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Debit loses favor with online thieves

By Claes Bell, CFA · Bankrate.com
Thursday, September 15, 2011
Posted: 4 pm ET

It looks like thieves are increasingly using alternative payment systems like PayPal, rather than debit cards issued by banks, to defraud merchants online.

Daniel Wolfe has an interesting article in American Banker this week highlights a Javelin Strategy & Research Study that finds debit cards' role in online fraud is decreasing:

Merchants that accept alternative payments reported in July that 27 percent of fraud takes place with those products, up from 20 percent a year earlier, according to data from Javelin Strategy & Research. Credit, debit and check transactions all showed declines in fraud occurrences among merchants that accept them.

The sharpest decline was for debit. Merchants that accept debit cards reported that just 18 percent of fraud took place with debit this year, compared to 30 percent a year ago. Check fraud dropped to 40 percent from 46 percent last year. Credit slipped to 65 percent from 66 percent.

From a consumer perspective,  I don't think alternative payment payment systems or debit cards are ideal for shopping online, because they're both customarily tied to a bank account.

That's problematic for a couple of reasons. For one, the laws protecting consumers in credit card transactions are much stronger than for electronic fund transfer transactions like debit. In the event of fraud, with EFT purchases, your maximum liability depends on how long after the fraud you report it, and can be $500 or even more if you take too long. With credit, your maximum liability is $50,and there's no time restriction.

For another, in the event of fraud involving a debit card or alternative payment, the thieves will likely be emptying your bank account. That can cause a cascade of overdraft fees and financial hardship until the bank gets to the bottom of what happened.

On the other hand, if a hacker gets your credit card information and makes a fraudulent purchase, they'll actually be stealing the bank's money. True, you'll have to deal with it, but it will be in the form of an inaccurate credit card bill and not an empty bank account. That distinction is important because, in my experience, it's much easier to get a fraudulent credit card charge cancelled than it is to get a bank to put cash back into a checking account, even when the case is clear-cut.

What do you think? What payment type do you use online? Do you think PayPal and other alternative payment systems are risky?

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3 Comments
Karl
October 15, 2011 at 8:12 pm

Have had fraud on my credit card once before and decided not to use my debit card for anything but ATMs afterwards.

The more you use a card, the more likely to have issues.

Much easier to dispute a credit card bill, rather than have an empty bank account.

melva
September 29, 2011 at 9:05 am

I have had several problems where I purchased a product, canceled within 24 hrs then had 2 and three more charges on my statement. One credit card didn't remove and I canceled them

Sheena
September 22, 2011 at 7:42 am

I accidentally signed up for an automatic re-order thing. I thought it was a one-time purchace. I cancelled it as soon as I found out.

A few months later, 2 charges appeared on our online statement (thank goodness for those!) that I did not make. The company apparently decided to sign me up for all kinds of health and beauty products without my permission.

The fraud division at my bank was very quick to return the money to me and have been great about helping to report the company.

Buyer beware. Read that fine print. All of it.