ARLINGTON, Va. – Any credit union executives who might have looked to updated credit and debit card technologies for ways to better combat card fraud should not hold their breath.
Executives with the Smart Card Alliance, a leading smart card manufacturer, and Visa USA agreed that, for a variety of reasons, the introduction of smart cards to fight card fraud in the U.S. is unlikely – at least in the near future – even though the increased use of smartcards overseas will make cards issued in the U.S. steadily more attractive fraud targets.
Some credit union industry executives, such as Jeff Post, CEO of CUNA Mutual Group, have called for Visa USA to begin supporting the use of smart cards to fight fraud. But the executives countered that a mixture of factors, most notably the cost of making such a change and resistance on the part of a majority of merchants, would keep smart cards from becoming the dominant card issued in the U.S.
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The source of Post's frustration is that smart cards genuinely do reduce fraud where they are used, according to Francois Lasnier, a vice president with Axalto, a leading manufacturer of smart cards worldwide whose U.S. headquarters are in Austin, Texas.
Lasnier said that smart cards beginning to be issued in Europe, in France, Italy and Germany and starting to be rolled out in the United Kingdom, have managed to reduce the incidence of fraud in those countries by a factor of two. In the U.K. alone, he reported, even though they have not finished rolling out the cards, the cost of fraud has been cut by almost 10 basis points, from 23 basis points to 14, and this has had a significant impact on issuer's bottom lines.
But Randy Vanderhoof, executive director of Smart Card Alliance, an organization which exists to educate the public about smart cards and promote their use, pointed out that even without smart cards, the rate of fraud as a percentage of transactions is at its lowest level in history. In its most recent card fraud report, Visa pegged the losses from card fraud at only six cents per every $100 and those kinds of numbers tended to act as a disincentive to adopting smartcards as an anti-fraud device.
"I don't think anyone minimizes the costs of fraud or means to downplay its importance," Vanderhoof said, but numbers like the costs of fraud in the U.S. as a percentage of transactions indicate that not every anti-fraud strategy will work equally well in every country, he added.
Vanderhoof said it was important to resist the urge to think of smart cards, or any new technology, as a silver bullet that is going to solve the card fraud problems in every place and for every issuer. Even with smart cards, Vanderhoof said, issuers are still going to have to put other fraud protection procedures and products into place.
He also noted that other nations have had card industries which are structured differently than then U.S. and that these structures have meant the adoption of smart card technology has gone more smoothly and less expensively than many thought it would in the U.S.
In one country, for instance, the issuing banks were also the acquiring banks so it was relatively easy for them to handle the mechanics and costs of upgrading merchant terminals to accept the new cards, Vanderhoof explained. In the U.S, this would be a major and expensive headache that would probably not even be possible without negotiations between the merchants and the card issuers.
Brian Triplett, senior vice president with Visa, went out of his way to put aside the notion that Visa might not care about fraud as much since the numbers, industry wide, are so low as a percentage of transactions.
"Visa recognizes that fraud is a significant problem for our issuers and is working very hard to drive down the fraud losses even further," Triplett explained. "But we think it's also important to recognize things that make the U.S. market unique."
Triplett explained that those unique elements included the reality that most card transactions on its network now occur in real time, giving the card brand the ability to score each transaction in real time and to provide that score to issuers and processors, allowing them to make fast decisions whether or not to permit the transaction.
Other nations where the smartcard combination of a chip and a personal identification number have worked best at reducing fraud, Triplett pointed out, had higher fraud rates to begin with and also had more offline credit card transactions which did not have the real-time network and scoring that Visa's network provided.
Visa's final problem with the smart card technology as an anti-fraud tool is that it really only works in one transaction channel, the purchase made at a terminal, and doesn't have any impact on fraud risks on the Internet or in other channels where the fraud is not present.
"Visa is working very hard on comprehensive anti-fraud tools that will work across more than one channel in real time," Triplett said, "but we just aren't prepared to talk about them yet."
Triplett also acknowledged fraud would likely migrate across borders as some countries' card industries made their cards tougher targets for thieves, but he noted that migration further validated Visa's strategy of trying to improve the anti-fraud capability of its underlying systems rather than just try to pass the fraud from place to place.
Lasnier acknowledged these challenges and the progress Visa has made in its real-time transaction network. But he predicted that the overall costs of fraud would only continue growing, in part because Visa and other parts of the card industry have only been looking at the actual card fraud losses and have not been looking at broader costs of fraud, the cost of replacing cards, of damaged reputations, of time, and frustration to card holders.
"The card fraud problem has a lot of sides and a lot of aspects," Lasnier said, "we are confident that smart card technology will have a roll to play eventually in fraud prevention."
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