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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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January 16, 2018


Not Just a Card-Not-Present Problem

In 2012, I published a paper that looked at trends in card fraud in several countries that had adopted or were in the later stages of adopting EMV chip cards. The United States is now in the process of adopting EMV, so I am refreshing that paper with an eye towards fraud trends in what are now mature EMV markets. Payments experts know that card-not-present (CNP) fraud will continue to pose challenges that EMV chip cards do not solve, but are there other challenges lurking in these markets that the U.S. payments industry should note?

Although I'm still gathering data, one particular data point from the United Kingdom—lost and stolen fraud—already has me intrigued. In 2016, losses from this type of fraud stood at more than £96 million (about $130 million), up from more than £44 million (about $60 million) in 2010, a 117 percent increase. In 2010, lost and stolen fraud accounted for 12 percent of overall card fraud in that country. By the end of 2016, it had become 16 percent of card fraud. It is now the second leading type of fraud in the United Kingdom, though it still falls far behind CNP fraud, which accounts for 70 percent.

Remember that in the United Kingdom, PIN usage was adopted to mitigate lost and stolen card fraud at the same time that EMV chip cards were implemented. Yet lost and stolen card fraud is up significantly. According to Financial Fraud Action UK, fraudsters are getting their hands on the PINs—a static data element—through distraction tactics and scams. Other factors, such as the proliferation of contactless transactions and those that have no cardholder verification method, could also be drivers of this fraud, as could an increase of reports of lost or stolen fraud that is actually first-party, or "friendly," fraud. EMV has proven to be an effective tool to authenticate cards, but authenticating an individual using a card, even in a card-present environment, remains a challenge.

The lost and stolen fraud figures out of the United Kingdom lead me to believe that cardholder authentication isn't just a CNP problem. Furthermore, the decades-old PIN solution for the card-present environment is now showing signs of weakness. At the same time, to reduce customer friction, many card networks are eliminating signature verification and relying on data analytics to authenticate transactions. Is this a perfect storm for lost and stolen card fraud? Is it the foreshadowing of the emergence of biometrics, or some lesser known technology? Or will I find that this problem is isolated and should not worry us in the United States?

Photo of Douglas King By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

January 16, 2018 in authentication , cards , chip-and-pin , debit cards , EMV , fraud , payments | Permalink

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