Emerging alternatives to chip and PIN to tackle card fraud in the US
Aug 19, 2009 (Datamonitor via COMTEX) -- Card fraud is expected to increase in the US with the country still no nearer to introducing the chip and PIN technology which has proved successful in Europe. With fiscal pressures particularly evident in the current economic climate, technology vendors are rushing to pilot alternative solutions to the costly chip and PIN option.
With the recent adoption of chip and PIN technology in Canada and Mexico, following its successful adoption in Europe, fraudsters are expected to increasingly target the US market. A recent survey by Actimize found that around 66% of bankers, card issuers or payment processors anticipate US card fraud levels to increase, with 11% expecting a significant level of fraud growth in the near future due to progressing technology upgrades in Canada.
US institutions appear to be aware of this apparent threat, yet the US card industry remains reluctant to embrace chip and PIN. Although the introduction of the technology has proven successful in reducing card-present fraud, it remains a costly solution. While chip cards cost $1.25 to $1.50 each, compared with 20 cents for magnetic stripe cards, the technology also requires upgrades to ATM fleets and point-of-sale devices. In the US, because the current infrastructure is considered to be reasonably secure, fraud losses are written off as a manageable cost of doing business. Moreover, given the impact of the current economic climate on the banking industry, the focus is not on expensive initiatives but on survival.
This situation creates opportunities for alternative solutions that are aimed at combating card fraud in the US market. Diebold recently launched its out-of-band authentication that uses a mobile device to authorize a withdrawal at the ATM. When the withdrawal transaction is initiated by a card holder, the system sends an authorization code to a mobile device. This code needs to be entered on the ATM in order to complete a withdrawal transaction. However, although the concept seems to be quick and relatively easy to implement, it remains in development and so further testing is still required.
MagTek, meanwhile, has developed MagnePrint technology. It examines the unique traits of the iron particles in a card's magnetic stripe, based on the fact that the low-level magnetic noise emitted by individual magnetic stripes is as unique as a fingerprint (according to the vendor). The system is therefore able to detect whether the card used at the ATM is indeed the original or simply a fake with stolen card data. According to MagTek, the technology can work with any magnetic stripe card that is currently in use. Fifth Third Bancorp began evaluating this technology in the US market in February.
Gemalto is betting on contactless payments technology, as a first step toward possible future chip and PIN implementation. The technical specifications of contactless and chip and PIN standards are closely aligned, and both formats define the way a smart card communicates with a card reader. However, the contactless approach still requires significant investment into card exchanges and infrastructure.
Major US chain stores are going through the implementation of card readers that accept contactless cards, but it is still quite difficult to find such ATMs. For example, Diebold has not deployed any machines with card readers that accept contactless cards anywhere in the US, although such machines from the company already exist in Thailand. Nonetheless, the technology often features in many predictions on the future of payments technology. Moreover, the addition of contactless chips can make a stronger case for chip and PIN deployments.
Finally, Actimize is looking to apply its experience in fraud-analytics to combat fraud across the enterprise. This back-office approach leverages consortium-based analytical models to detect fraud patterns, and also includes the move to real-time fraud detection, which prevents non-authorized transactions from execution. While this approach does not require additional investment into card/point-of-sale/ATM infrastructure, intensive data integration projects are needed upon implementation. These typically involve multiple channel approaches at issuers, processors and networks. Nevertheless, Actimize's solution has been implemented vendors such as MasterCard.
As the number of cases of attempted fraud threatens to rise in the US, local banks, card issuers and payment processors will come under increasing pressure to find a solution that reduces their liability. Knowing which technology solution to choose is not a simple decision, with many factors such as the current infrastructure and IT budget likely to drive the final determination. Fraud prevention and detection solutions are expensive, and it is hard to say that they guarantee business development. However, a lack of detection/prevention from fraud attempts may lead to even more significant costs within banks. Fraud losses comprise not only the actual amount that is stolen, but also labor costs related to investigation and managing fraud cases. These costs can be up to five times higher than the stolen amount, and are rarely published by banks. As such, identifying a suitable alternative to the costly chip and PIN solution is a sound strategic move.
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