Credit card fraud

Credit card fraud is a wide-ranging term for theft and fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an adjunct to identity theft. According to the Federal Trade Commission, while identity theft had been holding steady for the last few years, it saw a 21 percent increase in 2008. However, credit card fraud, that crime which most people associate with ID theft, decreased as a percentage of all ID theft complaints for the sixth year in a row.

The cost of card fraud in 2006 were 7 cents per 100 dollars worth of transactions (7 basis points). Due to the high volume of transactions this translates to billions of dollars. In 2006, fraud in the United Kingdom alone was estimated at £535 million, or US$750–830 million at prevailing 2006 exchange rates.

Origins

The fraud begins with either the theft of the physical card or the compromise of data associated with the account, including the card account number or other information that would routinely and necessarily be available to a merchant during a legitimate transaction. The compromise can occur by many common routes and can usually be conducted without tipping off the card holder, the merchant or the issuer, at least until the account is ultimately used for fraud. A simple example is that of a store clerk copying sales receipts for later use. The rapid growth of credit card use on the Internet has made database security lapses particularly costly; in some cases, millions of accounts have been compromised.

Stolen cards can be reported quickly by cardholders, but a compromised account can be hoarded by a thief for weeks or months before any fraudulent use, making it difficult to identify the source of the compromise. The cardholder may not discover fraudulent use until receiving a billing statement, which may be delivered infrequently. Cardholders can mitigate against this fraud risk by checking their account frequently to ensure constant awareness in case there are any suspicious, unknown transactions or activities.

Stolen cards

When a credit card is lost or stolen, it remains usable until the holder notifies the issuer that the card is lost. Most issuers have free 24-hour telephone numbers to encourage prompt reporting. Still, it is possible for a thief to make unauthorized purchases on a card until it is canceled. Without other security measures, a thief could potentially purchase thousands of dollars in merchandise or services before the cardholder or the card issuer realize that the card is in the wrong hands.

The only common security measure on all cards is a signature panel, but signatures are relatively easy to forge. Some merchants will demand to see a picture ID, such as a driver's license, to verify the identity of the purchaser, and some credit cards include the holder's picture on the card itself. However, the card holder has a right to refuse to show additional verification, and asking for such verification is usually a violation of the merchant's agreement with the credit card companies. Self-serve payment systems (gas stations, kiosks, etc.) are common targets for stolen cards, as there is no way to verify the card holder's identity.

A common countermeasure is to require the user to key in some identifying information, such as the user's ZIP or postal code. This method may deter casual theft of a card found alone, but if the card holder's wallet is stolen, it may be trivial for the thief to deduce the information by looking at other items in the wallet. For instance, a U.S. driver license commonly has the holder's home address and ZIP code printed on it. Visa Inc. offers merchants lower rates on transactions if the customer provides a zip code.

In Europe, most cards are equipped with an EMV chip which requires a 4 digit PIN to be entered in to the merchants terminal before payment will be authorised. However, a PIN isn't required for online transactions.

Requiring a customer's ZIP code is illegal in California, where the state's 1971 law prohibits merchants from requesting or requiring a card-holder's "personal identification information" as a condition of accepting the card for payment. The California Supreme Court has ruled that the ZIP code qualifies as personal identification information because it is part of the cardholder's address. Companies face fines of $250–1000 for each violation. Requiring a "personal identification number" (PIN) may also be a violation.

Card issuers have several countermeasures, including sophisticated software that can, prior to an authorized transaction, estimate the probability of fraud. For example, a large transaction occurring a great distance from the cardholder's home might seem suspicious. The merchant may be instructed to call the card issuer for verification, or to decline the transaction, or even to hold the card and refuse to return it to the customer. The customer must contact the issuer and prove who they are to get their card back (if it is not fraud and they are actually buying a product).

Compromised accounts

Card account information is stored in a number of formats. Account numbers – formally the Primary Account Number (PAN) – are often embossed or imprinted on the card, and a magnetic stripe on the back contains the data in machine readable format. Fields can vary, but the most common include:

• Name of card holder
• Account number
• Expiration date
• Verification/CVV code

Card not present transaction

Main article: Card not present transaction

The mail and the Internet are major routes for fraud against merchants who sell and ship products, and affects legitimate mail-order and Internet merchants. If the card is not physically present (called CNP, card not present) the merchant must rely on the holder (or someone purporting to be so) presenting the information indirectly, whether by mail, telephone or over the Internet. While there are safeguards to this, it is still more risky than presenting in person, and indeed card issuers tend to charge a greater transaction rate for CNP, because of the greater risk.

