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Fighting the unknown: do we stand a chance against credit card fraud?

By Hendi Yogi Prabowo, a PhD student at UOW’s Centre for Transnational Crime Prevention. His thesis is on credit card fraud prevention practices from interdisciplinary points of view (commerce and criminology).

The recent changes in payment systems around the world have indicated the demise of cash and the rise of noncash payment instruments including the credit card. However, the benefits of credit cards often come with a hefty price such as the increase of criminal opportunities in the economy that in financial terms alone may eventually supersede the benefits.

Periodical fraud statistics from institutions such as the US Federal Trade Commission (FTC), the UK Association for Payment Clearing Services (APACS) (currently known as UK Payments Administration) and the Australian Payments Clearing Association (APCA) have continuously demonstrated the magnitude of the problems of payments fraud, including credit card fraud. In Australia, according to the statistics of the APCA in 2008 alone, losses from charge card and credit card fraud were about $145 million with more than $71 million from card-not-present schemes.

Governments have tried to lessen the threats of credit card fraud but it remains among the fastest growing crimes in the world. Generally, the invisible and intangible nature of the offence has been identified as the main reason behind the difficulty in combating the offence. The invisible nature means that, unlike the more ‘traditional’ crimes where offenders and victims need to be at the same place where capable guardians are absent (crime triangle framework), credit card fraud offenders can attack their victims from other continents (e.g. using computer networks) and thereby making them virtually unknown to their victims. On the other hand, the intangible nature of the offence means that the offenders do not even need to steal the cards physically for it's the card information they are really seeking.

Studies by institutions such as the FTC, the APACS, and the APCA have all suggested that the major types of credit card fraud are:

• card-not-present fraud (e.g. online credit card fraud);
• counterfeit card fraud (e.g. using fake credit card);
• not-received fraud (e.g. theft from mailbox);
• application fraud (e.g. using false identity for credit card application);
• and lost and stolen card (e.g. stolen wallet).

Recent fraud statistics indicate that, at least in the United Kingdom and Australia, card-not-present fraud is generally the most common scheme. This is somewhat different from that of five or even 10 years ago where counterfeit card fraud was generally the most common card fraud scheme. Among the alleged factors causing this change were the development of e-commerce and the introduction of the chip and PIN technology.

In the United Kingdom, for example, the chip and PIN technology have been known to greatly reduce crime opportunities for the counterfeit card fraud offenders. It appears later on they have attempted to move to, or concentrate more on, card-not-present scheme. Additionally, as stated by APACS, some offenders were also believed to have been seeking more crime opportunities by shifting the offences to other countries with weaker credit card fraud prevention systems. In practice, the methods employed by the offenders may range from relatively simple means such as ‘extrapolating’ valid card numbers to the highly sophisticated ones such as hacking into merchants’ databases to steal customers’ data.

Although often quantified in monetary value, the true damages from credit card fraud can extend beyond financial matters. Proceeds may be used to finance other more serious crimes such as terrorist attacks that may result in the loss of lives. For example, the Bali bombings, based on the uncovered evidence, were allegedly funded by credit card fraud. Therefore, the best way to avoid further problems to emerge from credit card fraud is to prevent the offence from occurring in the first place. This requires active participation and co-ordination among members of payment systems (e.g. merchants, issuers, acquirers, and credit card networks) and those of criminal justice systems (e.g. police officers and prosecutors).

Intensive and extensive studies on the issues of credit card fraud should also be promoted to identify the real problems that need to be solved. This is so good crime prevention practices are those based on the actual problems rather than simply common practices. As crime prevention, investigation, and prosecution can be resource intensive, understanding the actual problems will also help the decision makers to properly allocate the necessary resources to achieve the targeted goals. However, the greatest challenge in doing so is recognising the many limitations in obtaining data and information on invisible and intangible crimes such as credit card fraud.

Many studies on credit card fraud rely on the victim side for data and information as part of the outcomes of the self reporting mechanisms in the payment systems (e.g. the FTC’s Identity Theft Data Clearinghouse) where complaints from victims were collected, managed, and distributed for decision making purposes.

Despite the breadth of this type of data, experts still believe that theoretically they only show half of the story because the other half will be from the offenders. On the other hand, to obtain such data, law enforcers must first be able to track down, investigate, and prosecute the offenders and their ability to do so is also influenced by the available information on the offences, the victims, and the offenders.

Additionally for researchers, according to Dr. Russel Smith of the Australian Institute of Criminology, even with the incarcerated offenders, obtaining permission to conduct interviews, as well as ensuring that the interviewees are being honest, can also be among the challenges.

Nevertheless, for the sake of the effectiveness and efficiency of crime prevention practices, efforts to shed light on credit card fraud should continue to progress.