Credit-Card Companies Step Up Anti-Fraud Efforts
UNITED STATES ECONOMY
THE nation's credit-card issuers are stepping up their efforts to combat fraud that costs the industry more than $1 billion each year.
"One billion dollars is a very conservative estimate," says Michael Sullivan, a spokesman for Citibank.
The Nilson Report, a credit-card newsletter, estimates that in 1991 more than $1.58 billion was lost to fraud, ranging from theft of new cards in the mail system to counterfeit cards.
Fraud-related losses cost VISA and MasterCard issuers about $624 million in 1991. The figure for 1992 was expected to exceed $700 million. That number does not include losses of other card issuers, such as American Express, Discover, AT&T, and retail stores.
Credit-card fraud "is a very serious problem for the entire industry," says Mitchel Montagna, a spokesman for AT&T's Universal Card. "We're competing with other card issuers 98 percent of the time, but when it comes to fraud, everybody is together."
Citibank, the nation's largest card issuer, introduced photo credit cards in April 1992. Since then, fraud losses have dropped 67 percent in the New York City area, the firm reports.
"If Citibank continues to experience success with this program ... other card issuers will soon follow," says James Daly, editor of Credit Card News, an industry newsletter. But producing a photo credit card costs $1 to $1.50, compared to $0.25 to $0.50 per a card without a photo.
The theft of cards during delivery is known as Never Received Issued (NRI) fraud. The cards are usually stolen from mailboxes or postal delivery trucks.
NRI losses have overtaken lost and stolen cards as the number-one fraud problem in the industry, according to MasterCard. In 1991, MasterCard NRI losses in the United States totaled $40 million, $60 million worldwide.
The US Postal Service receives about 200,000 complaints a year over lost financial mail, such as credit cards and personal checks, says Paul Griffo of the Postal Inspection Service. Last year the Service handled 7,567 mail-theft cases, up from 6,246 cases in 1991.
In the mail system, newly issued cards can make as many as 11 stops between issuer and cardholder, with each stop a potential target for theft, according to MasterCard. To prevent this crime, MasterCard and VISA are using private carriers to deliver cards directly to customers in areas where NRI fraud occurs frequently, especially New York City and Los Angeles.
During the past six months VISA used Federal Express. With the US mail system, VISA lost about 14 cards for every 10,000 cards mailed. With Federal Express, 50,000 cards were mailed without a single loss, says Albert Coscia of VISA USA Inc. Starting this month more banks will be using private carriers, Mr. Coscia says. This will cost a card issuer $4 per delivery, but a small amount compared to a potential loss of $1,600 - the average balance of a stolen credit card.
When a stolen card is used by another person, under law the original owner can be held liable for the first $50 of an unauthorized purchase, but most banks absorb the total loss themselves.
AT&T and other credit-card issuers are also taking an anti-fraud practice known as "card activation."
When a card is delivered to a customer, it is not usable until the cardholder calls to verify certain information. Using this method, AT&T has cut its fraud losses by about 66 percent, Mr. Montagna says.
The Postal Service is installing strong lock boxes in delivery vehicles and assigning postal inspectors to card theft alone. Preventing this crime "is an extremely high priority within in the Postal Service," Mr. Griffo says.
Currently the US Secret Service is investigating a counterfeit credit-card case that impacts all of North America, says special agent Mark Lowery at the Secret Service's financial crime division. "A very good counterfeit card is coming out from the Far East."
Last year the Secret Service said it had found bogus MasterCard and VISA cards in the Seattle area made by crime groups in Hong Kong. On the streets, a fake card sold for as much as $500.
In recent years criminal groups have been stealing legitimate credit-card account numbers from hotels, telemarketers, and rental car agencies. These numbers are embossed on the front of a counterfeit card and electronically encoded on the magnetic strips on the back.
To combat this problem, VISA and other card issuers are using a new technology called Card Verification Value, which allows banks to verify the authenticity of the magnetic stripe. If the stripe has been tampered with, the bank refuses to make a payment.
However, industry analysts say it is a consumer who can best prevent fraud. VISA urges people to treat their credit cards as they would treat a $1,000 bill.