History of Credit Card Frauds - Literature review Example

History of Credit Card Frauds Literature Review History of Credit Card The use of credit cards in the consumer sector had its inception in the region of United States. Gomez (2008) observes in this regard that a rich businessman of United States Frank X. McNamara helped to enhance the concept of credit in regards to making purchases of consumer products and other utilities. McNamara worked to bring about the Diners Club cards which helped many people to avail meals on credit (Gomez, 2008, p.461). Definition and Type of Credit Cards Credit cards emerge as a better substitution for cash through which the consumers can go for purchasing different categories of commodities. Sander (2003) observes in this respect that credit card companies relate different types of products and services with the credit cards. However these companies are largely complained for charging high amount of interests and large amount of fees from the customers. Further, Sander (2003) observes that there are essentially three main different types of credit cards viz. VISA Card, MasterCard and other cards like Discover. The first two types of credit cards are mainly rendered by franchisees and help the people to avail commodities within their credit limits (Sander, 2003, p.95-96). Benefit of Credit Cards The use of credit cards helps to bring about a wide range of benefits to the consumers. In this regard, Bailyn (2007) states that use of credit cards helps in generation of protection to the consumers in regards to purchase of commodities. The consumers can easily return such purchases if availed through credit cards rather than cash. Again the use of credit cards also helps the financial organisations to gain easy access to potential information pertaining to the credit position of the individuals before rendering credit cards (Bailyn, 2007, p.30). Definition and History of Credit Card Frauds Fraud activities have earned a new dimension through the manipulative measures taken with the help of credit cards. Joshi (2006) states in this respect that fraudulent activities concerning misappropriation of financial resources through the use of credit cards constructs the basic premises of credit card fraud. Unauthorized access to accounts through the use of credit card or activities to gain possession of large number of goods and services through adulterated use of credit cards are examples of credit card fraud (Joshi, 2006, p.40). Enhancement of fraudulent activities pertaining to credit card came into emergence with the development of internet. Montague (2004) observes in this respect that after the period of 1990s the development of internet technology has helped in the progress of electronic commerce. The use of credit cards to conduct such transactions online has led to the growth of hackers to retrieve potential information relating to such cards (Montague, 2004, p.43). Types of Credit Card Frauds With the growth of sophistication in consumerism the use of credit cards has gained huge momentum. Consumers around the world are found to increasingly gain hold of large number of consumer products through the extensive use of plastic money. To this end, Ravindra (2011) states that though the use of credit cards has largely changed the face of consumerism around the world it has also helped the growth of fraudulent activities. Ravindra (2011) further states that one of the main reasons for rise in the level of interest charged on credit cards is for the rise in fraudulent activities concerning such. The companies rendering credit cards tend to balance the loss of income owing to the event of loss of credit cards through the collection of high interest amounts (Ravindra, 2011, p.27). Fraudulent activities pertaining to credit cards are grouped essentially into two main types which imply different levels of significance. Kimiecik (1995) state in this regard that money laundering operations are carried out through the use of credit cards mainly in two different ways viz. either by the usage of a stolen credit card or secondly by counterfeiting the information pertaining to the credit card. Again credit card frauds can also be studied in two respects in where the credit card is physically present and in where the transactions are carried out through a communication medium not requiring the availability of credit cards. Fraudulent activities with the presence of cards are reflected above while in other cases people tend to retrieve information from past sales records to make fraudulent purchases (Kimiecik, 1995, p.136). Koppenhaver (2007) further elucidate that there are essentially six different types of fraudulent activities relating to credit cards. Firstly some people can go on making transactions with the use of stolen cards. Secondly the people having gained access to lost cards can potentially use them for making relevant purchases. Thirdly the criminal activities relating to credit card can also go for alteration of the same for meeting their fraudulent activities. Fourthly the fraudulent activities also relate to the counterfeiting of credit card information. Fifthly the criminal rings can also work on making some wrong applications with the credit card available with them. Finally the credit card frauds also relate to such activities where the criminal ring can extensively use the credit card information and numbers without making the physical use of such for wrongful activities (Koppenhaver, 2007, p.181). The risk of credit card and the type of risk The use of credit cards in an enhanced manner reflects the emergence of huge amount of risks. Owing to the high level of risks involved in credit cards interest rates charged for such are also high. Swart (2004) states in this respect that potential risks involved with credit cards are like it encourages the consumers to conduct large amount of transactions on debt and thus creates a burden for merchandisers. Further the consumers are taxed for loss of cards and also full interest is charged for cases where the balance is due (Swart, 2004, p.342). Extent of the Problem Relating to Credit Card