Chip and Pin Card Systems - Essay Example

Chip and Pin Card Systems Introduction Chip and Pin card systems were first introduced in the United Kingdom in 2003, and has gone on to be accepted as the best form of payment to replace the more traditional magnetic strip cards. Chip and Pin cards actually refer to EMV smartcard payment methods, where the debit or credit cards used by individuals are overlayed with a chip instead of the normal magnetic strip. EMV smartcards were introduced by three companies that provide card payments; Europay, MasterCard and Visa (King, 2012). The three companies partnered to introduce chip and pin cards in a bid to reduce instances of card fraud that affected most payments. Prior to the introduction of chip and pin cards, consumers used cards that had a magnetic strip that stored all the information. The magnetic strips required the customer to present their cards for swiping in a terminal, sign a slip of receipt and the payment would then be processed (King, 2012). However, with the introduction of chip-and-pin, the customer’s card is swiped and the details would be authenticated by entering a unique pin and the payment would be processed. Based on the introduced chip and pin cards in the United Kingdom, research is to be conducted to determine whether their introduction has really served to reduce incidences of card fraud in the United Kingdom. The main issue in this paper is whether there has been a reduction in card fraud since chip and pin cards were introduced, and whether any reduction can be attributed solely to the introduction of chip and pin cards. Literature Review The shift towards chip and pin technology in the United Kingdom was driven by increasing card fraud, which totaled to a lot of money in 2000. After the introduction of chip and pin technology, there has been a drastic reduction in card fraud in the UK. The technology is a technology backed by the government to implement the benchmark created by EMV to curb card fraud (King, 2012). This was meant to reduce the fraud committed when transactions are completed face to face with the customer. All major card providers in Europe and Canada have gone the way of chip and pin technology, but the United States still uses magnetic strips on their debit and credit cards. From research, the working of chip and pin technology is stated as replacing the common form of card performance; magnetic strips and requiring the customer to sign the accompanying receipt (Diebold, 2011). In chip and pin technology, the customer’s information is stored on an IC chip embedded in the card as opposed to the magnetic strip used before the technology was introduced. The data is then encrypted on the card using different algorithms that generate random numbers when transactions are recorded. In the previous magnetic strip technology, the card was swiped on a terminal, but with the new technology, the customer inserts the card in a terminal, the information in the integrated circuit is decrypted and authorization for the transaction provided. When the authorization for the transaction is provided, the customer then enters a unique pin, a receipt is generated and the money deducted from the cardholders account. One of the main security features of chip and pin technology is the ability to use wireless terminals that are more secure since the card is used in the presence of the customer. This also means that the terminals use secure modes of transmission of customer data to a central database. Before the introduction of chip and pin technology, magnetic strips were used for authentication reasons (Financial Fraud Action UK, 2011). The magnetic strip on the card had personal details for the holder which could be related to the bank account in case they want to perform any transaction like withdrawing money on the ATM or purchasing items in shops using the card. The use of the magnetic strip card lead to serious security breaches because the details about the card holder could be obtained easily by fraudsters by fixing cameras at ATM outlets and add the use of skimming devices which could read the ATM card information. In the old technology, a customer had to submit their card to the service provider who would then swipe the card in a fixed terminal. Research indicates that this posed a lot of security risks since the card had to be swiped away from customer sight (The UK Cards Association, 2010). Most credit card and debit card theft occurred when the person swiping the card would swipe the card in a fake terminal and copy the information on the card. This information would then be used to create counterfeit cards that would be used to commit fraud. The other drawback to old magnetic card technology was the common thefts that occurred. After an individual steals the card, there would be no security measure that accompanied its use. The signature on the back of the card could be forged and the card used. Apparently, the only measure that prevented fraud from this was the fact that large transactions had to be verified by phone, which could be easily avoided by many small transactions. With the introduction of chip and pin technology, the thieves had to