The United States leads the world in credit card fraud — by a huge margin. Fraud losses incurred by banks and merchants on all credit, debit, and pre-paid general purpose and private label payment cards issued globally hit $21.84 billion in 2015.
The U.S. currently accounts for two-fifths (38.7%) of global debit and credit card fraud even though it generates only 22.9% of the total global purchase and cash volume, according to Global Card Fraud, from a recent issue of The Nilson Report. Experts predict that by 2020, total card losses in the U.S. could reach up to $12 billion. This is up from 2015 when the U.S. accounted for $8.45 billion dollars in card fraud.
The question is: Why is U.S. a world leader in credit card fraud?
Part of the answer stems from the fact that theres plastic cards everywhere in the United States. Do you know one person over the age 18 who doesn’t have some sort of debit or credit card? Probably not. According to some estimates, American consumers carry 1.8 billion credit and debit cards (in a country with 330 million people). The U.S attracts thieves and hackers because we’re one of the largest markets for credit card use. This isn’t the only reason why we’re good targets. Below are four other reasons why the U.S. leads the world in credit card fraud.
1. Late EMV Adoption
As many people will have already seen in person, the EMV standard revolves around a security chip that is implanted in otherwise conventional-seeming payment cards. Each such chip hides a unique cryptographic key that is used to answer challenges sent by EMV-compliant card terminals. Most EMV-equipped cards also include a fraud-prone magnetic strip and an imprinted account number. The EMV chip itself is virtually impossible for criminals to duplicate or counterfeit. In more simple words, this makes credit card fraud near to impossible.
Because of this enhanced security, most countries made EMV adoption mandatory years ago. The U.S. finally introduced liability rules in 2015. Now you can see why thieves and hackers target the U.S.
If your business made the switch to EMV credit card processing, then I’m sure you saw an immediate drop in in-store fraud. Nationwide, EMV adoption produced a 27 percent reduction in counterfeit fraud between January 2015 (before the credit card chip reader law when into effect) and January 2016. Since the EMV credit card process hasn’t reached 100% penetration in the U.S., in-store fraud is still a major problem. This is especially true for many smaller businesses who lack the resources to switch over.
2. The Rise of Online Credit Card Fraud
As in-store credit card fraud becomes more difficult, many thieves move their operations online — targeting card-not-present (CNP) transactions instead. Many countries that adopted EMV credit cards noticed an increase in CNP fraud precisely for this reason.
Since the U.S. is one of the most active online retail markets in the world (second to only South Korea and China), the increase in CNP fraud was especially prevalent.
One estimate shows that U.S. e-commerce retail sales in 2017 hit $453.5 billion. With volume like that, it’s no surprise why the U.S. is such an attractive target for online credit card fraud.
3. Strong Consumer Protection
A great thing about the U.S. is that we have some of the strongest consumer protection laws in the world. One of these laws is the chargeback rule. A chargeback is the result of an action taken by a cardholder who disputes a credit card transaction through their credit card issuer. The card issuer initiates a chargeback against the merchant’s account and the funds are withdrawn unless the chargeback is reversed. Chargebacks are designed to protect customers from unauthorized purchases, damaged goods and other legitimate grievances.
Chargebacks bring about a couple of problems:
- Incredibly easy for customers to initiate
- Extremely difficult for merchants to dispute
Because of this, some customers buy products knowing they will abuse the system and dispute the charge. This is known as “friendly fraud”. At the current rate, friendly fraud will cost merchants upwards of $25 billion a year by 2020. Preventing friendly fraud, on the other hand, can be a tricky balancing act. You need to make sure that your prevention methods prevent fraud without punishing honest customers buying in good faith. It is important to set up stumbling blocks for people who would attempt to defraud you by making a purchase in bad faith and denying the charge later on. This is where AVS and CVV come in.
AVS stands for Address Verification System. So it’s not difficult to guess what AVS is. It’s simply requiring people to provide a billing address when they sign up. CVV stands for Card Verification Value. A little less obvious than Address Verification System. But it’s the three digit code that you always have to put in when you set up a new account on an e-Shop.
4. The Internet of Things
The world of e-commerce is always changing. What was true in the marketplace just a year ago may not be true today. New e-commerce trends, technological innovations, and economic shifts may transform an entire business from the ground up on a weekly basis.
With smart devices, cars and even kitchen appliances all processing real-time information in increasingly centralized databases — we’re more connected than ever before. This trend isn’t just in the U.S., it’s worldwide. The U.S. is third in the world when it comes to total internet usage.
Connectivity equals convenience, but it also means there are more “holes” or opportunities for thieves to exploit. This explains why the U.S. also leads the pack when it comes to data breaches. There are plenty of big companies that have been hacked; Facebook, Equifax, Target, etc. Hackers accessed 145 million records from Ebay, 109 million records from Home Depot and 83 million records from JP Morgan Chase.
Smaller companies are the ones more at risk for credit card fraud since they typically have fewer data security safeguards in place. This is why fraud management must be a top priority for every company.
How Often Is Credit Card Fraud Caught?
No matter how well you know a customer, chargeback abuse is extremely difficult to prove. Our strong consumer protection laws are usually on the customers side. Most types of credit card identity theft and abuse happen anonymously involving people you’ll never meet. Many of these crimes originate from foreign nations. These hackers work remotely from all over the globe.
This explains why only 0.14 percent of identity theft suspects are arrested (and why an even smaller percentage of thieves are successfully prosecuted).
If you’ve been a fraud victim and are hoping for some justice, it will probably never happen. A better approach is to prevent payment fraud before it happens.
How to Prevent Credit Card Fraud
I’m sorry to say that there is no single solution to stop credit card fraud, but they’re some strategies you can implement to help reduce payment abuse. The first one, which should be a no brainer is to make sure your business is using a PCI-compliant payment processor that understands the importance of data security. This is the MOST important step in reducing credit card identity theft and abuse.
A couple other important things you should understand are:
- How to use fraud management filters correctly
- How to prevent chargebacks in your retail store
- Why the U.S. adopted the credit card chip reader
If you’d like to learn more about how these data security tools can help reduce credit card fraud within your business, schedule a free consultation with our merchant services team today.