Why UK SMEs risk fraud activity as US adopts chip and pin

You may not think that the US finally adopting chip and pin will have a significant effect on British SMEs: but if you're worried about card fraud you may have to think again.

In 2004, EMV technology was introduced to the UK public. More commonly known as chip and PIN, it transformed transaction technology in a way that continues to affect retailing today.

Within two years, the UK was almost completely migrated to EMV, with 99.8% of card transactions PIN verified. The technology put a considerable dent in the rates of lost, stolen and counterfeit card fraud, but it was not the total fraud cure that some UK industry insiders had hoped.

Criminals began looking elsewhere for easier ways to commit fraud and since UK-issued cards retained their magnetic stripes to ensure backward compatibility, captured card data was used to commit fraud in countries that had not yet migrated to chip and PIN.

CNP fraud on the rise

Meanwhile, as ecommerce began to take off in the UK, fraudsters here started turning online, causing card-not-present (CNP) fraud to rise. This pattern was repeated after France adopted EMV, with CNP fraud increasing by around 20% between 2007 and 2011, while the trend was also reflected in other countries around the world after adopting the technology.

The USA is approaching the date set for its liability shift deadline (1st October 2015), whereby the party responsible for a chip transaction not being conducted will be financially liable for any resulting card-present counterfeit card losses.

>See also: How to minimise employee fraud

The global repercussions of this last major market moving to EMV have yet to be felt. Retailers everywhere should be aware of it but SMEs in the UK especially should sit up and take notice as fraudsters start to look elsewhere for fresh opportunities…

The difference between the UK’s adoption of EMV and the late take-up of it by the USA is that ecommerce has since become a truly global market for customers, but also for fraudsters.

Analytic software firm FICO reported that in 2014, the USA accounted for an incredible 47% of the fraudulent cross-border transactions on UK debit cards. This pattern can only really be explained by America’s late adoption of EMV and as it increases its physical card security, the full force of stolen card monetisation will move online to CNP fraud, simply because fraudsters are running out of places to go.

Since ecommerce effectively ignores the vast expanse of the Atlantic, UK businesses must prepare themselves now for an increase in fraudulent activity.

Unfortunately in this global fight against these criminals, small businesses can find themselves a prime target, as fraudsters look to test their anti-fraud technologies and processes.

Technology is key

Fraud prevention technologies are key to combatting this rising threat and reducing the likelihood of expensive chargebacks. At Global Risk Technologies we’re dedicated to combatting CNP fraud and recommend some simple steps that every company of any size can follow to help protect against the risk while increasing customer satisfaction:

  • Maintain impeccable records – If you have the customer’s signature on file, any fraudulent claim that they “never received the parcel” is easy to disprove.
  • Concentrate on customer service – Happy and well-informed customers are more likely to talk to the retailer than head straight to their bank to instigate a chargeback. They’re also likely to spend more too.
  • Optimise logistics – Speedy delivery of goods combined with an effective paper trail keeps customers happy and can also help highlight potentially fraudulent transactions. Why, for example, would a customer suddenly double their order and set a new delivery address? Often, if a transaction looks too good to be true, it usually is.

CNP fraud represents 70% of total card fraud losses, but with ecommerce profits continuing to soar, it’s important for SMEs in particular to limit their losses but avoid putting customers off by adding so many security measures into every transaction that they erode confidence and start to feel like barriers to commerce.

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Getting the customer experience right remains crucial; Gallup recently reported that fully engaged customers yield 23% more in terms of share of wallet than the average cardholder.

If businesses get the experience wrong they increase the risk of transaction abandonment – a customer simply giving up part way through the process – or raise fears about the safety of their ecommerce offering. The same Gallup report noted that disengaged cardholders deliver 13% less.

History has taught us that the US will see substantially reduced instances of point-of-sale (POS) fraud but likely see an increase in CNP fraud. Unfortunately, with so much commerce now online, this will not just be a problem for American retailers. Small business in the UK should prepare now by identifying and following best practice strategies to stay secure once the liability deadline hits.

Further reading: How selfies can prevent identity fraud

Alan Dobie

Alan Dobie

Alan Dobie was assistant editor at Vitesse Media Plc before moving on to a content producer role at Reed Business Information. He has over 17 years of experience in the publishing industry and has held...

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