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Running head: UNDERSTANDING OF CREDIT CARD FRAUD

A Better Understanding of Credit Card Fraud


Through Statistics, Cases, and Prevention
Jesica Paredes
Chemeketa Community College

UNDERSTANDING OF CREDIT CARD FRAUD

A Better Understanding of Credit Card Fraud


Through Statistics, Cases, and Prevention
What a financial disaster it can be if one checks their credit card statement and discovers
purchases they did not personally make. What a betrayal! The definition for this type of action is
called credit card fraud. Such an instance may give rise to the question: what percentage of
credit card transactions are considered fraud? The answer is a low percentage; it is not so much
the times fraud is committed, but the amount of money involved in this type of activity (Sullivan,
2013). The percentage of money involved in credit card fraud reflects back to the number of
times credit cards are used as a payment method in the United States (Sullivan, 2013). For
instance, Richard J. Sullivan quoted in a report, U.S. cardholders used more than one billion
debit and credit cards in 2011, making 69 billion transactions, valued at more than $3.9 trillion
(Nilson Report 2012a, 2012b; Federal Reserve Board) (2013, p. 59). Furthermore, statistics,
cases, and prevention will be discussed in the continuing paragraphs to provide a better
understanding of credit card fraud.
Statistics
Earlier, it was mentioned that the percentage of fraudulent transactions is very low, but
the money or losses is much greater (Sullivan, 2013). How much money do banks lose due to
fraud? According to the report published by Richard J. Sullivan, In 2009, payment card fraud
losses in the United States totaled an estimated $3.4 billion (Table 1) (2013, p. 59). However,
the amount of losses is clearly lower than the amount of money used with credit and debit cards,
which is beyond 3.9 trillion (Sullivan, 2013).

UNDERSTANDING OF CREDIT CARD FRAUD

Cases
In 2012, it was reported by financial professionals that 29 percent of fraud attempts were
credit and debit card fraud (Hodges, 2014). However, the number of fraud cases for credit and
debit card fraud increased to 43 percent in 2013 (Hodges, 2014). Because fraud attempts for the
card payment method is at 43 percent, it is close to being one of the most targeted methods
because it is close to 50 percent (Hodges, 2014).
How is credit card fraud attempted or committed? There are different ways credit card
fraud can be attempted or committed. The first way can be by misplacing the card or by someone
stealing it and faking the card signature while conducting a transaction (Sullivan, 2013). The
second method according to Sullivan is counterfeiting which is when someone other than the
cardholder replicates the credit card (2013). The third method is purchases not made in person
such as, purchases made online (Sullivan, 2013). However, thieves are now after more than just
credit card information (Pyzik, 2014). According to Kenneth Pyzik, thieves are now going after
information that identifies individuals, which the author calls personally identifiable information
(PII) (2014). Information that can identify individuals can include more than just credit card
numbers, but state issued identifications such as a license, which is information that can then be
used to commit credit card fraud (Pyzik, 2014). For instance, someone may go to a retail store
and purchase an item with their credit card; therefore, information such as the credit card number
is collected to verify the owner of the credit card (Pyzik, 2014). Therefore, stores need to be
aware of thieves that may attempt to steal customers personal information from their system.
Who do credit card thieves target when they attempt credit card fraud? Is there something
specific they target? Actually, it all goes back to how these thieves attempt or commit fraud. In
2014, thieves started going after stores, such as Target to steal credit card numbers and

UNDERSTANDING OF CREDIT CARD FRAUD

information that identifies an individual (Pyzik, 2014). Therefore, it seems that thieves target
companies with customers personal information stored in their system.
Prevention
What has changed to reduce or prevent credit card fraud? Original credit cards have a
magnetic stripe on the back used to swipe the card when making a payment. The stripe on the
back of the credit card has the same code for every transaction made with the credit card
(Battersby, 2015). Therefore, credit card issuers are replacing cards and integrating a computer
chip that creates a new transaction code with each transaction, unlike the other credit cards that
send out the same code for every transaction (Battersby, 2015). However, businesses will also
need to switch their payment machines to ones that accept credit cards with a computer chip
(Battersby, 2015). The biggest question a person may have regarding these new credit cards is
about the difference when it comes to making the payment. Credit cards with a stripe on the back
are swiped at the terminal when conducting a transaction (Battersby, 2015). However, credit
cards with a chip are inserted into the machine when instructed by the machine, while in the
meantime; new data is being created (Battersby, 2015). The machine then guides the credit card
owner on any additional steps and notifies when to remove the credit card (Battersby, 2015).
Although learning this new payment process can be an inconvenience to some, there are
advantages. One of the advantages of credit cards with a computer chip is that they are more
difficult to counterfeit, in other words, to duplicate (Sullivan, 2013). Additionally, these
computer chips can save data more securely (Sullivan, 2013). Moreover, a third advantage is that
these cards can protect the cardholder from fraud also known as unauthorized transactions on the
credit card (Sullivan, 2013). How are these advantages possible with computer chip credit cards?
As mentioned earlier, these new computer chips create new transaction codes for each new

