sys·ad·min·ol·o·gy [sis-ad-mih-nol-uh-jee]

noun

  1. The scientific study of system administration and related phenomena.

Monday, 10 December 2012

Card Fraud In America

Credit & Debit card spend in North America accounts for 27% of total card based purchases, however it accounts for over 47% of total world wide card fraud.

What's the reason for this disparity? Well, it comes down to a number of factors, but the root is a chicken and egg situation, that looks unlikely to be resolved while things are so tough for the banks. But before we get into that, we must go back to the beginning!

In the UK and much of Europe, magnetic strip on a card is largely defunct. Sure it still holds data, it can even be used as a back up, should the chip not be read, but in the main, the chip & pin has replaced the function of the strip and signature.

Why was the chip introduced? As with most things, when the magnetic strip was invented, only the banks and a few scientific institutions had access to the devices which allowed reading and writing of information to the magnetic strip. This system served us very well, but then two things happened:  The internet happened, and the equipment used to read and write data became available to anyone who had the inclination and technical know how to use it.

These two factors added up to the magnetic strip system being woefully inadequate at keeping payment details safe from skimming (where the card is swiped with out the card holders knowledge) cloning (where the cards data is duplicated) and indeed any other form of unauthorised use.
In response to this, a new system was developed. Chip and pin not only encrypts the card information, but negates the need for the customer to loose sight, or even physical contact with the card. This makes it very difficult to skim or clone. In France, fraud dropped by 80% when Chip and pin was introduced. This pattern was repeated in almost all countries that implemented a chip and pin system.

Of course chip and pin does not help with card holder not present fraud. Infact card-not-present fraud is growing every year. In May 2009 it made up more than 50% of all credit card fraud. Why the increase? As with most criminal activities (and indeed some non criminal activities!) It tends to migrate to the path of least resistance. With card-not-present fraud, its the Internet. However “at the till fraud” North America presents itself as big easy target.

For retailers not using chip and pin, its common practice for the customer to hand their card to a waiter / waitress / shop teller / assistant. At this point they walk off with it, to “put it through the machine” The customer looses sight of the card, and of course, during this period the card can be cloned, skimmed or just have its details recorded for use later.

This represents a massive security hole through which billions of US dollars can and are stolen every single year.

So why don’t the American banks just introduce chip and pin? Essentially, the banks don’t want to upset the customer, and risk them moving to another bank, pressure from retailers is minimal because they don’t want to have to invest in costly new equipment for card processing. But another reason the banks don’t want to issue chip and pin cards is because the retailers don’t have the equipment. What bank would want to issue a card that you only use in 2% of stores? And so the chicken and egg situation continues.

The problem American card holders have is that they will find a decreasing pool of international sellers that are willing to accept them. If a transaction is processed by a retailer, and is later found to be fraudulent, the retailer looses out because the bank reclaims the money. Given this risk, its unsurprising, that retailers wince when handed a vanilla magnetic strip card. Many find “reasons” why the card cannot be used. And who can blame them?


Many automated kiosks issuing tickets for tram & train systems, simply spit them back out at the user.
VISA are introducing chip and pin to a number of their cards this year. It will also see the American retailers responsible for refunding fraudulent transactions. Currently the banks take the loss on the chin. This in turn will negate the need for costly security checks from the card issuers to retailers, and hopefully show the retailers that investing in the equipment is cheaper than not doing.

So introduce Chip and Pin and Americas card fraud problems are slashed? Almost, but sadly its not the whole story. In 2004, 12 months before the UK introduced chip and PIN, Card fraud actually sky rocketed. Why? Probably because would be fraudsters wanted to make the most of exploiting the old system, before the chip and pin made it harder. One step back, two steps forward.

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