have come to find that best practices for debit limits is around $1,000 for point-of-sale and $300 for ATM cash withdrawals. So long as an FI communicates these limits to cardholders clearly and frequently – and also explains that the limits can be adjusted as needed – the FI is usually able to strike a pretty solid balance between cardholder convenience and protection.