know the pin and also have the original card in order to commit fraud. Statistics on Fraud Reduction in the UK Statistics released by Financial Fraud Action UK (2011) indicate that after the introduction of chip and pin card technology, card fraud has steadily fallen from 2003 to date. Between January and June 2011, the amount of money lost to card fraud reduced to a figure of £169.8 million, a 9% reduction from the previous year. This figure reveals a reduction in seven consecutive years after the introduction of chip and pin technology. Despite the fact that other factors contribute to this reduction in card fraud, chip and pin technology is touted as the biggest contributor to this reduction. This is because fraudsters have been deterred from committing high-tech, high-value frauds and have instead resorted to common ways like stealing cards and forcing the holders to reveal their pins. The UK payments administration indicates that there have been significant reductions in card frauds committed after the introduction of EMV technology. This reduction has mainly been seen in areas where the card has to be used physically, but this reduction is countered in areas where the card is not present (CNP). As the chip and pin technology gained momentum in 2008, total card fraud reduced, but in 2007, fraud peaked as fraudsters targeted CNP areas. Since no technology had been introduced to curb fraud in online payments, fraudsters stopped targeting cards and instead targeted online and cross-border payments. The other factor is that chip and pin cards still contain magnetic strips for payments with vendors who have not adopted the technology, meaning that fraud still targeted counterfeit cards and technology. However, cross-border fraud reduced in 2009 since many countries now adopted chip and pin technology. According to The UK Cards Association (2010), chip and pin technology in the UK has been very influential in reducing domestic card fraud, especially counterfeit card fraud and lost or stolen cards. For example, fraud losses from counterfeit cards in the UK declined by over 63% in the UK in 2004. An interesting fact is that, in 2004, counterfeit card fraud accounted for 25% of all card fraud, a figure that reduced to less than 13% in 2010 due to the introduction of EMV chip and pin cards. Another area which EMV chip and pin cards has helped is in the reduction of lost or stolen card fraud, an area which has seen a reduction of 61% from 2004 and 2010. Compared to domestic card fraud arising from counterfeit cards, lost or stolen card fraud has been on a steady decline from 2004, a fact that indicates the efficiency of chip and pin technology. Based on the above statistics, it is important to mention specific areas in which chip and pin technology is efficient in reducing card fraud. One of the biggest factors is that the chip embedded in the card is authenticated and the card can store more security information that traditional magnetic strip cards (King, 2012). This means that the customer has to have the transaction automatically authorized before payment is made, a fact that has greatly contributed to the reduction in card fraud. One other security feature is that these cards are difficult to copy; in fact, fraudsters have yet to find a way to clone the chips on the card (King, 2012). This accounts for the steady decline in fraud accumulated over counterfeit cards. This is supported by two main factors of the card, secure card chip that cannot be cloned and the use of a PIN to authenticate every transaction. One other shortcoming of traditional magnetic strip cards was the skimming done in ATM terminals, a fraud that has been effectively captured by EMV chip and pin cards (King, 2012). Despite the facts discussed above, research also indicates that there have been rising cases of fraud in the United Kingdom after the introduction of chip and pin cards (Murdoch, Drimer, Anderson and Bond, 2010). This one of the biggest challenges in the introduction and use of EMV chip and pin cards is the increase in cross-border and CNP frauds. With the increasing security of EMV chip and pin cards, fraudsters have migrated to other types of fraud, the result being that fraud has not reduced too much. The fraud witnessed when EMV chip and pin cards were introduced are somewhat balanced out by the increase in other types of fraud. According to Murdoch, Drimer, Anderson and Bond (2010), the United States is one of the biggest markets that has not yet introduced EMV chip and pin cards, and yet the UK still has to do business with the country. Since most online consumers do business with other countries, instances of cross border frauds have continued to increase. Fraudsters have also migrated to other means of fraud apart from cross-border payments. CNP frauds are also referred to as card-not-present frauds, where frauds are committed when the user makes purchases without the card. The best example of this is online payments or payments done over the phone. The fraudsters could hack into computer systems, ATM outlets or trick customers into releasing information about their credit cards. With the increase in these types of fraud, the