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Fraud Worries: Debit vs. Credit Cards

posted on 2015-05-20 by Karen Damato

Finding fraudulent purchases on your credit-card account is bad enough. Having a thief gain access to your bank balance is much worse.

Criminals are stealing card data from U.S. automated teller machines at the highest rate in two decades, preying on ATMs while merchants crack down on fraud at the checkout counter.

Meanwhile, the risk of unauthorized bank withdrawals is weighing on consumers deciding whether to make purchases with debit cards, which are connected to a bank account, versus credit cards, for which accountholders get a bill to pay later.

If fraudulent transactions are made on your credit-card account, there is no immediate financial hit while you straighten things out, notes Greg McBride, chief financial analyst at website Bankrate.com.

By contrast, if a thief is able to withdraw dollars from your bank account, “the horse is out of the barn,” he says. The money is gone from your account until you are able to get it restored.

Mr. McBride says he generally recommends credit cards over debit cards, but principally for benefits such as more-generous rewards programs.

Website CardHub.com says fraud concerns are one reason it suggests consumers use a credit card as their “primary spending vehicle.”

CardHub Chief Executive Odysseas Papadimitriou says he has personally experienced credit-card fraud and a fraudulent $3,000 withdrawal from his bank account. The credit-card problem was annoying but when money disappeared from his bank account, he says, “I got really, really stressed out. It was very painful to see that.”

Here’s a look at your fraud-related liability on credit and debit cards:

Credit cards

The Consumer Financial Protection Bureau says that if your credit-card number—not your physical credit card—is stolen, “you are not responsible for unauthorized charges under federal law.”

If the actual credit card is stolen, you are liable for no more than $50 in unauthorized charges as long as you report it to the card issuer. But “most card issuers don’t even hold you to the $50,” Mr. McBride says.

The Visa V -0.38% and MasterCard MA -0.25% networks and big issuers Discover Financial Services DFS -0.45% and American Express AXP -0.10% all have a zero-liability policy on fraudulent credit-card transactions, according to a recent study by CardHub.

Debit cards

Many banks have instituted a zero-liability policy on their debit cards, says Mr. McBride, because “they want people to use their debit cards.”

But issuing banks usually have some discretion to determine if the customer promptly reported the theft. And different types of debit-card transactions may be treated differently.

Federal rules allow significant liability for fraudulent debit-card transactions that aren’t reported in a timely manner.

With debit cards, the CFPB says that “if an unauthorized transaction appears on your statement (but your card or PIN has not been lost or stolen), under federal law you will not be liable for the debit if you report it within 60 days after your account statement is sent to you.”

The rules are different if the card or PIN has been lost or stolen: Report the problem within two business days and liability is limited to $50 of unauthorized charges. Then the maximum liability rises to $500.

“If any unauthorized charges go unreported for more than 60 days,” the CFPB says, “your money, and future charges by the same person, could be lost.”

While financial-industry policies can be more generous than the U.S. requires, that can also vary with the type of debit-card transactions involved, the CardHub report says.

For instance, CardHub says Visa and MasterCard both provide for zero liability on signature-based transactions on their debit cards. Also, there’s no liability on a PIN-based Visa debit-card transaction processed through the Visa network—and the same for MasterCard transactions on that network. (But a consumer “has no way of knowing what network transactions are processed on and therefore how much coverage they have,” the CardHub report says.)

Meanwhile, on ATM withdrawals, CardHub says coverage is at the discretion of the individual bank that issued the card.

The Federal Trade Commission has a handy summary of the rules and advice on how to report card fraud on its website.




Virginia Governor Signs Directive Requiring Enhanced Card Payment Security

posted on 2015-05-15 by By H. Scott Kelly and Michael E. Lacy

On May 5, Virginia Governor Terry McAuliffe signed an executive directive which sets enhanced security requirements for the purchase card program used by state agencies, including the implementation of “chip and pin” technology by December.  The directive further instructed Virginia’s treasurer, comptroller, and secretaries of finance and technology to implement enhanced payment technologies that “meet or exceed” federal standards for the state’s prepaid debit card, merchant, and purchase card programs.

“Ensuring the safety of citizen data is a critical responsibility of the Commonwealth of Virginia,” the Governor stated in the executive directive.  “In the face of ever-increasing cybersecurity attacks on consumer and business-related entities, I am committed to ensuring that transactions conducted between citizens and the Commonwealth meet the highest level of transactional security standards.”

The security features have been a hot issue for the Obama administration.  The President recently signed two executive orders that attempt to spur greater collaboration between the public and private cybersecurity sectors and encourage enhanced payment card technology.  The executive directive issued by Governor McAuliffe builds on both orders by making Virginia the first to apply the principles at the state level.

“I am keenly aware of the need for best practices and models to help spur states to advance their cybersecurity position and make it more difficult for hackers to gain access to our sensitive data,” McAuliffe said.  “We must partner with the federal government, the private sector and other states to push innovation and adoption of enhanced electronic payment technologies — by our agencies, our merchants and our citizens — to help reduce credit card fraud.  This directive will ensure the highest level of security for transactions conducted between citizens and state agencies.”




