Visa International said a technology that detects alteration of the magnetic stripes on credit cards has significantly slowed the growth of losses from that nettlesome new type of counterfeiting.

Electronic counterfeiting -- the entry of valid account numbers on the magnetic stripes of stolen or duplicated cards -- cost Visa's member institutions $39 million last year, the card association said. That was up by $11 million, or 39%, from 1990's level, but the 1990 figure was 460% higher than 1989's $5 million.

Visa said its members are installing about 4,000 specially equipped point-of-sale terminals to prevent losses from electronic counterfeiting.

The crime, which was virtually nonexistent as recently as 1988, has become a major concern for the law-enforcement agencies and private-sector security departments that must keep up with increasingly sophisticated techniques of credit card fraud.

Small but Growing

Losses from electronic counterfeiting made up a relatively small part of the $1 billion in total fraud losses -- including $146 million from all types of counterfeiting -- reported last year by Visa International and MasterCard International.

But the rapid growth of electronic counterfeiting had card association officials concerned.

Frequently, the culprits in fraudulent alteration and use of magnetic-stripe cards are crime syndicates. The syndicates involved had been concentrated until recently in Asia, but are now fanning out to California and other parts of the world.

While counterfeit cards are most likely to used in shops close to where the crime rings operate, the valid account information they enter on the cards can come from anywhere.

Therefore, cardholders in the United States -- and ultimately their banks -- could be hit with fraudulent charges.

A Major Arrest

In March, for example, police arrested three men leaving the inaugural flight of Cathay Pacific Airlines from Hong Kong to Johannesburg with more than 100 counterfeit credit cards concealed in hollowed-out books, according to Visa senior vice president William D. Neumann.

Nine months ago, people who bought more than $300,000 of Rolex watches using fraudulent cards were arrested as they prepared to move to California.

Using what Visa has dubbed Card Verification Value technology, some Visa-issuing banks are encoding credit cards with a four-digit number that indicates that the card is legitimate.

The verification digits are generated by an algorithm based on the card's account number and expiration date. When a merchant sweeps the card through a reading device, the authorization system of the issuing bank can notify the merchant if the four-digit number does not match up. If it does not, the authorization is automatically denied.

Mandatory for Some Merchants

To encourage adoption of the Card Verification Value where it is most critical, Visa has instituted a program to share losses with members in the Asia-Pacific region that have encoded their cards.

At the same time, merchants with above-average levels of fraudulent card use are required to install point-of-sale terminals capable of reading the verification code.

About 60% of Visa transactions in the card association's Asia-Pacific region can be verified with the technology. By the third quarter of this year, the proportion will be 65% in the United States and 25% in Canada, Mr. Neumann said.

Merchants' purchases of the special point-of-sale terminals represent most of the technology's cost, Mr. Neumann said.

Changes by MasterCard

Like Visa, MasterCard International has develop a program for special encoding of magnetic stripes. That program will be fully in effect in April 1993, when merchants will be required to pass all magnetic-stripe information back to the card issuers.

Currently, many merchants transmit only portions of the magnetic data, to speed the authorization process, said James R. D'Amelio, vice president of security and risk management at New York-based MasterCard.

Mr. D'Amelio said MasterCard has seen a slight reduction in credit card counterfeiting in the Asia-Pacific region over the last year, thanks to a program to review the procedures of issuing banks when they start experiencing high levels of fraud.

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