Frauds The fraudulent activities relating to credit cards has earned considerable amount of significance in today’s date. To this end, Levy and Handley (2002) observe that out of the total level of criminal activities recorded in a certain period the level of credit card frauds contribute to around 16 percent. The extent of the credit card fraud problem can be studied along different parameters pertaining to change in social demographics, rise in the income level of people and change in the consumer approaches in the different economies. Moreover with the development of the technological interface pertaining to the development of social networking the level of card fraud has in fact become much more organized and synchronized and thus has become hard to track. The development of internet has helped in enhancing the credit card fraud activities wherein the financial cheaters can gain large amount of secrete information relating to credit cards like codes and other personal information (Levy and Handley, p.13-16). The extent of fraudulent operations pertaining to credit card usage is found to rise in a considerable scale along a certain time period impacting the state of the companies. In this regard, Maggini (2009) observes that the level of credit card frauds has considerably increased from the period of 1990s. The extent of the rise of credit card problem in the developed countries has led to the rise in annual expenditure pertaining to some billions of United States dollars. More specifically it is found that with the growth in the level of online and physical retail activities the rise in the extent of credit card fraudulent activities has gained huge dimensions. Thus the new dimension of credit card fraud has emerged from the event where no credit card exists and the fraud makers can operate extensively to cause major disruptions through gaining of easy accessibility to online information. Development of technology has further led to the rise in different concepts like skimming of cards where the cheaters can gain access to potential information required for counterfeiting activities (Maggini, 2009, p.232-233). The extent of the credit card fraud problem can also be studied in respect of nations like Saudi Arabia is found to have developed strong links with the rise in the level of terrorism and criminal activities. To this end, the Centre of Excellence Defence Against Terrorism (2007) embark upon that generally rich people like large bankers and financiers in the region cater to the development of the nexus helping in the progress of credit card fraud activities. Moreover the happening of several bombing and terrorism operations pertaining to several countries has been found to be financed by the growth of credit card fraud activities. The Saudi Arabian people has also started making large scale use of internet communication technology to cause a rapid growth in the credit card scam activities that helped in fetching large financial resources to their hands (Centre of Excellence Defence Against Terrorism, 2007,p.168-169). The extent of credit card fraudulent activities pertaining to the Saudi Arabian landscape has tempted many credit card companies to take potential safeguarding techniques. To this end, Karake-Shalhoub and Al Qasimi (2006) observe that credit card companies in the Saudi Arabian region has made some binding operations to raise the consciousness levels of credit card holders to look after their cards. These companies straight away deny rendering of any type of compensation pertaining to monetary losses of the credit card holders on the event of any credit card scam. Thus many people in Saudi Arabia are restraining them from taking resort to any type of online transactions through the use of their credit cards. Thus the level of purchases conducted over the internet has significantly dropped in Saudi Arabia as people are found avoiding the use of credit cards. Internet purchases mainly dependent on credit card usage have recorded a sharp decline in Saudi Arabia for the stringent measures taken by the credit card companies (Karake-Shalhoub & Al Qasimi, 2006, p.24). Risk Pertaining to Credit Card Frauds Credit cards used extensively for making purchasing practices more sophisticated increasingly become stolen or lost from the possession of their original owners. Along with the above case with developments in internet technology the risks relating to credit card frauds has reached an area of considerable significance. Smith (1997) states in this respect that rise in the level of lost or stolen cards has triggered the increase in the counterfeiting activities where through the use of skimming technologies the persons involved in fraudulent activities can copy the details to help built an new card for making false purchases. Another considerable risk associated with the use of credit card frauds involves the misuse of the Personal Identification Number obtained from the owner’s end through any means. Similarly the rise of hacking activities along the internet sphere has triggered the risk factor involved with the credit cards usage wherein the hackers through the use of internet can gain potential information relating to cards and draw in large amounts (Smith, 1997,p.2-3). The extent of the risks related to credit card usage has gained more impetus with the emergence of wireless communication technology. In this context, Godbole (2008) observes that the rise of purchase and sales transactions conducted through the use of wireless and cellular technology has led to the augmentation of the risks involved with the credit card usage. It is observed that with the advent of wireless networks the credit card holders can use their credit card facility anywhere for making purchases and sales. This feature also triggers the rise in fraudulent activities in regards to credit card usage. The range of risks involved with regard to credit card usage over the cellular or wireless sphere mainly revolve around the creation of fake identities risking the usage of credit cards (Godbole, 2008, p.30). The level of risks associated with credit cards can be essentially