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Fraudulent Trends Surrounding EMV Chip Card Technology

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“EMV” is a payment method based on chip cards (also known as smart cards or Chip and PIN cards) that are equipped with computer chips and store data on integrated circuits. It was expected that the introduction of chip cards in lieu of magnetic stripes for data storage, would significantly increase security of financial transactions for retailers.  The new technology in these cards, which are inserted into readers at the point of purchase or at ATMs, outshines the older magnetic-stripe cards. But the main advantage has been that EMV provided increased security over older style cards, leveraging advanced technology that is used to authenticate chip-card transactions.


However, recent studies are revealing a surprising trend: there is an increase in fraud as reported by retailers. In the February 2018 issue of NRF’s Stores Magazine, the lead headline reads, “Retail losses from fraud are continuing to increase despite the introduction of EMV chip cards that were supposed to dramatically reduce credit card fraud.”  Because the chip makes it harder to commit fraud than the magnetic stripe, it is a more effective deterrent in a store setting. However, the chip plays no role at all in online shopping. So, as more consumers turn from bricks to clicks, the less control the retailer has over counterfeit and fraudulent transactions conducted on line even as fraud may decline for in store purchases.


Retail industry red flags are indicating that fraud prevention techniques need to be reconsidered in order to address the challenges of online purchasing as well as in-store selling, including putting a major focus on data breaches as well as on implementing tools for greater payment safety. This concern was reinforced in a white paper authored by retail industry consultants, BRP, citing the organization’s Vice President, Perry Kramer, saying - “While EMV has received most of the attention in the last few years, there are several other critical security strategies that play a much greater role in protecting sensitive payment card and personal information…making it imperative that retailers have the right strategies and controls in place to thwart the ever-increasing advances made by fraudsters.”       


Pessimistic reports continue across the sector, pointing out that as of September 2017, data breaches were 375% higher than in the previous year. Retailers are being warned to watch for key scenarios, such as card not present fraud (CNP), data cyber breaches, digital gift cards (this is especially abused during the holiday season!), ground shipment fraud and credit card bank identification numbers fraud (BIN), all of which have a major impact on retailers who are unprepared for handling cyber fraud of this magnitude.


Tom Byrnes noted in Multi-Channel Merchant that “The new EMV standard will push opportunistic fraudsters to card-not-present (CNP) transactions.”  This is just one more reminder that CNP fraud in the U.S. alone is expected to grow to $6.4 billion this year!  Nonetheless, there are some things retailers can do. BRP says that “with robust tools and processes, retailers can achieve high proficiency in differentiating between legitimate and illegitimate transactions.” One of their basic suggestions is continuous monitoring, updating and tweaking their processes, which is a good common sense option for any business owner seeking to minimize online fraud. As the volume of ecommerce accelerates, other suggestions from a range of sources include assembling a fraud prevention team and being vigilant and knowledgeable about every new trend that evolves, Being prepared and alert is the key!

John Mellage, CPA, Sobel & Co.