It is difficult for a merchant to verify that the actual cardholder is indeed authorising the purchase. Shipping companies can guarantee delivery to a location, but they are not required to check identification and they are usually not involved in processing payments for the merchandise. A common recent preventive measure for merchants is to allow shipment only to an address approved by the cardholder, and merchant banking systems offer simple methods of verifying this information. Before this and similar countermeasures were introduced, mail order carding was rampant as early as 1992. A carder would obtain the credit card information for a local resident and then intercept delivery of the illegitimately purchased merchandise at the shipping address, often by staking out the porch of the residence.

Small transactions generally undergo less scrutiny, and are less likely to be investigated by either the card issuer or the merchant. CNP merchants must take extra precaution against fraud exposure and associated losses, and they pay higher rates for the privilege of accepting cards. Fraudsters bet on the fact that many fraud prevention features are not used for small transactions.

Merchant associations have developed some prevention measures, such as single use card numbers, but these have not met with much success. Customers expect to be able to use their credit card without any hassles, and have little incentive to pursue additional security due to laws limiting customer liability in the event of fraud. Merchants can implement these prevention measures but risk losing business if the customer chooses not to use the measures.

Identity theft

Identity theft can be divided into two broad categories: Application fraud and account takeover.

Application fraud

Application fraud happens when a criminal uses stolen or fake documents to open an account in someone else's name. Criminals may try to steal documents such as utility bills and bank statements to build up useful personal information. Or they may create counterfeit documents.

Account takeover

Account takeover happens when a criminal tries to take over another person's account, first by gathering information about the intended victim, and then contacting their card issuer while impersonating the genuine cardholder, and asking for mail to be redirected to a new address. The criminal then reports the card lost and asks for a replacement to be sent.

Some merchants added a new practice to protect their consumers and their own reputation, where they ask the buyer to send a photocopy of the physical card and statement to ensure the legitimate usage of a card.

Skimming

Skimming is the theft of credit card information used in an otherwise legitimate transaction. The thief can procure a victim's credit card number using basic methods such as photocopying receipts or more advanced methods such as using a small electronic device (skimmer) to swipe and store hundreds of victims’ credit card numbers. Common scenarios for skimming are restaurants or bars where the skimmer has possession of the victim's credit card out of their immediate view. The thief may also use a small keypad to unobtrusively transcribe the 3 or 4 digit Card Security Code which is not present on the magnetic strip. Call centers are another area where skimming can easily occur. Skimming can also occur at merchants such as gas stations when a third-party card-reading device is installed either out­side or inside a fuel dispenser or other card-swiping terminal. This device allows a thief to capture a customer’s cred­it and debit card information, including their PIN, with each card swipe.

Instances of skimming have been reported where the perpetrator has put a device over the card slot of an ATM (automated teller machine), which reads the magnetic strip as the user unknowingly passes their card through it. These devices are often used in conjunction with a miniature camera (inconspicuously attached to the ATM) to read the user's PIN at the same time. This method is being used very frequently in many parts of the world, including South America, Argentina Europe, the Netherlands. Another technique used is a keypad overlay that matches up with the buttons of the legitimate keypad below it and presses them when operated, but records or transmits the keylog of the PIN entered by wireless. The device or group of devices illicitly installed on an ATM are also colloquially known as a "skimmer". Recently-made ATMs now often run a picture of what the slot and keypad are supposed to look like as a background, so that consumers can identify foreign devices attached.

Skimming is difficult for the typical cardholder to detect, but given a large enough sample, it is fairly easy for the card issuer to detect. The issuer collects a list of all the cardholders who have complained about fraudulent transactions, and then uses data mining to discover relationships among them and the merchants they use. For example, if many of the cardholders use a particular merchant, that merchant can be directly investigated. Sophisticated algorithms can also search for patterns of fraud. Merchants must ensure the physical security of their terminals, and penalties for merchants can be severe if they are compromised, ranging from large fines by the issuer to complete exclusion from the system, which can be a death blow to businesses such as restaurants where credit card transactions are the norm.

Carding

Carding is a term used for a process to verify the validity of stolen card data. The thief presents the card information on a website that has real-time transaction processing. If the card is processed successfully, the thief knows that the card is still good. The specific item purchased is immaterial, and the thief does not need to purchase an actual product; a web site subscription or charitable donation would be sufficient. The purchase is usually for a small monetary amount, both to avoid using the card's credit limit, and also to avoid attracting the card issuer's attention. A website known to be susceptible to carding is known as a cardable website.

In the past, carders used computer programs called "generators" to produce a sequence of credit card numbers, and then test them to see which were valid accounts. Another variation would be to take false card numbers to a location that does not immediately process card numbers, such as a trade show or special event. However, this process is no longer viable due to widespread requirement by internet credit card processing systems for additional data such as the billing address, the 3 to 4 digit Card Security Code and/or the card's expiration date, as well as the more prevalent use of wireless card scanners that can process transactions right away. Nowadays, carding is more typically used to verify credit card data obtained directly from the victims by skimming or phishing.