broken down into three main types according to the type of merchandise purchased through such. To this end, Montague (2004) states that the level of risks related to credit card frauds are essentially of three main type viz. low, medium and high. It is observed that for credit card frauds involved with the purchase of low category merchandises the rate of risks involved amounts to around 0.25 percent. Again the rate of risks involved with credit card frauds for making purchases of products like toys, music and leisure products hovers to around 0.75 percent. However when the credit card is used for making high volume purchases of high end products like consumer electronics rate of risks involved with credit card frauds rise to around 1 percent. Thus based on the above rates the different level of risks involved with the credit card frauds can be effectively understood (Montague, 2004, p.75). Again the level of risks involved pertaining to credit cards is found to vary along in respect to the nature of credit cards. To this end, Cellary and Iyengar (2002) observe that the level of fraudulent activities pertaining to mainly two types of credit cards viz. Visa and Master cards happen to accrue to around 0.08 and 0.09 percent respectively. The above estimates were made along the period of November 2000 while again another estimate made along for the period pertaining to January 2001 the credit card transactions along the online sphere shows that the rate of credit card frauds amount to around 0.03 percent. In regards to developed countries like United Kingdom the rater of credit card frauds conducted over the online sphere figures to around 5 percent (Cellary & Iyengar, 2002, p.168). Credit Card Fraud Risk Mitigation Strategies In regards to the high amount of risks involved pertaining to credit card frauds certain strategies are required to be undertaken both by the consumers and as well as by the credit card companies to reduce the intensity of the same. In this regard, Amor (2002) observe that credit card holders must render high amount of scrutiny while scanning the bills to credit card transactions. Through the process of proper scrutinizing the consumers can easily track fraudulent events pertaining to the same. Further another set of strategies involve the use of multiple credit card numbers which would help discourage the amount of fraudulent activities in the relevant sphere. Again the improvements in the technological interface focus on the development of digital signatures. This method is being developed to help protect the position of the credit card holders from the activities of the miscreants (Amor, 2002, p.241). Again the credit card companies can also take resort to a number of strategies to help reduce the level of risk pertaining to credit card frauds. To this end, Holden et.al (2008) states that to prevent the intensity of credit card frauds the credit card companies are found to bring about several anti-fraud policies to help deter the fraud activities to take along on a large scale. Secondly the credit card companies can issue a special form like ‘Know Your Customer’ wherein relevant personal information about the customers is furnished. Further other information pertaining to the credit cards like credit card numbers and date of expiry is also rendered. Again in the third case the customers using credit cards are trained by the credit card companies to become increasingly conscious about the rate of charges levied. Fourthly in regards to the merchant firms they are required to conduct a thorough check before approving any type of purchasing activities in an online mode. Name and verification of the addresses must be made to earn the confidence of the trade. Fifthly in case of online trading activities through credit cards development of authentication mails must be made or these customers can be contacted to help render a sense of added security. Finally the customers purchasing with the help of credit cards must be made bound to render their address of shipping and billing. This activity helps to track the extent of fraudulent activities (Holden, et.al, 2008, p.171-172). The credit card and financial companies along with the consumers can also act based on underlined set of strategies to help reduce the intensity of risks pertaining to credit card frauds. In this regard, Cendrowski, Martin and Petro (2006) observe that the financial institutions like banks and others tend to render activities like locking and disabling the credit cards from being further used to conduct transactions. This activity can be pursued by the banks in the light of information furnished by the customers for any theft or misappropriation of credit card accounts. Moreover the consumers can also depend on the information published by credit rating agencies on these banks and financial institutions before proceeding to take the help of them for issuance of credit cards. This fact would help the consumers to get highly informative before taking potential decisions to purchase credit cards (Cendrowski, Martin & Petro, 373-374). Internal control mechanisms in place within financial institutions to monitor and address issues related to credit card fraud when it arises To help mitigate the level of risks pertaining to credit cards the financial institutions can work based on proper technology. In this regard, Obaidat and Boudriga (2007) observe that special programs can be generated to manage the transactions in order to track the level of fraudulent activities involved in such. The transaction management program that is developed works to render separate authentication requests to deter the activity of people to conduct fraudulent activities. Further the programming is also developed to manage the payment scenario to help retrieve the amounts pertaining to the sale transactions. Different protocols are being developed by the financial companies to rightly built in codes to effectively generate the authentication process and thereby verification of customer data (Obaidat & Boudriga, 2007, p.197). How the credit rating system works and how effectively the banks use this to limit