Fraud Losses Surge at Visa as Counterfeiting Takes Its Toll

Fraud losses, particularly from counterfeit cards, increased significantly last year at Visa International.

Worldwide losses grew to $354 million in 1990, up 37% from $259 million in 1989, according to Visa officials. This represents 0.13% of Visa's total volume, a rise of two basis points since last year.

Mastercard International reported earlier this year that fraud and counterfeit losses nearly doubled in 1990. Though small relative to total credit card sales, fraud losses are significant because they come right off the bottom line.

High Cost of Fighting Fraud

Added to the direct losses are the millions of dollars that card companies spend each year for systems, software, and procedures aimed at preventing fraudulent card use.

Fraud losses at Visa had been rising slowly over the previous several years. The big climb last year was caused in part by a surge in counterfeiting schemes in the Far East and card theft from the mails in the United States.

"The causes vary in different parts of the world," said William D. Neumann, senior vice president of risk management. Losses on cards intercepted in the mail accounted for most of the fraud in the United States, he said. "Counterfeiting has increased dramatically and is centered on the Asia-Pacific region."

No Specific Numbers

Mr. Neumann did not cite specific numbers for the rise in losses from cards that were stolen from the mails. But other Visa sources say these losses, categorized as "never-received items" in credit card circles, rose 70% in the United States last year. Counterfeit losses were $41 million, the source said.

Visa has started several programs in the last six months to combat fraud and motivate issuers to do more to stop card fraud.

Last year, the credit card giant formed a national task force with the U.S. Postal Service, MasterCard, and American Express to concentrate law enforcement activities in regions where many cards are stolen from the mails, either by postal workers or thieves who steal mail bundles before they reach post offices. The task force is focusing on New Jersey, where many mail thefts have occurred.

Information Shared

Visa officials gave no specifics about the program's success in curtailing the thefts. "But we're able to share information with the Postal Service on a daily basis about where the thefts are occurring," Mr. Neumann said.

The company also began a program under which it can deny insurance reimbursements to banks that process transactions from merchants with too many fraudulent transactions.

Visa tracks these suspect merchants, and banks are required to take some action against them. Such actions might include requiring bank authorization for each transaction, no matter how small; installing more-advanced point-of-sale terminals; or discontinuing the merchant's account.

Rather than forfeit the insurance reimbursements, Visa members have discontinued more merchant relationships than in the past, Mr. Neumann said. "This has been very successful," he said. "Thousands of merchants have been closed."

Special Codes

Banks issuing Visa cards will also lose insurance coverage for counterfeit losses unless they implement a plan to place a special identification code in the magnetic stripe of credit cards.

The code, known as card verification values, or CVV, helps issuers and merchants identify cards that are fraudulent. Banks have until April 1, 1993, to implement CVV. After that, they will lose insurance coverage for some losses on counterfeit cards.

MasterCard has taken similar steps to get banks to do more to stop card fraud. Earlier this year, the company adopted rules requiring banks with large fraud losses to beef up monitoring systems or lose insurance reimbursements.

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