Last week, I talked about a controversial topic in a piece examining the philosophical statement “The Fraud Enigma: Good or Bad?” Surely, some of you questioned my mental health when I said “fraud is good.”
Is credit card fraud part of the Fraud Enigma? Certainly, credit card fraud is bad and I couldn’t help but notice this BBC News headline last week: Card fraud in Asia-Pacific ‘costs banks $400m a year’ and is rising by 20%-25% a year, according to FICO.
Credit Card Fraud
The point of the story to me isn’t that Asian banks will be losing half a billion dollars due to credit card fraud by next year but the fact that credit card fraud is incredibly profitable.
Think about it, if these loss figures are anywhere close to correct, that’s half a billion dollars in losses just for credit card fraud in the Asia-Pacific region alone and don’t account for credit card fraud committed anywhere else nor other types of fraud being committed around the globe for that matter.
Card Fraud is Profitable
Let’s face it, credit card fraud is profitable. Your losses, or the company who credits you for the loss and becomes the actual victim, is definitely “someone else’s” gain. So, the question is “who’s the elusive someone?”
“Someone” is generally considered to be individuals (lone wolves), loose knit rings, organized criminal groups and terrorist organizations as we discussed in last week’s blog. All of these individuals and entities are profiting from fraudulent activity committed around the globe and credit card fraud is but one of the avenues available to these groups.
Fraud has been in the news a lot lately due to the rising number of massive, mind-boggling data breaches and attacks against global businesses. People are demanding improvements in financial tools and one of the easiest answers to preventing credit card fraud is to implement chip-and-pin EMV technology in U.S. credit cards.
Chip and Pin Fraud: The Truth
Will chip-and-pin cards reduce credit card fraud as part of the Fraud Enigma? Absolutely! Any fraud deterrent mechanisms put in place in commercial transactions will almost always prevent some form of fraud. Is it likely to be a better system than what’s in place now for preventing credit card fraud? Absolutely, it would be hard for it not to be. However, for anyone that thinks of chip-and-pin cards as the second coming… there are likely to be some surprises.
While credit card fraud levels might be reduced initially, eventually criminals catch up to the technological fraud prevention mechanisms for particular financial services products and adapt their frauds accordingly. There hasn’t been a technological tool invented yet which prevents 100% of all fraud from occurring.
The Point of Least Resistance
The flip side to the realities associated with technology deployment to prevent credit card fraud is that criminals always migrate to the point of least resistance. Loosely translated, this means that once chip-and-pin’s implemented in the U.S. the challenges associated with defrauding credit cards will be a bit more difficult so criminals will migrate to other forms of fraud which are more easily committed.
So, while it’s likely we’ll see a decrease in some forms of credit card fraud post chip-and-pin deployment, we’ll see a corresponding spike in other forms of financial crimes. In 2012, the Federal Reserve Bank of Atlanta agreed saying
“Based on available data from countries around the globe with EMV experience, chip-and-PIN cards have successfully reduced fraud on face-to-face transactions. However, these cards have had less impact on overall fraud levels as fraudsters have shifted their focus to non-chip transactions. Fraud has simply shifted to different products (from credit to debit),other channels (from card-present to card-not present, or CNP), or other geographies (cross-border fraud).”
Fraud is Profitable
Earlier, I made the comment fraud is profitable. How profitable you ask? Well, if you take the 2013 U.S. GDP which was 16.8 trillion dollars and calculated a 5% fraud loss figure (widely believed to be the average percentage businesses loss annually due to fraud), U.S. fraud losses alone would be placed at 840 billion dollars a year and a slice of that pie is definitely credit card fraud.
Now while that’s only an estimate, and lacking analytical research to substantiate the figure, even if U.S. fraud losses were only a fraction of that amount, it’s still a gigantic number for one country. When magnified globally, it’s an astronomical figure. If this estimate is accurate, would it surprise me? No, it would not.
Like the Fraud Enigma piece from last week, the forest fire analogy in the chip-and-pin world is well placed. The fraud forest has been burning with all of the credit card fraud damage done by data breaches. Out of the ashes rises chip-and-pin technology.
While that’s positive growth, which helps rebuild the financial services forest, it doesn’t however prevent other wildfires from happening again. One thing’s certain, out of the new growth not only will there be beautiful flowers but nasty weeds as well.
Those are our insights. What are yours?