News & Views - Savantor

Welcome to Chip & Pin - Goodbye to fraud?

Saturday, 01 January 2005

Article by Steve Carter, Head of EMV Solutions, Savantor Limited.

Chip and PIN deployment in the UK is well under way (58m cards issued by July 04) bringing about the biggest change to the card industry since ATMs were introduced.  Business users in the banks are becoming more aware of the development potential which the new cards bring.  Pilots are underway of new applications and ways to utilise the capabilities of the chip to bring about greater return for the investment made so far by the banks.

Original business cases were clearly based on fraud savings, but will the fraud savings projected materialise? 

In the year to July 04 total card fraud increased 18% to £479m.

Counterfeit fraud (impacted by the chip) fell by 2% to £123m

Lost and stolen card fraud (will be impacted by PIN) increased 11% to £119m

Intercepted card mail increased by 51% to £61m

Card not present fraud (phone orders and Internet transactions) increased by 29% to £139m

ID theft increased by 61% to £37m

So, significant fraud savings are still some way off and certainly will not be seen until the chip and PIN retail infrastructure is fully implemented, and fallback to signature and magnetic stripe processing is switched off.  Issuers therefore need to look for other ways to offset the costs in areas such as: -

  1. Additional applications. These can be added to the current card platforms by using products such as VS3 (Visa Smart Secure Storage ) and MODS (MasterCard Open Data Storage).  The VS3 specification creates a common environment for value-added services on any chip card including EMV cards, allowing issuers to more easily broker new partnerships and manage multi-function chip programs. VS3 allows issuers to create pre-formatted "cells" that they can offer to their partners to populate with data related to their programs, such as loyalty rewards programs, personal identity services, and club memberships.  MODS can be used as a personal technology in which cardholders can customise their cards and access personal preferences, addresses, phone numbers, passwords, logins, membership numbers, clothing sizes, and more - and update this information as and when they wish from a PC.
  2. The deployment of pre-authorised applications. This will provide new revenue-generating opportunities for all card-issuing and acquiring institutions, enabling banks to expand their market and reach new cardholders and merchants.  In addition, service levels to existing customers can be increased by delivering value-added products that can be associated with existing credit and debit cards. The pre-authorised debit payment method leverages the infrastructure that is already being put in place for EMV, i.e. smart card readers and PIN pads. Thereby minimising further investment for the introduction of a wholly new payment product.  The pre-authorised transaction is debit-like, but reduces risk by guaranteeing that funds are available – based on the fact that they have been 'ring-fenced' on the account for off-line spend. 
  3. Loyalty schemes continue to be something of an enigma in the UK.  Popular elsewhere in the EU and the USA these schemes have never really captured the imagination of the UK public.  Nectar was launched with great expectations but seems to be declining in popularity with retailers, and given that there are 8 trillion unused air miles, this system also appears to be unattractive to the mass of cardholders.  Perhaps these schemes could be used for certain sectors of an issuers portfolio, but for the mass market they will never appeal until the redemption of points is made easier.  Unless cardholders can purchase items over the counter using loyalty points, instead of cash, at a wide range of retailers we are unlikely to see more of these schemes introduced.

One of the most interesting trends to become apparent this year has been the emergence of debit cards as the predominant payment channel.  For the first time this year plastic card payments at £269m exceeded cash payments at £268m. Debit cards are now used on average 8.2 times per month (compared to 6.3 for credit cards) totalling £12.2 bn in 2003 (up 16%) and account for 65% of all plastic transactions and 53% of value of plastic card spend in 2003.  As a result, banks are looking for ways of leverage their portfolios of debit cards. We have seen examples, such as Halifax launching the first ever current account in the UK paying cash-back on debit card purchases. This new product, called the Moneyback current account, offers 1% cashback on debit card purchases up to a total of £10,000 automatically payable to the account holder, tax-free, once a year.  Other banks are likely to follow this trend offering customers better value.

Looking forward to 2005 we can expect the introduction of the liability shift for chip and PIN transactions to come into play. Retailers will become liable for fraudulent transactions and can refuse to accept signatures if the customer presents a Chip and PIN card where a chip and PIN terminal is available.

The top 25 retailers which can afford system upgrades and stand to lose the most from the liability change, and the smallest retailers which rent their point-of-sale terminals direct from the banks, are all expected to meet the deadline.  However, many of the UK's 10,000 tier-two retailers feel they cannot afford or justify the replacement of existing systems ahead of their planned schedule.  Whilst this situation continues we will not see the expected savings from fraud if fraudsters are still able to use stolen cards without a PIN at these outlets.

We still need to educate cardholders about PIN. Despite the prolonged advertising campaign by issuers and the PMO, we still have one in five UK Chip and PIN cardholders using a signature rather than a PIN.  Currently three in five cardholders in the UK have a Chip and PIN card, but recent research by Visa suggests that 20% of Chip and PIN cardholders in the UK are not using their PIN because they can't remember it!

We are also likely to see issuers managing card parameters proactively and dynamically by sending scripts to the cards, usually via ATMs, thus reducing business risk.

National ID cards continue to make the news although the introduction of such a scheme is likely to take until at least 2010 due to the need to collect biometrics from the whole population and validate each application.  Most people are probably skeptical about claims that this will help fight terrorism but seem generally in favour of the scheme, at least until they find out how much it will cost them!

Local Authorities will continue to push ahead with their various schemes to introduce an ID card with additional functions such as transport and facility access but these schemes are plagued by lack of interest by residents.  Perhaps the answer to local cards is to build from the bottom up and start with applications that have more appeal.  In the USA such cards are being introduced with e-purse functions to allow purchase of parking tickets and use in local shops where discount is available.

Contactless cards continue to be viewed as the 'next great thing' and indeed, in the payment industry, there is a real and growing interest amongst issuers now that the various pilots and installations such as Octopus, Paypass and Oyster have proved their worth.  Mastercard are putting more weight behind Paypass as the prime channel for 'touch and go' payments such as petrol pump, fast food, event entry etc.  This has further appeal now that international standards are in place. Contactless cards have proved to be faster in operation than contact cards and the form factor can vary significantly so that a multitude of devices can be offered, e.g. watches and key fobs.

Online shopping is another interesting area. As an example, Visa is forecasting sales volume for global e-commerce for 2004 to exceed US$150 billion, a 56% increase over last year.

Visa report that the average e-commerce transaction value, at $107, now outstrips the average high street card transaction of $70. Increasing consumer confidence comes from a familiarity with this buying channel plus the improved security available for online shoppers from programs like Verified by Visa. 

Security continues to be a concern with prominence given by the press to phishing scams, although the losses through such schemes are actually quite small.  Issuers do need to address cardholder concerns in this area.  One way to achieve this is with improved authentication methods, rather than simple passwords as used today to gain access to online banking or even to pay for purchases. 

A method gaining popularity is to use an unconnected, hand-held card reader which allows a one-time password to be entered by the cardholder into the merchant website.  This method of authentication has been successfully used in countries such as Belgium and Sweden. The real benefit of this approach is that it can be used as a single, highly secure authentication method across multiple delivery channels; not just Internet payments.




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