Magnetic Stripe Authorizations Invite Fraud

January 25, 2011

Magnetic stripe card technology is going away, but it continues to pose a significant fraud risk for debit card issuers still using it, says Ann Davidson, CUNA Mutual Group senior risk manager.

Davidson, speaking at the 2011 ATM, Debit & Prepaid Forum in November, encouraged card issuers to move away from magnetic stripe cards and adopt more secure chip technology.

“The U.S. is a magnetic stripe fraud hot spot particularly for debit cards because we’re among the last country to migrate to chip technology,” Davidson says.

U.S. card fraud is double that of global fraud, notes Davidson, citing a recent Nilson Report study. The U.S. loses 9 cents to fraud for every $100 worth of credit and debit card transactions, while the global average is 4.5 cents.

The days of lone perpetrators peeking over a card user’s shoulder to obtain a PIN are long gone. Today, data breaches and skimming equipment at ATMs or at the point of sale prevail. Outdated magnetic stripe technology is an enabler, allowing fraud schemes to continue.

Accelerating the deployment of chip technologies will create a much more secure payment environment, says Davidson. It will also move the U.S. payment infrastructure toward using mobile payments by building the infrastructure to process chip transactions that support either a signature or PIN at the point of sale.

Some U.S. merchants are already accepting contactless transactions today. Visa will require U.S. processors and sub-processor service providers to support merchant acceptance of chip transactions no later than April 1, 2013.

As Visa- and MasterCard-branded cards are issued and reissued, CUNA Mutual Group is encouraging credit unions to check with their card processor to determine if chip technology is available. As the payment infrastructure evolves from magnetic stripe to devices such as EMV (Europay-MasterCard-Visa) chip technology and near field communication mobile phones, cardholders will rely on these upgrades to continue conducting their transactions.

Ultimately, consumer education will be a key as more debit card issuers offer chip technology and more merchants accept or require chip technology for transactions.

Davidson offered card issuers the following tips to avoid debit card fraud and successfully migrate to chip technology:

* Check with your card vendor to determine if chip contact and contactless technology is available. If so, start enhancing your card programs to include the new technology.
* Tell staff and card holders about how chip technology and dynamic authentication works to secure transactions.
* Provide your cardholders with timely educational material.
* Get involved and network with other card providers to understand the impact of this change.
* Review all releases from card vendors concerning the acceleration of chip migration and liability shift programs.

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