CFPB Extends CARD Act Comment Period Regarding Four Areas of Interest

posted on 2015-05-15 by Ethan G. Ostroff, H. Scott Kelly and Michael E. Lacy

As we discussed in March, the Consumer Financial Protection Bureau is soliciting public comment on how the credit card market is functioning and the impact of credit card protections on consumers and issuers.

To allow interested persons additional time to consider and submit their responses, the CFPB announced it is extending the comment period on four of the specific areas of interest noted in the original Request for Information, including online disclosures, grace periods, add-on products, and debt collection.

The 90-day comment period for these four areas will now end on June 17, 2015.  The original 60-day comment period for the other eight specific areas on which the CFPB is requesting information will end on May 18, 2015.




FTC Settles $26M Enforcement Action Against Credit Card Payment Processor

posted on 2015-05-15 by H. Scott Kelly and Michael E. Lacy

On May 5, the Federal Trade Commission obtained court approval of a settlement against CardFlex, Inc. and its CEO and President, Andrew Phillips, and Executive Vice President of Operations, John Blaugrund.  The lawsuit, captioned FTC v. CardFlex Inc. et al., No. 3:14-cv-00397 (D. Nev.), involved allegations that the defendants operated a $26 million credit card scheme by connecting consumers with another company known to be scamming customers.

According to the FTC, CardFlex partnered with iWorks, which allegedly tricked customers into paying monthly fees for non-existent services – including the use of fine print in its agreements to force customers to pay recurring monthly charges of up to $60 for online plans and services.  The FTC alleged that the defendants knew about iWorks’ deceptive practices and still helped it open nearly 300 merchant accounts under dozens of corporate names.

Under the settlement agreement, the defendants would pay $3.3 million (though that sum would be suspended pending a $150,000 deposit), the forfeiture of more than $1.2 million in jewelry, a Ford pickup truck, gold coins, and furniture, and a check on the truthfulness, accuracy, and completeness of financial statements and related documents.  The individual defendants are also permanently banned from acting as an independent sales organization or sales agent for a variety of services involving money-making opportunities, fraud prevention, and risk monitoring, and they must undergo a screening process before working with high-risk clients.




Think Credit Reports Are Too Expensive to Use as an Ongoing Due Diligence Tool? Think Again

posted on 2015-05-06 by Matthew Debbage, Creditsafe U.S.A.

A business credit report is most often used by credit and collections professionals at the beginning of a new client relationship to determine a company’s risk level before issuing a line of trade credit. But after that their usage tends to dwindle, largely because of the notion that obtaining reliable credit data is too expensive.

SunGard Corporate Liquidity’s Credit & Collections Global Benchmarking Study found a huge disparity in how much money companies spend on credit bureau data, based on their budget. According to the study, in 2014, 26 percent of companies with over $1 billion in revenue spent more than $150,000 annually on credit bureau data, while 29 percent of companies with under $1 billion in revenue spent less than $25,000 annually on credit bureau data. As you can see, the decision to purchase business credit data might appear to be contingent on a company’s financial wherewithal.

What’s unfortunate about this approach is that to get the most out of credit reports, they need to be used as an ongoing risk management tool, allowing you to spot any changes to your customer’s risk profile or payment behaviors and take action before they become a bigger issue. For instance, a credit monitoring service can provide regular alerts about any significant or sudden changes to a company’s financial status or credit health before the problem spirals into a bigger one, such as its credit rating, credit limit, payment behaviors, directors or legal filings.

Now for the silver lining. Credit reports have become more affordable in recent times, making it possible for businesses of all sizes to get more use out of them than they once could. Here are the primary factors driving down the costs:

-          The Internet – The delivery of credit reports via the Internet has made access for businesses more affordable by reducing or eliminating paper trails and speeding up the process of obtaining reports.

-          Flexible, subscription-based pricing models – Typically, a company would have to spend hundreds of dollars to get just one individual business credit report on a customer. Doing this quickly adds up. But now companies can sign-up for a subscription-based credit reporting service, allowing them to view credit reports on all of their customers, as often as needed.

-          De-monopolization – For decades, companies that needed reliable business credit information would have to turn to one of the big bureaus to obtain it, like Dun & Bradstreet or Equifax. But, this is quickly changing as more credit reporting bureaus are arriving on the scene to give American businesses more options, availability and pricing.


For these reasons, business credit reports are no longer just reserved for large companies with big pockets. If cost has held you back in the past from utilizing credit reports as a regular part of your risk management strategy, it doesn’t have to anymore.

About the Author

Matthew Debbage is the president of Creditsafe’s U.S. operations, overseeing the company’s expansion into the U.S. market. Creditsafe is the world’s most-used supplier of online company credit reports. Nearly 5,000 companies in the U.S. use its credit reports, ranging from small businesses to large, global concerns like Staples, Ryder and Nestle. Debbage, with more than 15 years of experience in market entry strategies, has successfully led the research, planning and launch of a number of operations in markets around the world, making companies more efficient and profitable.





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