their risk The level of credit card frauds can also be minimized through the dependence on the information published by credit rating agencies. Mena (2007) states in this respect those credit rating agencies like Fair Isaac helps to reduce the level of risks involved in many financial institutions spread along large number of countries. These credit rating agencies operate based on a huge database pertaining to customer information which is rendered to the banks and financial institutions for making relevant search before rendering of credit cards or approval of sale transactions. The credit rating given by the above organization is held effectively by many big organizations round the world (Mena, 2007.p.205). Role of credit rating agencies: such as Simah in Saudi Arabia Credit rating Agencies like Simah in Saudi Arabia increasingly operate to help both the consumers and credit card companies by generating potential information. To this end, Saudi Credit Bureau (2010) states that this agency formed in 2002 operate to generate information regarding credit status of both individuals and of credit card companies pertaining to the region of Saudi Arabia. The government of Saudi Arabia in coordination with global financial bodies widely encourages a system of transparency in both the personal and commercial scale (Saudi Credit Bureau, 2010). Challenges of Customers in regards to the use of Credit Cards Though the use of credit cards has helped the consumers to easily avail large number of products and services on credit yet it confers many considerable challenges. Khosrowpour (2000) observe in this respect some consumers increasingly feel the process of making payments of bills online through credit cards complex and insecure. Moreover consumers feel that their personal information may increasingly get publicized through the range of online activities. Again another set of challenges faced by the consumer constitute the incidence of high amount of taxes and interest rates charged which sometimes appears to be misappropriated (Khosrowpour, 2000,p.26). How the technology is making the system secure The technological interface of many online commercial companies is being largely developed to help reduce the chances of risks pertaining to credit card frauds. In this regard, Reynolds (2009) observes that several electronic commerce concerns are developing their encryption based technological effectiveness to help protect the interest of the consumers. Similarly the creation of a separate numerical coding to be rendered over the signature panel helps in enhancing the verification process of credit card owners (Reynolds, 2009, p.85). Increasing Awareness of the Banks in regards to Credit Card Fraud The banks and financial institutions have become increasingly aware to safeguard the interest of their client base holding credit cards and also of their own position. Oxford Business Group (2007) state in this regard that the banks are opting to hike the interest rates of the credit cards to reduce the propensity of its use. Again the banks are taking resort to stricter practices to understand the solvency of the customers before generating credit cards. Finally the present retail scenario also reflects the low usage of credit cards for which banks are endeavoring to render less number of such (Oxford Business Group, 2007, p.53). Current Situation-Saudi Arabia In context of Saudi Arabia the extents to which credit card frauds take place tend to render potential impacts over the general consumers and the working of the financial intuitions. In this regard, Al-Meaither and Mitchell (n.d.) observe that special protection measures are taken to generate authenticity through use of scanning devices in electronic terminals before such cards are issued. Again the terminal is so designed as to revert back to the customer for generating answer to any potential query from the customer’s end. Verification of the Personal Identification Number of the customers is carried out effectively through the use of such electronic terminals (Al-Meaither & Mitchell, n.d., p.2). Credit card fraud activities in Saudi Arabia are observed to have developed strong linkages with the emergence of Islamic terrorism. In this regard, Catley and Mosler (2007) observe that huge amount of finances drained in the hands of terrorists through credit card fraud activities tends to weaken the financial and economic position of the country. It is observed that such funds being drawn from rich credit card holders help in building up a criminal ring which effectively functions to render large amount of terrorism activities (Catley & Mosler, 2007, p.104). Again developing nations like Saudi Arabia also show huge prevalence of crime based on the online interface. To this end, Mambi (2010) state that rise of cybercrimes are being increasingly traced in regards tom the Saudi Arabian landscape. The rise of potential hackers around that area has led to the rise in large range of criminal activities which focus on the drawing of funds from rich people like businessmen and other bank accounts of investors. This event gains dominance owing to the lack of proper legislations and thus leads the credit card companies to increasingly charge against transactions made through such (Mambi, 2010, p.177). Conclusions Credit card has gradually taken up a significant position in the consumer sphere in recent times which is reducing the needs for meeting transactions in cash. However the increased use of credit cards on a global sphere also causes large amount of fraudulent activities. Moreover with the emergence of online transactions conducted over the internet requiring less need of physical cards has further enhanced the image of fraud pertaining to credit cards. This activity has lead to the misappropriation of funds in regions like Saudi Arabia to help in the financing of terrorism operations. References Al-Meaither, M & Mitchell, C. (No date). Extending EMV to support Murabaha transactions. [Pdf]. Available At: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.5.5895&rep=rep1&type=pdf. 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