Fraud Liability Adds Urgency to Card Technology Changes

‘If you’re last in line to deliver chip technology, you may be first in line for fraud.’

November 16, 2012
/ PRINT / ShareShare / Text Size +

For more than a year, CUNA Mutual Group's Ann Davidson has been preaching to credit union card issuers the need to migrate from magnetic stripe to chip technology to prevent fraud and remain competitive.

While some are heeding her advice, others are not.

The magnetic stripe has been around since the 1960s and is going the way of the dinosaur worldwide, says Davidson, a senior risk management consultant. However, the U.S. is the last country in the world to convert to chip technology across its payment structure.

“That continues to make us vulnerable to magnetic stripe fraud, including ‘card present counterfeit’ schemes such as point-of-sale skimming, data breaches, and devices on ATMs,” Davidson says.

The Secret Service reports magnetic stripe fraud cases have risen 10% over the past three years. In addition, Nilson Report research indicates U.S. card fraud losses are more than double the global fraud losses--$0.09 compared to $0.045 for every $100 in transactions.

Mitigating fraud risk

Migrating to chip technology combats card-present magnetic stripe fraud.

“By having chip technology as an additional payment option, credit unions will likely experience a significant decrease in counterfeit magnetic stripe fraud—provided their cardholders use the chip capability on the card,” Davidson says.

Chip-and-pin technology is much safer than mag-stripe, Davidson says, because authentication employs unique data for each transaction, which enhances security. The contactless chip field also supports mobile near field communication chip transactions.

“Remember, during the migration to chip, cards will maintain the magnetic stripe,” she says. “It will be important to have ongoing education to cardholders to teach them to not swipe their cards and instead use the new chip technology.”

After switching to chip technology, Canada’s annual debit card fraud dropped from $142 million in 2009 to $70 million in 2011, she says.

Changing industry standards

Other forces are also pressuring card issuers to make the switch.

Visa announced plans to accelerate migration to EMV chip technology in the U.S. Similarly, MasterCard announced all ATM transactions occurring in the U.S. will need to be compliant with EMV standards to avoid having issuers accept fraud liabilities.

“Likewise, if the acquiring financial institutions’ merchant entities do not support chip transactions, they may be financially liable for magnetic stripe fraud,” Davidson says.

Visa’s liability shift to the acquirer/merchant is Oct. 1, 2015 (Oct. 1, 2017 for fuel merchants).

MasterCard’s liability shift to the ATM owner/acquirers for Maestro transactions is April 2013. And, in October 2016, all fraud liability will shift to ATM owners/acquirers.

“When merchants become responsible for fraud losses, many may no longer accept magnetic stripe transactions,” Davidson says. “If you’re not offering chip technology, your members’ cards may not be accepted, which will create PR and member service issues and put your credit union at a competitive disadvantage.”

U.S. cardholders are already finding it increasingly difficult to use their magnetic stripe cards in foreign countries.

The bottom line

Davidson praises credit unions switching to chip technology, but cautions that even this new technology is not flawless.

Reports from the United Kingdom indicate it’s critical to make sure the personal identification number is unpredictable (random) and not set up as a potential predictable number easily solved by criminals.

The bottom line, Davidson says, is simple.

“If you’re last in line to deliver chip technology, you may end up first in line for fraud,” she says.

Davidson addressed CUNA Mutual Group’s third-annual Online Discovery Conference.

Post a comment to this story


What's Popular

Popular Stories

Recent Discussion

Great article! Unfortunately, most employees don’t feel valued or appreciated by their supervisors or employers. In fact, research has shown that the predominant reason team members quit their jobs is because they don’t feel valued. This is in spite of the fact that employee recognition programs have proliferated in the workplace – over 90% of all organizations in the U.S. has some form of employee recognition activities in place. But most employee recognition programs are viewed with skepticism and cynicism – because they aren’t viewed as being genuine in their communication of appreciation. Getting the “employee of the month” award, receiving a certificate of recognition, or a “Way to go, team!” email just don’t get the job done. How do you communicate authentic appreciation? We have found people have different ways that they want to be shown appreciation, and if you don’t communicate in the language of appreciation important to them, you essentially “miss the mark”. Additionally, employees need to receive recognition more than once a year at their performance review. Otherwise, they view the praise as “going through the motions”. A third component of authentic appreciation is that the communication has to be about them personally – not the department, not their group, but something they did. Finally, they have to believe that you mean what you say. How you treat them has to match the words you use. If you are not sure how your team members want to be shown appreciation, the Motivating By Appreciation Inventory (www.appreciationatwork.com/assess) will identify the language of appreciation and specific actions preferred by each employee. You then can create a group profile for your team, so everyone knows how to encourage one another. Remember, employees want to know that they are valued for what they contribute to the success of the organization. And communicating authentic appreciation in the ways they desire it can make the difference between keeping your quality team members or having a negative work environment that everyone wants to leave. Paul White, Ph.D., is the co-author of The 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman.

Your Say: Who should be Credit Union Magazine's 2014 CU Hero of the Year?

View Results Poll Archive