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Sharp increase in direct debit fraud

So far this year, 26,000 Britons have discovered that fraudsters have set up regular direct debit payments from their bank accounts, according to research from insurer, LV=.

Direct debit fraud occurs when a criminal sets up a payment from a victim’s bank account to pay for a service, such as a mobile phone account.

Over the last four years, reports of such incidents have rocketed (from 6,200 in 2006) and today’s victim loses £540 on average before realising their bank account has been hijacked.

The increase has been driven by the introduction of Chip and PIN which has made it harder to make use of stolen credit or debit cards.

In 2009 the number of “traditional” card fraud cases fell by 4% as fraudsters changed tactics, while direct debit fraud now accounts for around 10.6% of all identity fraud cases.

The study, which was conducted by the Centre for Economics and Business Research on behalf of LV=, is predicting that the problem is set to grow to 41,000 cases a year, by 2013.

Comments (1)

One Response to Sharp increase in direct debit fraud

  1. Jonathan Williams says:

    It is commonly accepted that criminals react very quickly to newly-introduced security measures. Perhaps it is not surprising that as new fraud prevention technologies such as Chip and PIN and two-factor authentication have become the norm fraudsters are already moving to the next perceived loophole – direct debits. Typically this is, as discussed in the report, a fraud of “misuse of facility”: using someone else’s bank account to pay the fraudster’s bill. The telecoms industry quite rightly provides a prime example of the challenges around direct debit fraud. Criminals set up unauthorised direct debits on third-party bank accounts or by using stolen and/or made-up account and sort code details and walk out of high-street shops with expensive smartphones and no intention of paying the ongoing subscription.

    From our research many corporates still report direct debit fraud as theft and therefore report it to the police instead of informing their bank or a clearinghouse such as Bacs. It is therefore not surprising that these organisations don’t get to see the true picture. What businesses have to bear in mind, however, is that, as cheques decline and efficiency becomes paramount in this new age of austerity, there is a general drive in both the private and public sector to move more and more payments to Direct Debit. A propotion of these will be fraudsters posing as legitimate customers and this report provides a first estimate of this fraction.

    It is good to see a corporate talking openly about the problems of preventing fraud. Only by facing up to the challenges, including what measures could be applied to manage the problem, can the payments industry start to take control. The key is further verification of the data provided. Direct Debit originators should check the account numbers appear to be valid, but best practice is to confirm the link to the owner of the account and authenticate the prospective consumer and, ideally, his or her address.

    Fraud considerations, especially in today’s financial climate, need to be top of the agenda for financial institutions and corporates. In order to prevent a rise in direct debit fraud, companies need to adopt the relevant data validation tools to verify a customer’s account at the point of entry. Connecting an individual’s identity to their bank account and address is one solution; only by linking these three pieces of information can corporates really be sure of their consumer information, and more importantly the source or destination of their customer’s funds. Preventing fraud is like repairing a burst pipe – it is only when all the holes have been plugged that there will be no leakage.

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