momentum gained with the introduction of EMV chip and pin cards, is curtailed. Research Methods As indicated above, the main research idea in this proposal is to determine whether the introduction of chip and pin card systems has reduced instances of card fraud in the United Kingdom. This research question is also expanded to whether the reduction in card fraud due to the introduction of chip and pin technology is balanced out by the increase in fraud caused by fraudsters migrating to other forms of fraud. The main strategy for conducting this research is to find the data connected to the design and prove or disprove the research hypothesis. From this, the research hypothesis proposed is that the introduction of chip and pin technology has reduced card fraud in the United Kingdom. The main strategy for proving this hypothesis is by first finding data on total losses on card fraud on domestic issued cards in the UK. This will determine whether chip and pin technology has successfully reduced the main fraud losses that it was made to prevent. The second way of proving this hypothesis is by collecting secondary data on fraud losses on face-to-face transactions that involve chip and pin cards. From this data, it can be established whether the introduction of chip and pin technology has indeed reduced face-to-face fraud on cards. The third step in this research is finding secondary data on counterfeit card losses in the United Kingdom. From this data, it will be possible to determine whether counterfeit fraud has increased or reduced with the introduction of chip and pin technology. Finally, the research will determine whether CNP frauds and cross-border frauds have increased or decreased. This will be done by collecting secondary data on the mentioned factors and analyzing over the period mentioned. From this analysis and the previous one conducted on the effect of chip and pin technology, it will be possible to determine whether chip and pin technology has been effective overall in reducing instances of fraud. From this research, two main objectives will have been achieved; measuring the single effect of chip and pin technology on fraud, and measuring the cumulative effect of chip and pin technology on other forms of fraud. This will indicate whether fraud related to cards and chip and pin technology has reduced in overall. Implications of research From the research conducted, many factors have been determined, and it is immediately obvious that chip and pin technology is helpful to the business community and the society. First, it can be seen that chip and pin technology has been effective in reducing card fraud in the United Kingdom. This means that other countries that have not introduced chip and pin technology should introduce it in order to reduce instances of fraud. For example the United States still relies on magnetic strip cards that are prone to attack by fraudsters. The second point that should be noted is that chip and pin technology has not completely eliminated card fraud in the United Kingdom. This is because fraudsters have come up with other ways of committing fraud. The implication of this fact is that the authorities should come up with other ways of curbing CNP frauds and cross-border frauds. This will mean that card fraud will be virtually eliminated from the market and consumers will be safer. Conclusion From the research conducted, different points that need statistical analysis in order to be proven come up. First, the data analysis will be used to prove the facts stated, and from this, viable conclusions for the market can be made. Chip and pin technology has been seen to reduce instances of card fraud since its introduction in 2003. Chip and pin technology is definitely better than magnetic strip technology in prevention of card fraud, and other ways should be found to curb the other forms of fraud that arose after the introduction of chip and pin technology. The research being conducted will determine the actual figures that chip and pin technology have helped in reducing card fraud, whether it accounts for all reduction in fraud and whether fraudsters will find other ways of committing fraud. The research also indicates that, even though chip and pin technology is effective, other frauds related to cards have increased. This means that chip and pin technology systems on credit cards has reduced fraud but has not completely eliminated it. The research question is answered but more research needs to be conducted to determine whether the technology can be improved to curb other ways of fraud. References Diebold. 2011, Battling Card Fraud through Chip and Pin Technology. Diebold Innovation White Paper. Financial Fraud Action UK. 2011, “Fraud: The Facts 2011-The Definitive Overview of Payment Industry Fraud and Measures to Prevent It. Financial Fraud Action UK. King, D 2012. Chip and Pin: Success and Challenges in Reducing Fraud. Retail Payments Risk Forum Working Paper. Murdoch, J. S, Drimer, R, Anderson, R and Bond, M 2010, “Chip and Pin is Broken” 2010 IEEE Symposium on Security and Privacy. The UK Cards Association. 2010, New Card and Banking Fraud Figures. Retrieved on May 6, 2013 from: Read More