23 May 2008

Merchants Love Pictures

I have a credit card with my picture on it. I am continually amazed at what a strong and positive reaction this draws from merchants, from proprietors to cashiers, of all types. They are impressed by the technology of it, and heartily endorse its value in preventing credit card fraud, a problem which even cashiers and grocery store baggers are remarkable sensitive to, even though they personally face little harm from it.

In commercial practice, almost all credit card fraud is born directly by the credit card company, that generally reverses fraudulent charges incurred with customer cards and often waives "deductibles" that its contracts allow it to impose, and indirectly by merchants, who generally receive charge backs for fraudulent charges at their premises from the credit card company.

Reducing credit card fraud with photo ID cards would both reduce time and money spent processing disputes arising out of these incidents for customers, credit card processors and merchants alike, and would also save merchants money.

About 23% of credit card fraud takes place in lost or stolen card transactions that could be prevented with photo ID credit cards. Fraud is actually surprisingly low, however, at least in Canada where:

In the end of 2005, MasterCard and Visa generated a sales volume of more than $190.6 billion, from the circulation of approximately 56.4 million credit cards across Canada. Credit card fraud statistics show that about $2.8 million was lost due to credit card fraud, from fraudulent use of MasterCard and Visa alone.

Thus, credit card fraud produces about $1.47 of losses per $100,000 of sales.

Another source suggests that fraud losses are higher overall, with net fraud losses of $70 per $100,000 of sales, for a total of just under $1 billion per year, although it doesn't identify how much of that loss is in face to face transactions.

Another tool, password protection for credit cardsand ATM cards using the same kinds of personal identification numbers used by ATM cards verified by "smart chips" on the card that are not revealed to the vendor, has reduced fraud in face to face transactions in the U.K. by two-thirds from 2004 to 2007. Credit card PINs will be near universal by 2010 ion Europe. Similar declines have been seen elsewhere in Europe (also here).

Any way you cut it, losses in credit card transactions to fraud pale compared to losses by credit card companies due to defaults by credit card holders.

In the U.K. for instance:

[B]etween 2007Q2 and the same quarter a year earlier the write-off rate for credit card debt rose from 5.6% to 7.5%. Each write-off rate is calculated by dividing the amount written-off over the latest four quarters by the average stock of debt over the same period. Write-off rates are increasing. At the start of 2000 the write-off rate for credit card debt was below 2%.

On a comparable basis with the numbers mentioned above for fraud, that means that write offs produced losses of $5,600-$7,500 per $100,000 of sales, and approached $2,000 per $100,000 of sales the less debt stressed year 2000.

Merchants pay on the order of 1% to 3% of their sales as a service fee to credit card companies, which works out to $1,000 to $3,000 per $100,000 of sales, which is similarly far more significant than merchant losses from fraudulent charges which they are required to bear through charge backs.

Bad debts are 100 times more important to credit card system bottom lines than fraud.

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