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January 30, 2012
Is the United States payments industry following in the footsteps of the Netherlands?
The Forum recently took a dive into card fraud data from the many countries (not the United States, of course) that have tossed out their old magnetic-stripe cards and adopted the EMV standard. You can read the paper—it's available on our website—but here's a quick recap.
What we found in the data is a recurring pattern of fraud losses. For instance, the data show that chip-and-PIN has been highly successful in the domestic card-present environment in reducing counterfeit and lost or stolen card fraud. This chart depicts the United Kingdom's positive domestic card-present experience.
On the other hand, fraud on non-chip-and-PIN transactions—most notably in the card-not-present and cross-border environments—has actually increased. Ultimately, the net results to date on EMV chip-and-PIN's impact on total card fraud losses in these countries have been marginal. As an example, this next table shows Canada's growing card-not-present fraud loss trend.
The working paper uses the Netherlands experience as a case study because of the country's similarities to the United States. Much like the United States, the Netherlands was experiencing low rates of payment card fraud, so this country did not migrate to the EMV standard when all the rest of Europe was adopting it. Eventually, fraud loss rates in the Netherlands climbed, ultimately propelling the Netherlands banking industry into implementing chip-and-PIN.
Like the Netherlands, the United States is now seeing a growth of card fraud loss rates on both credit and debit cards. As we've blogged several times, the costs for an EMV implementation here in the United States have so far outweighed the fraud loss reduction benefits of chip-embedded cards, according to some industry stakeholders. But given the parallels between the United States and the Netherlands, it is reasonable to expect card fraud losses to continue to grow here as long as the industry relies on mag-stripe technology.
Clearly, there is a need for industry coordination for an EMV implementation to effectively reduce payment card fraud. Based on the fraud trends experienced by countries adopting EMV chip-and-PIN, implementing the EMV standard in the United States for only certain types of card products or without solutions for mitigating card-not-present fraud could lead to only a marginal reduction in total fraud losses as fraudsters seek to exploit the lowest hanging fruit.
It should be noted that while the card industry in each of the countries investigated in the working paper adopted PIN authentication, this method is only one of several options. The working paper focused on PIN authentication because of the abundance of card fraud and transaction data reported by these countries' payments industries.
For more details on the successes and failures that a number of countries have experienced in moving to EMV technology, read the paper on our website.
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
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