As of 1st quarter 2008, more than 730 million EMV payment cards were in use worldwide, two-thirds of the world’s EMV cards and devices are in Europe with nearly 50% of cards and POS and more than two thirds of ATMs enabled.
In the UK after four years of EMV deployment card fraud loss rate declined 48% from 18 to 12 basis points from 2001 to 2008, while overall card spend nearly doubled, overall card fraud increased 48% from 2001 to 2008, at a global level, the Nilson report estimated card fraud of $5.5 Billion on $11.8 Trillion purchases in goods and services and cash advances in 2007. The true cost of fraud, however exceeds the actual monetary amount of losses, financial services companies incur damage to their reputations, higher overall operating costs for increased vigilance, reduced productivity and higher staff expenditures, and they also bear the cost of re-issuing cards after a fraud incident.
Fraud is a global issue, in its broadest sense, it is a deception carried out for personal gain although it has a more specific legal meaning, the exact details varying between jurisdictions. Fraud in manifested in many forms in the banking system some of which are attributable to bank malpractices, corrupt officials, negligence and disgruntled employees to mention a few. The Nigerian payment systems management bill of 2009 is a step in the right direction for combating the multifaceted nature of fraud in the payments system especially as regards the payment card value chain.
Acquirers and Issuers understand that losses emanating from card fraud affect card usage rates, authorization parameters, operational processes and staffing while also decreasing profit margins. Furthermore, these losses can endanger the most valuable asset acquirers and issuers have –their relationships with business partners and consumers. It follows clearly that the industry should pay close attention to new technology and processes that may prove to be effective in combating fraud. EMV an instance of the chip payment technology is an example of one such methods.
The adoption of EMV has been coupled with the Personal Identification Number (PIN) stored on the chip, the PIN replaces the card holder signature, significantly improving protecting against loss and theft. ATM skimming fraud losses have also decreased by up to 55% with the deployment of EMV compliant ATM machines. While EMV has helped reduce payment card fraud, e-commerce web based fraud is still a cause of concern, the payment industry will need to build on the progress with EMV to combat fraud via this channel; however VISA and master card have recorded some progress with the Dynamic Passcode Authentication and Chip Authentication Program respectively.
It is very difficult to prevent the data on a magnetic stripe from being copied and used for unauthorized transactions as the card security code is static and does not change for every transaction, chip cards provide a new security feature called Dynamic Data Authentication (DDA), DDA generates an encrypted value for every transaction, these encrypted tokens are very difficult to replicate and presents a better security model over static magnetic stripe security tokens.
Initial investment in EMV is future proofing the payment system for security in long term. Benefits to issuers in this case the banks include increased profit from fewer loses due to fraud, merchants will profit from fewer charge backs and consumers or card holders will profit from improved service delivery and security levels. It is important to note that EMV is not the proverbial heaven of smart card payment systems; stakeholders should understand that security measures are to be updated regularly to remain a step ahead of fraudsters. Another added advantage of the chip model is the fact that security can be incrementally increased over time which supports the need to update security mechanisms on an ongoing basis.
1. “Top 10 reasons US should consider EMV”; Smart Card Alliance Webinar, January 2010. –Randy Vandehoof, Deborah Baxley, Nick Holland, Simon Hurry, Dave Metcalfe.
2. “Fraud in the US Payments industry: Fraud mitigation and prevention measures in use and chip card technology impact on fraud”; Smart Card Alliance white paper, October 2009 CMPC-09004.
3. The Nilson Report, issue 915; November 2008.
4. The Nigerian Payments System Management Bill, 2009.