Credit card incidents and control systems

Abstract

Credit and debit cards have spread and skyrocketed all around the world to become the most popular means of payments in many countries. Despite their enormous popularity, cards are not free of risk. Technology development and e-commerce have exponentially increased internal credit card incidents. This paper identifies and quantifies the different types of credit card fraud and puts into question the effectiveness of the role assigned to cardholders in its detection.

Introduction

Technological developments have changed the way we view money, especially with relation to its use as a method of payment. It has evolved from being considered a physical active (gold, coins or notes) to the idea of money being a figure in an account. This change in framework, that has modified the way monetary policy is designed on a large scale, has influenced the behaviour of small businesses. In the last thirty years, the use of credit/debit cards has spread and skyrocketed all around the globe, gradually becoming the most popular and most efficient means of payments in many countries.

As examples, there were almost 800 million cards in circulation in 2010 in Japan alone, the total amount of card payments (excluding e-money cards) made in the Eurozone surpassed one trillion of euros in 2010, the total US revolving debt (98 percent of which is made up of credit card debt) reached $812.1 billion in January 2012, and the average number of cards per inhabitant in UK was about 2.33 in 2010 (Banco de España, 2011, Euromonitor International, 2012, European Central Bank, 2012, Federal Reserve, 2012). In fact, according to the American Bankers Association, “it is estimated that there are 10,000 payment card transactions made every second around the world” (Schulz & Woosley, 2009).

In spite of their enormous popularity, plastic cards are not free of risk. Credit card issuers as much as card owners are aware of the possible problems that can arise from an incident involving a card. For instance, the May-2009 Unisys Security index pointed out credit and debit card fraud as the first concern of Americans, superseding fears of terrorism. Further, according to a report by VISA in 2010, worldwide card fraud accounts for around 0.055% of the sum of all credit card payments and likewise, according to issuers and police, security measure costs (including investment in technological developments, security and the fight against fraud) are equivalent to 0.06% of the value of all card transactions. Since 1958, when the first widely accepted plastic charge card was issued by American Express, issuers have been virtually running a race without end in the fight against fraud.

If, traditionally, early detection of a card incident was important because of its extensive use as means of payment in high street shops, the rapid expansion of e-commerce and online banking has made it essential (see, e.g., Bang, Lee, Bae, & Ahn, in press). Both the issuer and the cardholder are interested in an early alert and prevention of incorrect use of the card to avoid the unintended economic consequences that could result (Chung & Suh, 2009).

The range of the profile of the incidents is wide, from external incidents, such as robbery, theft or mislaying a card, to internal incidents, such as duplication, cloning or piracy of passwords, via phishing or skimming. With the development of technology and e-commerce and the growing use of the Internet, the increase of internal incidents has been exponential.