UNDERSTANDING OF CREDIT CARD FRAUD

transaction, making it harder for thieves to steal these codes; therefore, duplicating a credit card
is more difficult (Sullivan, 2013). The only disadvantage that comes with computer chip credit
cards is that the transactions take more time compared to transactions where the credit card is
swiped (Battersby, 2015).
What are the consequences that come with a business that does not make the switch to
terminals that accept computer chip credit cards? Moreover, or banks that do not issue credit
cards with computer chips? The business or bank that has not made the change will not only risk,
but also the one that has not made the switch will be liable when fraud has taken place
(Battersby, 2015). However, according to Whalen, October 1, 2015, is the closing day before
companies are responsible for fraud activity due to their terminals not upgraded to work with
credit cards with a computer chip (2012). Furthermore, many major credit card issuing
companies such as American Express reported their plans to issue credit cards with integrated
computer chips (Whalen, 2012).
What are the suggestions to avoid being a target of fraud? First, go by the rules encrypted
on the credit card stripe; moreover, these rules decide what is needed to complete the approval
process (Sullivan, 2013). According to Sullivan, these rules are known as decision rules (2013).
Overall, these rules help reduce approval of fraudulent transactions (Sullivan, 2013). Second,
check the purchases made with the card, such as suspicious purchases. According to Richard
Sullivan, this step is known as transaction screening (2013). Third, follow the process of
authentication by verifying that the person presenting the credit card is the authentic cardholder
(Sullivan, 2013). In this step, the person receiving the payment compares payment-required
signatures by comparing the signature on the back with the one presented to ensure the person

UNDERSTANDING OF CREDIT CARD FRAUD

using the card is not attempting a fraudulent purchase (Sullivan, 2013). In addition, the card
should be verified for authenticity (Sullivan, 2013).
In conclusion, because credit cards are in high use in the United States, credit card fraud
is a persistent problem. However, prevention has been taken with the new computer chip
technology that is more effective toward fraud prevention than the magnetic stripe on the back of
a card. Moreover, although these computer chips are harder to duplicate to use for fraud,
companies should not let their guard down in protecting their customers personal information
stored on their system. Furthermore, the person managing transactions should follow the three
suggestions by Sullivan, which are the following: go by the rules encrypted on the credit card
stripe, check the transactions for suspicious purchases, make sure the cardholder is the one
authorizing the transaction and that the card is authentic through the process of authentication
(2013).

UNDERSTANDING OF CREDIT CARD FRAUD

References
Battersby, M. (2015 , September). Will your practice be on the hook for credit card fraud? Here's
how to comply with a global security standard coming to the United States for the first
time. Veterinary Economics 56.9, 22. Retrieved from
http://proxy.chemeketa.edu:2048/login?url=http://go.galegroup.com/ps/i.do?id=GALE
%7CA431082749&v=2.1&u=oregon_chemeke&it=r&p=&sw=w&asid=b602f02aa12ff0
70184ffa41b89aa81b
Hodges, C. (2014, June). Playing defense against card fraud: merchants are moving to strengthen
security measures. Internal Auditor 71.3, 15. Retrieved from
http://proxy.chemeketa.edu:2048/login?url=http://go.galegroup.com/ps/i.do?id=GALE
%7CA372553477&v=2.1&u=oregon_chemeke&it=r&p=&sw=w&asid=3247368717947
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Pyzik, K. (2014, October). Safeguarding customer data: protecting personally identifiable
information is the latest front in the battle against fraud. Internal Auditor 71.5, 22.
Retrieved from http://proxy.chemeketa.edu:2048/login?
url=http://go.galegroup.com/ps/i.do?id=GALE
%7CA387347268&v=2.1&u=oregon_chemeke&it=r&p=&sw=w&asid=c9e34de3799f83
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Sullivan, R. J. (2013, Winter). The U.S. adoption of computer-chip payment cards: implications
for payment fraud. Economic Review [Kansas City], 59. Retrieved from
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%7CA347404080&v=2.1&u=oregon_chemeke&it=r&p=&sw=w&asid=6576aac9e2c3fa
f128ccd7141b7a3f53

UNDERSTANDING OF CREDIT CARD FRAUD

Whalen, E. (2012, July-August). Preparing for the payment processing switch. Risk Management
59.6, 10. Retrieved from http://proxy.chemeketa.edu:2048/login?
url=http://go.galegroup.com/ps/i.do?id=GALE
%7CA299886483&v=2.1&u=oregon_chemeke&it=r&p=&sw=w&asid=40138c7104a97
58e2e6c46946fc62fd2

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