A set of credit card details that has been verified in this way is known in fraud circles as a phish. A carder will typically sell data files of the phish to other individuals who will carry out the actual fraud. Market price for a phish ranges from US$1.00 to US$50.00 depending on the type of card, freshness of the data and credit status of the victim.

BIN attack

Credit cards are produced in BIN ranges. Where an issuer does not use random generation of the card number, it is possible for an attacker to obtain one good card number and generate valid card numbers by changing the last four numbers using a generator. The expiry date of these cards would most likely be the same as the good card.

Balance transfer checks

Some promotional offers include active balance transfer checks which may be tied directly a credit card account. These are often sent unsolicited, and may occur as often as once per month by some financial institutions. In cases where checks are stolen from a victims mailbox they can be used at point of sales locations thereby leaving the victim responsible for the losses. They are one path at times used by fraudsters.

Fraudulent Charge-Back schemes

There is a class of email spam (usually sent to commercial / corporate email addresses) where the spammer makes an offer to purchase goods (usually not specifically identified) from a vendor. In the email, the spammer makes it clear that they intend to pay for the goods using a credit card. The spammer provides the shipping address for the goods, and requests a product and price-list from the vendor in the initial email. It has been speculated that this is some form of charge-back scheme, whereby the spammer is using a valid credit card but intends to request a charge-back to reverse the charge while at the same time retaining the goods that were shipped to them.

Profits, losses and punishment

United States

Cardholder liability

In the US, federal law limits the liability of card holders to $50 in the event of theft of the actual credit card, regardless of the amount charged on the card, if reported within 60 days of receiving the statement. In practice many issuers will waive this small payment and simply remove the fraudulent charges from the customer's account if the customer signs an affidavit confirming that the charges are indeed fraudulent. If the physical card is not lost or stolen, but rather just the credit card account number itself is stolen, then Federal Law guarantees card holders have zero liability to the credit card issuer.

Merchants

The merchants and the financial institutions bear the loss. The merchant loses the value of any goods or services sold, and any associated fees. If the financial institution does not have a chargeback right then the financial institution bears the loss and the merchant does not suffer at all. These losses incline merchants to be cautious and often they ban legitimate transactions and lose potential revenues. Online merchants can choose to apply for additional services that credit card companies offer, such as Verified by Visa and MasterCard SecureCode. However, these are fiddly for consumers so there is a trade-off of making a sale easy and making it secure.

The liability for the fraud is determined by the details of the transaction. If the merchant retrieved all the necessary pieces of information and followed all of the rules and regulations the financial institution would bear the liability for the fraud. If the merchant did not get all of the necessary information they would be required to return the funds to the financial institution. This is all determined through the credit card processory.

High-risk industries such as online shops anticipate losses and spread them over the prices that are paid by honest buyers. The FBI's Financial Report to the Public in 2007 estimated such losses to be $52.6 billion that are borne by 9.91 million US consumers. Recently several attempts have been made to amend the legislation to protect cardholders and merchants from fraud, but credit card companies are heavily resistant to such initiatives.

United Kingdom

In the UK, credit cards are regulated by the Consumer Credit Act 1974 (amended 2006). This provides a number of protections and requirements.

Any misuse of the card, unless deliberately criminal on the part of the cardholder, must be refunded by the merchant or card issuer.

Distance Selling Regulations require goods ordered by telephone, Internet or mail order to be delivered to the cardholder's address. There is also a 7-day "cooling off period" where they can be returned without charge. The aim is more to protect people from mis-selling, but it also helps protect against fraud.

Credit card companies

To prevent being "charged back" for fraud transactions merchants can sign up for services offered by Visa and MasterCard called Verified by Visa and MasterCard SecureCode, under the umbrella term 3-D Secure. This requires consumers to add additional information to confirm a transaction.

Often enough online merchants do not take adequate measures to protect their websites from fraud attacks, for example by being blind to sequencing. In contrast to more automated product transactions, a clerk overseeing "card present" authorization requests must approve the customer's removal of the goods from the premise in real time.

Credit card merchant associations, like Visa and MasterCard, receive profits from transaction fees, charging between 0% and 3.25% of the purchase price plus a per transaction fee of between 0.00 USD and 40.00 USD. Cash costs more to bank up, so it is worthwhile for merchants to take cards. Issuers are thus motivated to pursue policies which increase the money transferred by their systems. Many merchants believe this pursuit of revenue reduces the incentive for credit card issuers to adopt procedures to reduce crime, particularly because the cost of investigating a fraud is usually higher than the cost of just writing it off. But in the US and Australia credit card issuers do not take these costs; they are passed on to the merchants as "chargebacks". This can result in substantial additional costs: not only has the merchant been defrauded for the amount of the transaction, he is also obliged to pay the chargeback fee, and to add insult to injury the transaction fees still stand.

