Credit Card Fraud and the New Chip Technology

A major shift in who is liable for credit card fraud took place October 1, 2015. In order to provide incentives for businesses to transform their credit card processing technology from the old black stripe swipe method to the new square “chip” technology, major credit card companies have shifted the onus of responsibility for fraudulent use of credit cards to the merchants who accepted them or the individuals who use them. Credit card companies are no longer liable for the costs and recovery of fraudulently used credit or debit cards. Newly created machines will be designed to read the chip on your card, that futuristic looking gold or silver colored metallic square on the front of your newest debit and credit cards, in order to determine if you are the correct user instead of reading that information off of the black magnetic stripe on the back of your cards that contains all of the identification data.
Read on as you discover all about this unprecedented major shift in liability, its reasons and rationales, as well as finding out about the new chip technology and how it ties in with credit card fraud.

The Liability Shift
Credit card fraud refers to many things, but one major type of credit card fraud is the misuse of stolen or counterfeit cards being used without the original owner’s approval. If that ever happened to you, you are not alone because top surveys report that more than 42 percent of all credit card holders surveyed, which can be scientifically extrapolated to all Americans, have been victim to some sort of credit card fraud, while 53 percent were worried that there is a real chance that it could happen to them. Well, if it did happen to you, you know that what you had to do to recover the funds unlawfully used against your account, was to report the transactions to your credit card company, and they would take on the financial responsibility and pay down the fraudulent exchange. As far as small businesses are concerned, a similar thing regularly occurred. They also reported if bad cards were accepted at their business and would not be fully responsible for the misused, basically stolen, funds. The credit card companies would issue reimbursements.
Well, consumers and business owners can kiss away that freedom from liability enjoyed since using plastic cards became our dominant manner of making purchases. October 1, 2015 marks the day that credit card issuers shifted responsibility for fraudulent transactions to merchants. This is of course legal, and now has become, or soon will become, the new normal.
This liability shift has taken place in tandem with the major credit card corporations rolling out a new technology designed to cut down on credit card fraud. You may respond, rightly so, that this immediately seems unfair to small business owners and consumers. However, once you have a better understanding of the immense amount of losses that occur annually, you will have a better understanding of why the credit card industry is shifting to chip technology and how that is to benefit you and everyone else in the long run.

Annual Losses from Credit Card Fraud
Let’s look at some facts and data from the authoritative Nilson Report, a relevant and respected report that is the most trusted source of global news and statistics about the payment industry, and is subsequently quoted by more business news publications than any other in the payments industry.

• The cost of global payment credit card fraud grew by over 22 percent in the last five years to reach approximately $17 billion.
• The cost of U.S. payment card fraud grew by over the last few years by 32 percent to $9.5 billion.
• The United States, the only place in the industrialized world where credit card fraud is consistently growing, accounted for 47 percent of that amount, almost half.
• In the rest of the world, card fraud grew by 13 percent to $6.2 billion.
• In 2014 credit card fraud cost a small business an average of around $20,000 in damages, up from $8,600 in 2013.

The Chip Technology
Most of us are aware of those little silver squares on the bottom left or right of our plastic bank cards and credit cards. Well, credit and debit card issuers will be sending out new chip-inclusive cards to millions of card owners. From now on, all merchants are required to purchase and install brand new card-reading machines in their stores. The new terminals are designed to read the chip on the card, which is hailed as an advance over black magnetic stripe technology for reducing fraud. Over the decades, fraudsters have developed quite a sophisticated ability to copy all of the indentifying information programmed on the magnetic stripe, allowing them to produce thousands of counterfeit credit and debit cards. Well, the chip makes it much more difficult for fraudsters to copy the information. Because it is much more difficult to copy information from the metallic chip and then make counterfeit cards.
How, exactly does it work? According to a 1914 article titled How Does Chip & PIN Actually Work? Published by “unlike a simple magnetic strip, the chip interacts with the machine that is reading it, in order to encrypt the data and authenticate it more securely. In effect, the credit card and its reader have an encrypted conversation in order to ensure the credit card is valid, while a simple (that is, “dumb”) magnetic stripe merely recites your credit card number and expiration date to any machine that can read it. It is this vulnerability that allows credit cards to be so easily cloned for fraudulent purposes.”

Chip Technology is a Win-Win Situation
Even though the chip technology is coming to the United States in 2015, this way of processing credit and debit cards, using chip technology, has been being used in Europe for years. As of 2014, 85% of all credit cards issued in Europe and Canada and 88% of all credit card terminals were equipped to use chip-and-PIN technology. In addition to the safety features of the chip, in Europe the new systems also require the keying into the terminal a unique PIN that each card holder has. This is double the protection. The chip technology goes very far to limit counterfeiting but it is not foolproof. Adding a pin to be used before the card purchase can be verified and processed, along with the chip, is the state-of-the art and the most secure type of credit card transaction technology that presently exists.
Since the chip-and-pin technology’s inception in Britain in 2011, card issuers and merchants witnessed their lowest levels of fraud in decades. The change-over to chip-and-pin technology in Canada lowered the costs of fraud from C$142 million ($129m) in 2009 to C&38.5 million in 2012. That is a very substantial amount of money saved, if you will, in the sense that it was not stolen. It is impressive numbers like those that motivated American card issuers to initiate their national roll-out and eventual total transformation of the system.
The cards are called E-M-V cards, named after the three companies—Europay, MasterCard, and Visa—that have instituted the program. The new terminals cost anywhere from $100 to $500. The liability shift was actually put in place to give time to merchants to switch over, or decide if they want to switch over, to the new system.
An individual with chip technology built into their card will notice that their card will work, but only by reading the black magnetic strip. Unless the merchant has the appropriate terminal, the chip will not work.
Small businesses now have a choice; they can either invest the money into the new terminals, or decide that it is not cost effective. It all depends on how much you might experience card fraud in your business. Some businesses, as we have said, report tens of thousands of lost revenue due to fraudulent cards.
On the other hand, other businesses, due to the kind of services they offer, or the kinds of products that they sell, do not lose that much and so investing the money in the new system and the time to train their employees may not seem cost-effective to them. As of the October 2015 deadline, only 33 percent of businesses had shifted over to the new technology.

Story by Mark Joseph Manion