Deposit Accounts Bust Out
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As an ex-banker who spent many years fighting deposit account fraud, I had never heard the terms "DDA bust-out" or "debit card bust-out†until recently. While "bust out" is a commonly used term to describe a specific type of credit card fraud, the term seems to be slowly but surely creeping into the vernacular for the liability side of the bank.
For those readers who aren't familiar with credit card fraud, a first party bust-out is a type of fraud scheme in which credit cards are obtained and maintained for a period of time to simulate "good" customers. Credit lines are then charged up to the limit, large payments are made, and the cards are quickly run to their limits again. Using counterfeit or forged checks, or unauthorized ACH transactions as the payment vehicle, the cards may be paid in full and charged up to their limits several times, resulting in the "bust-out". This often happens over a weekend, and the scheme may involve crooked merchants as well. Issuing institutions take losses in multiples of the credit lines when bust-outs occur. These fraudsters steal hundreds of millions annually by taking advantage of the combined effect of being allowed the immediate use of credit lines after payments are posted and the delay in identifying fraudulent payments.
As we all know, fraudsters are inventive, and they have begun applying this bust-out technique to debit cards as well credit cards. On the deposit account, bust-out activity looks like this: large deposits are made (generally via counterfeit check or unauthorized ACH), followed by fast expenditure of the funds. In the true fraudster tradition, cash withdrawals or purchases of fence-able goods(e.g. jewlery, electronics) are often part of the scheme. As in the credit card environment, the fraudsters open the deposit accounts and maintain them for some period of time to lull the bank into viewing them as good customers and eventually loosening up hold policies on deposits to their accounts.
Are you hearing about bust-outs in your liability risk management shop? Are you experiencing them first-hand? What are your thoughts on a traditional type of credit card fraud impacting deposits?