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New ways to eliminate credit card fraud

March 19, 2015

Credit card fraud is a major problem. Accordingly, new technologies are coming to the market that aim to fix the issue. Chip-based cards should help reduce fraud substantially, but there are also a number of other initiatives taking place that will improve security in the payments industry. Different forms of encryption and authentication requirements will make it more difficult for malicious activity to occur.

Credit card fraud is a major problem. Accordingly, new technologies are coming to the market that aim to fix the issue. Chip-based cards should help reduce fraud substantially, but there are also a number of other initiatives taking place that will improve security in the payments industry. Different forms of encryption and authentication requirements will make it more difficult for malicious activity to occur.

Credit card fraud is a serious issue for retailers and consumers today
Business Insider reported that last year, fraud cost U.S. retailers approximately $32 billion. In 2013, the number was $23 billion. These are not small sums that can be easily ignored. As a result, credit card companies and technology developers are working hard to introduce measures that will make personal information more difficult to steal.

One major development that can reduce fraud is EMV, which involves credit cards embedded with microchips, reported PYMNTS. The technology cannot stop fraud altogether, but it should substantially lower the rate at which personal information is stolen and used to make illegal purchases. David Lott, a payments risk expert at the Federal Reserve Bank of Atlanta, explained that before EMV cards are rolled out, fraud is likely to increase, as has been witnessed in recent months.

“A number of financial institutions have reported a marked increase in counterfeit checks and duplicate-item fraud, usually by way of the mobile deposit capture service,” said Lott, according to the news source.

Financial crimes related to checks and bank account applications were mentioned as being the primary areas where fraud occurred.

“Criminals are opening checking accounts to perpetrate overall identity theft fraud as well as to create conduits for future counterfeit check or kiting fraud,” added Lott, according to PYMNTS. “And they’re submitting fraudulent credit applications to purchase automobiles or other merchandise that they can then sell easily.”

Several strategies will be employed to limit credit card fraud
According to Business Insider, a handful of approaches can be used to address the problem of fraud. One such method is 3D Secure, which aims to address the difficulty in verifying that persons using cards are the actual cardholders. 3D Secure requires customers to enter either biometric data or passcodes to authenticate purchases. Unfortunately, research has found that merchants who implement 3D Secure have higher shopping-cart abandonment rates. It seems that while security is an important issue, consumers do not enjoy spending the extra time to complete transactions. 

Other ways to limit fraud involve various forms of encryption. By translating card information into encrypted codes, it becomes significantly more difficult for criminals to steal payment data and use it for illegal transactions. Point-to-point encryption is a tightly defined form of encryption, according to Business Insider, because it encodes sensitive information as it travels between payment terminals and gateways. Using this form of encryption protects sensitive data from being stolen online or in stores. It is important to mention that popular mobile payment product Apple Pay uses a form of encryption called tokenization. Apple Pay takes payment data and turns it into a token that is impenetrable to hackers. Because the information is assigned random values, even if a criminal were to ascertain the token itself, it would be virtually useless.

Chip-based cards are a good place to start
As previously mentioned EMV cards with embedded microchips will be highly advantageous for the fight against fraud. Business Insider noted that the chips generate dynamic cryptograms – in a way similar to encryption – that change with every purchase. As such, it will be very difficult for criminals to make counterfeit cards in the future, as EMV is too sophisticated to crudely emulate. Additionally, the microchips will run real-time risk assessments when cards are used, checking to see if transactions are in line with card users’ previous history. With EMV, suspicious behavior can be flagged immediately.

Lott explained that while all these new security measures are helpful and essential, banks must also do their part to prevent the fraud, by addressing the problem where it starts, noted PYMNTS. Efforts made by banks to ensure that new account information is accurate and background checks are conducted will also help limit fraud in the future.

“Financial institutions should already be evaluating their check acceptance processes and account activity parameters to spot problem accounts early,” said Lott, according to the news source. “Likewise, financial institutions should make sure their KYC, or know-your-customer, processes and tools are adequate to handle the additional threat that the credit and account application channel may experience.”

Ultimately, the payments industry will always have questionable individuals sauntering around in the periphery. Financial institutions, retailers and consumers should all do their part to ensure security is a top priority. It is important to stop fraud, although this is not a problem that will be overcome in one day.  

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