With more secure card technology, financial institutions, merchants and cardholders could all avoid situations such as the recent data breach at Michaels Stores, but Consumer Reports makes clear that banks and credit card companies have structured things such that they don’t have the right incentives to invest in less fraud prone technologies:
“American credit and debit card data are usually stored unencrypted in a magnetic stripe on the back of each card, which thieves can easily and cheaply copy. The U.S. and some nonindustrialized countries in Africa are among the only nations still relying on magstripe payment cards, which came into wide use in the 1970’s” . . . .
“So why is the U.S. so far behind? It seems to come down to money. The losses for banks do not yet exceed the costs of a switch-over, although merchants say that’s because they usually shoulder much of the cost burden from fraud” . . ..
“’We’re falling behind the rest of the world in fraud protection, and I’m afraid American consumers are getting the short end of the stick,’” says Richard Oliver, executive vice president of the Federal Reserve Bank of Atlanta and director of the Fed’s Retail Payments Risk Forum, a group that focuses on better ways to detect and reduce fraud” . . .
“’We’ve recommended to several of the large financial institutions that the biggest deterrent to skimming [the type of theft used in the Michaels breach based on early reports] would be using the kind of cards that are issued in Europe and Canada with a chip that makes them pretty much impossible to skim, but so far they seem unwilling to do that,’” says Antonsen at the NYPD” . . .
“Merchants usually have to absorb losses for fraudulent transactions conducted by mail, phone, and online, and card issuers generally are supposed to take the financial hit for fraudulent transactions conducted in walk-in stores. But retailers report that banks also often charge those losses back to them.”. . .
“The Mercator report estimates U.S. card issuers’ total losses from credit and debit card fraud at $2.4 billion. That figure does not include losses that are borne by merchants, which probably run into tens of billions of dollars a year.
Yet, change for the better may be on the horizon thanks to the recent Durbin amendment on interchange transaction fees and routing:
According to a Mercator analyst, “A carrot to entice the banks and credit unions away from magstripe debit cards already exists. It’s in the hotly debate rules the Federal Reserve proposed in December 2010 to limit the fees merchants pay card issuers for debit card transactions.”
Reference: “House of cards: Why your accounts are vulnerable to thieves.” Consumer Reports Magazine. June 2011. http://www.consumerreports.org/cro/magazine-archive/2011/june/money/credit-card-fraud/overview/index.htm