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CHARACTERISTICS OF A SUCCESSFUL PAYMENT METHOD: SECURITY
Special Feature: Fraud And Approvals The digitization of payments and commerce has grown exponentially over the last several years. This has increased convenience for consumers and sales for merchants but has also made fraud a more serious consideration for merchants. Section 2 provides profiles of the various payment methods in commerce today; each payment method presents merchants with fraud risks and requires different solutions to consider. In this section we will review the most prevalent fraud affecting merchants today. Given cards’ dominance in the global payments mix – 66% for POS and 64% for ecommerce (including card-backed digital wallets) – card-present (CP) and card- not-present (CNP) card fraud will be a main focus. 7 8 Card-Present (CP) Fraud Card-present (CP) fraud has decreased since the liability shift to the merchants and issuers who do not support EMV. 9 This shift happened for most environments – with some exclusions like Automated Fuel Dispensers (AFDs) – in the U.S. in 2015 and in Europe in 2005. 10 The success of the EMV chip in decreasing card- present counterfeit fraud 11 could be attributed to the difficulty, if not an impossibility, of cloning a physical chip card due to the technology utilized by the EMV itself.. By contrast, reprogramming a magstripe on a non- EMV chip card is significantly easier for a fraudster. 12 While on the decline, fraudulent activity still commonly takes place in CP transactions taking the form of gift card fraud, card testing, and trying to force payments to fallback transactions. Gift Card Fraud Gift cards are undeniably an important revenue source for many merchants. The global gift card market reached $984.3 billion in 2023 with the U.S. representing 28% of the market. 13 In addition to gift card sales themselves, consumers are more likely to spend more during a single shopping experience when redeeming a gift card, averaging around $32 more than the gift card value. 14 Gift cards also build brand awareness, bring in new customers, and provide flexibility for consumers during holiday seasons. While overall gift cards are an added value to merchants, they – like all payment methods – present merchants with fraud risks. Ease of access, assurance of purchase and flexible usage all contribute to gift cards being an attractive opportunity for fraudsters to take advantage. Gift card fraud may entail fraudsters removing gift cards off the shelf, documenting the card information, resealing the gift cards and replacing them on the shelves of the merchants. With the documented information, the fraudster can set up an automation which runs through the gift card details and alerts them when one is activated. Once a consumer activates the card, the fraudster will be able to redeem the funds before the consumer can use/gift the card. Gift card utilization of magstripe instead of chips continues to make them vulnerable to this type of hacking by bad actors. Merchants are actively searching for solutions and attempting to limit the loss they are incurring because of gift card fraud. Regulators in the U.S. are also beginning to pass laws related to gift card fraud; Maryland is the first state to pass a law to enforce tamper-proof packaging for gift cards. State-by-state enforcement could lead to further costs for merchants including wasted gift card inventory and multiple processes for gift card packaging. The packaging of gift cards has proven to be a vulnerability for merchants, but it is important to consider the underlying credentials of the gift card as a concern. A solution one merchant has actioned to increase security for gift cards involves decoupling the access code from the gift card; the access codes are added to the gift card at the register. 15 Another potential solution is to implement EMV chip technology to gift cards, but given it costs around $2 per card to create, this also could lead to further wasted inventory and financial investment in a disposable card. 16
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