Merchants have started to request changes in state and federal laws to protect themselves and their consumers from fraud, but the credit card industry has opposed many of the requests. In many cases, merchants have little ability to fight fraud, and must simply accept a proportion of fraud as a cost of doing business.

Because all card-accepting merchants and card-carrying customers are bound by civil contract law there are few criminal laws covering the fraud. Payment transfer associations enact changes to regulations, and the three parties— the issuer, the consumer, and the merchant— are all generally bound to the conditions, by a self-acceptance term in the contract that it can be changed.

Merchants

The merchant loses the goods or services sold, the payment, the fees for processing the payment, any currency conversion commissions, and the amount of the chargeback penalty. For obvious reasons, many merchants take steps to avoid chargebacks—such as not accepting suspicious transactions. This may spawn collateral damage, where the merchant additionally loses legitimate sales by incorrectly blocking legitimate transactions. Mail Order/Telephone Order (MOTO) merchants are implementing Agent-assisted automation which allows the call center agent to collect the credit card number and other personally identifiable information without ever seeing or hearing it. This greatly reduces the probability of chargebacks and increases the likelihood that fraudulent chargebacks will be successfully overturned.

Famous credit fraud attacks

Between July 2005 and mid-January 2007, a breach of systems at TJX Companies exposed data from more than 45.6 million credit cards. Albert Gonzalez is accused of being the ringleader of the group responsible for the thefts.

In August 2009 Gonzalez was also indicted for the biggest known credit card theft to date — information from more than 130 million credit and debit cards was stolen at Heartland Payment Systems, retailers 7-Eleven and Hannaford Brothers, and two unidentified companies.

Countermeasures

Countermeasures to combat credit card fraud include the following.

By merchants:

• PAN truncation – not displaying the full number on receipts
• Tokenization (data security) – not storing the full number in computer systems
• Requesting additional information, such as a PIN, ZIP code, or Card Security Code

By card issuers:

• Fraud detection and prevention software that analyzes patterns of normal and unusual behavior as well as individual transactions in order to flag likely fraud. Profiles include such information as IP address
• Fraud detection and response business processes such as:

• Contacting the cardholder to request verification
• Placing preventative controls/holds on accounts which may have been victimized
• Blocking card until transactions are verified by cardholder
• Investigating fraudulent activity

• Strong Authentication measures such as:

• Multi-factor Authentication, verifying that the account is being accessed by the cardholder through requirement of additional information such as account number, PIN, ZIP, challenge questions
• Out-of-band Authentication, verifying that the transaction is being done by the cardholder through a "known" or "trusted" communication channel such as text message, phone call, or security token device

• Industry collaboration and information sharing about known fraudsters and emerging threat vectors

By Governmental and Regulatory Bodies:

• Enacting consumer protection laws related to card fraud
• Performing regular examinations and risk assessments of credit card issuers
• Publishing standards, guidance, and guidelines for protecting cardholder information and monitoring for fraudulent activity

By cardholders:

• Reporting lost or stolen cards
• Reviewing charges regularly and reporting unauthorized transactions immediately
• Installing virus protection software on personal computers
• Using caution when using credit cards for online purchases, especially on non-trusted websites
• Keeping a record of account numbers, their expiration dates, and the phone number and address of each company in a secure place.

Additional technological features:

• EMV
• 3-D Secure

See also

• Chargeback insurance
• Credit card hijacking
• Financial crimes
• Friendly Fraud
• Identity theft
• Internet fraud
• Phishing
• Predictive analytics
• Reimbursement
• Traffic analysis
• White-collar crime
• International credit card data theft

External links

• Federal Financial Institutions Examination Council (FFIEC) IT Booklets » Information Security » Appendix C: Laws, Regulations, and Guidance
• Visa's fraud control basics for merchants
• Mastercard's merchant training support
• The Internet Crime Complaint Center (IC3) is a partnership between the Federal Bureau of Investigation (FBI) and the National White Collar Crime Center(NW3C).
• Security and your Credit Card at Simon Fraser University
• Internet Fraud, with a section "Avoiding Credit Card Fraud", at the Federal Bureau of Investigation website
• Counterfeiting and Credit Card Fraud at the Royal Canadian Mounted Police website
• Avoiding Credit and Charge Card Fraud at U.S. Federal Trade Commission
• Credit Card Fraud: Prevention and Cures Idaho Office of Attorney General
• US Federal Trade Commission Consumer Sentinel Network Report
• Making Business a Little Less Risky - Fraud and Risk Blog