While credit card fraud has been decreasing steadily in the United States, it has been rising in the United Kingdom, and bank card executives there say blame the relatively low percentage of phone-authorized transactions.
Preliminary figures for 2000 indicate that 0.15% of the total value of purchases made by credit card in the United Kingdom were fraudulent - or 15 cents out of every $100 of transactions, according to the Association for Payment Clearing Services, a London-based group for U.K. banks. The figure is up from 0.11% in 1999 and more than double the fraud rate that Visa U.S.A. reported for 1999 in the United States, 0.06%. The U.S. numbers for 2000 are not yet available. Visa said the problem in the United Kingdom, where credit cards are more prevalent than in any other European country, has skewed the entire European Union region's fraud results. Credit card fraud rose by 50% in the European Union last year, to 0.07% of the total value of transactions, or about $547 million, Visa said. More than half of the region's credit card transactions take place in the United Kingdom.
"The U.K. has a problem both domestically and across borders," said Frank Wilkins, vice president of fraud management for the EU region of Visa International. "Organized crime is behind some of what we are seeing."
Mr. Wilkins pointed out that although Visa-developed neural network fraud detection software, called Card Risk Identification Service, or CRIS, is in use throughout Europe, fraud practices vary from country to country, giving each area a different fraud profile. "CRIS is a neural system so it learns from data it is fed," said Mr. Wilkins. "there is even a different model between U.K. and the rest of Europe because the U.K. has got such a large share of the market. They cold skew learning capabilities of the system."
Visa officials say part of the problem stems from high telecommunications costs, which have stifled the growth of credit cards throughout Europe and dissuade some merchants from making the authorization calls that might validate a cardholder's identity and thwart fraudsters.
Fraud in the United Kingdom reached a high of 0.35% of transaction value in 1991, and card executives made a concerted effort to get merchants to authorize more transactions by telephone, which helped cut the rates, said Richard Tyson-Davies, spokesman for the Association for Payment Clearing Services, whose members are the U.K.'s major banks.
But the campaign to improve authorizations did not become as pervasive, and today about half of U.K. payment card transactions are authorized at the point of sale, Mr. Tyson-Davies said. In the United States, nearly all credit card transactions are authorized at the time of purchase.
The cost of international calls is high in the U.K., so when foreigners make purchases in stores there, merchants are even less likely to place an authorization call, Mr. Tyson-Davies said. He said criminals are aware of this and have been trying to exploit it.
On the plus side, "the rate of acceleration is starting to flatten," he said. "Things are bad, but not as bad as they might have been."
One particular type of fraud on the rise is skimming, in which store employees copy a magnetic stripe or account number and use it to create duplicate cards. A report by the European Commission said skimming in the United Kingdom rose sharply in 2000, while fraud from lost and stolen cards dropped slightly.
In its report, the European Commission said it will try to help matters by introducing a single phone number, operational in all member states, for customers to report lost or stolen cards, and a Web site with fraud prevention information. The commission said that credit card issuers must take their own steps, and that such steps ought to include a wide-scale switch to smart cards.
In France, for example, which already uses a system of smart cards combined with PINs, only 0.02% of transaction value on credit cards (including smart cards) was fraudulent last year.
The United Kingdom began converting from a magnetic stripe-based card system to a smart card-based system in 1999, but most of the chip cards are not yet functional, and won't be until 2003, when merchants are expected to have converted terminals. U.K. banks, primarily Barclay's Bank PLC, have reissued 10 million credit cards with chips and are waiting to make the switch.
Mr. Wilkins said Visa is trying to encourage other countries to switch by offering subsidies for terminal replacements and cards. All European issuers and acquirers must convert to chip by 2005, he said.
With smart cards it becomes nearly impossible for fraudsters to duplicate the data on a chip, Mr. Tyson-Davies said.
While card association executives like to boast about how low the fraud rates are in the United States, some executives say that the popularity of business cards - which are rare in Europe - may make the numbers look better than they would be otherwise. Business cards are typically used to make high dollar-volume transactions with very low risk, skewing the total fraud picture in favor of the States.
"There are a lot more company-type transactions on cards in the U.S. than there are in Europe," said Paul Lucraft, deputy general manager for the United Kingdom and Ireland region of Europay, MasterCard International's European division. "There are also more domestic, rather than crossborder, transactions."
Once the U.K. finishes its conversion to chip cards, payment officials expect counterfeiting gangs to move elsewhere.
"Whoever is the last region in the European Union will undoubtedly be liable to a lot of fraud," Mr. Wilkins said. "Experience tells us if we make it more difficult for fraudsters, they generally migrate away to other things."