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

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.