How fraud prone are prepaid debit cards?

Use of prepaid debit cards is at an all time high. People are using prepaid debit cards for issuing gift certificates to handing out money for disaster relief. By the end of 2013, money placed on to reloadable cards is expected to reach $209.1 Billion. Back in 2009, the reported numbers on prepaid debit cards were $28.6 Billion, according to Mercator Advisory Group. Increase in usage of prepaid debit cards also means it is vulnerable to being hacked.

When asked by Reuters about prepaid cards being targeted by the hackers, Joe Petro (Managing Director at Promontory Financial Group) said 'It's usually prepaid debit cards. That's the card of choice in this. The bad guys know the system and they have been able to exploit it.'

Prepaid cards have less security features on them in comparison to a bank issued debit or a credit card. There are also no credit histories or no individual purchase pattern associated with such cards. This has made it vulnerable to hacking by fraudsters.

Hackers are able to access systems hosted by the third party payment processors who have presence outside US and have lesser security standards. Once the hackers are in, they increase the withdrawal limit of the prepaid debit cards and steal the money without raising any alarm bells.

One of the recent attempts by the hackers was to do away with over $45 million by raising the withdrawal limits on prepaid MasterCard debit cards issued by Bank of Muscat and National Bank of Ras Al Khaimah (from UAE). In about 10 hours, over $45 Million was stolen from multiple ATM’s by one hacker group.

LTP View: There are several measures to safeguard the prepaid card such as picking a PIN, putting a lid on the reloadable cash amount, etc. There is an opportunity for startups to build solid fraud detection and prevention systems for prepaid cards. Banks have less space to innovate here but need to ensure that the security measures are beefed up both in house and at the third party payment processors. Prepaid cards are here to stay. They continue to be great instruments for underbanked and unbanked.