Aging Card Technology Drives Rise In Credit Fraud

Originally published on June 6, 2011 3:51 pm

U.S. credit and debit card fraud is on the rise. According to one survey, nearly a third of American consumers have reported credit card fraud in the past five years.

And part of the problem, as Andrea Rock of Consumer Reports tells NPR's Mary Louise Kelly, is that U.S. card issuers rely on security systems that lag behind measures taken in other countries.

"The credit and debit cards that most Americans use are really surprisingly vulnerable to fraud," Rock says. "Because, unlike cards in most of the rest of the world, they rely on outdated technology."

Rock, a senior editor at Consumer Reports, wrote about the technology gap in a recent article for the magazine.

"The account information that's needed to make a transaction on American cards is stored, unencrypted, on a magnetic stripe on the back of each card," she says.

That information is easily copied and reproduced on a bogus card. Rock says that in general, thieves prefer to target debit cards, which allow them to get cash from an ATM, instead of conducting risky transactions in a store.

By contrast, credit and debit cards are much more secure in Europe, Rock says. First of all, the account information is in a computer chip that's embedded in the card, instead of on an easily read magnetic stripe.

"It's less easy to copy; the data on it is encrypted; it often includes an identifying code that changes with each transaction," Rock says.

Many of the cards, called "chip and PIN cards," also require the user to enter a PIN number to access an account.

But those cards aren't commonly used in America. And Rock says that the reason boils down to economics — and a dispute over who pays for card fraud.

U.S. credit card issuers, Rock says, "claim that losses due to fraud here don't yet exceed the cost they'd incur in switching to the new technology. But the merchants say that that's because the banks shift much of the cost burden for fraud onto them, anyways."

That situation has led some large American retailers, like Walgreens, Kroger and Sears, to push for an adoption of the more secure card technology, Rock says. And chain stores like Best Buy, Home Depot and Wal-Mart are beginning to install new sales terminals that can process the smart-chip cards.

"When this technology for cards was introduced in France way back in 1992, total fraud losses there dropped by 50 percent," Rock says. Card counterfeiting, she says, dropped by 78 percent.

As U.S. card systems start to catch up with the rest of the world, Rock says there are some steps consumers can take to protect themselves.

First, she says, never enter your PIN number unless you absolutely must.

"It's better to use a credit card rather than a debit in general," Rock says.

That means that if a merchant offers the choice, consumers should choose the "credit card" option when using their debit card in a store.

That's because while most card issuers offer zero-liability policies for losses, "under the law, the liability for unauthorized transactions is greater for debit card holders," Rock says.

And when using an ATM, Rock says to be sure to cover the keypad while entering your PIN, so that a nearby camera or a spying thief can't use it to make a fraudulent card.

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MARY LOUISE KELLY, Host:

Thanks for joining us.

LOUISE KELLY: Thank you.

LOUISE KELLY: Well, let me start by asking, why is card fraud rising so sharply? And the problem seems to mostly involve debit cards. Is that right?

LOUISE KELLY: Well, yes. The credit and debit cards that most Americans use are really surprisingly vulnerable to fraud because unlike cards in most of the rest of the world, they rely on outdated technology. The account information that's needed to make a transaction on American cards is stored unencrypted on a magnetic stripe on the back of each card, and that's very easy for thieves to cheaply copy and produce counterfeit cards. And as you mentioned, debit cards are particularly appealing to them because they allow them to just get their hands on cold hard cash more quickly than credit cards.

LOUISE KELLY: So Europeans, for example, or places in just about everywhere else in the world I gather, instead of having the cards we have with the magnetic stripe you mentioned, they have actually a security chip that's embedded in the card. Now why is that so much better?

LOUISE KELLY: It's actually part of multiple layers of security, but it's less easy to copy, the data that's on it is encrypted, it's - often includes an identifying code that changes with each transaction. And for a lot of the cards, whether you're making a debit or a credit card purchase, you're also required to enter a PIN number, which is why they're sometimes called chip and PIN cards.

LOUISE KELLY: Well, so if this technology is so much better, the chip technology, why don't we have it here in the States?

LOUISE KELLY: Well, banks and some of the other financial players in the card industry in the U.S. claim that losses due to fraud here don't yet exceed the cost they'd incur in switching to the new technology. There is a change beginning to occur that some of the big-name retailers, including McDonald's, Walgreens, Kroger, Sears, are now pushing for an upgrade to the better card technology used in Europe and the rest of the world. And some of the biggest, Best Buy, Home Depot and Wal-Mart are already in the process of installing the new sales terminals that can process the smart-chip cards.

LOUISE KELLY: So let me make sure I'm hearing you correctly. It is banks that would have to pick up most of the tab for switching to the new chip technology.

LOUISE KELLY: Banks and merchants. Merchants also have to incur the cost of switching their sales terminals. But despite that cost, they're willing to do that because of the clear improvement in security. When this technology for cards was introduced in France way back in 1992, total fraud losses there dropped by 50 percent and card counterfeiting by 78 percent. So it makes a significant difference.

LOUISE KELLY: Well, for now, as people wait for U.S. banks and retailers to catch up on the technology, is there anything people should be doing to protect themselves?

LOUISE KELLY: Yes. It's better to use a credit card rather than a debit in general because even though card issuers extend zero liability policies for card losses to both credit and debit cardholders, that's a voluntary policy and under the law, the liability for unauthorized transactions is greater for debit card holders. If you are at an ATM and you do need to enter your PIN, what you want to do is take your other hand and cover the keypad as you're entering it, because the way they're capturing the PINs often is from pinhole video cameras that are aimed at the keypads to see what number you're typing.

LOUISE KELLY: Well, thanks so much.

LOUISE KELLY: Thank you again.

LOUISE KELLY: That's Andrea Rock, senior editor at Consumer Reports. Transcript provided by NPR, Copyright NPR.