FMI Report Details Cost of Debit Fraud Prevention

ARLINGTON, Va. — Food Marketing Institute here on Tuesday issued a report indicating that food retailers pay a disproportionate amount of money for debit-card fraud protection relative to the actual rate of debit-card fraud in their stores.

The report, “Debit Card Fraud and the Impact of Regulations on the Grocery Industry,” noted that signature-debit transactions account for 85% of the fraud losses on debit cards each year, compared to the more secure PIN debit transactions favored by food retailers.

Card issuers, however, are incentivized to favor signature debit transactions, the report explained, because they are more profitable than PIN debit transactions for the issuers themselves.

“Supermarkets have long encouraged their customers to enter a PIN when swiping a card because it is more secure and efficient, and we believe it’s inappropriate for food retailers to shoulder the cost burden of more fraud-prone signature cards,” Leslie G. Sarasin, president and chief executive officer of FMI, said. “Use of a PIN helps minimize data security risks preventing our customers from a card compromise that may leave them without critical access to funds in their checking accounts.”

In association with the report, FMI issued a letter to Ben Bernanke, chairman of the Board of Governors of the Federal Reserve, urging the Federal Reserve to review supermarket costs associated with preventing debit card fraud before finalizing its interim final rule on interchange-fee fraud adjustment provisions. Last June the Board adopted an interim rule that capped fees at 21 cents per transaction, plus 5 basis points of the total transaction amount to account for debit-fraud losses. The Board also allowed issuers a 1-cent-per-transaction fraud prevention adjustment, provided they meet certain criteria.

“By paying 5 basis points for debit fraud losses, regardless of the transaction type, food retailers would be effectively subsidizing the cost of fraud that disproportionately takes place in other parts of the payment system,” the report states.