According to forecasts from Aite Group nearly all credit cards issued in the U.S. will have EMV capabilities by 2018 when CNP credit card fraud losses are expected to reach $6.4 billion in the United States. As EMV cards become commonplace among U.S. cardholders it will make counterfeit card fraud more difficult and drive more fraud attempts to the online channel. CNP merchants should already be preparing for increased fraud attempts, considering how it may impact manual review loads and if current risk management strategies should be supplemented with additional tools and techniques.
As EMV or Chip-and-PIN cards began to phase out magnetic-stripe payment cards in the UK, Canada and several other countries, fraudsters started migrating online and to other Card Not Present channels. While counterfeit card fraud in Canada fell from $245 million CAD in 2008 to $112 million CAD in 2013 after five years of chip cards, CNP fraud increased from $128 to $299 million CAD over this same time frame. Card Not Present fraud increased more than 300 percent in the UK following the rollout of Chip-and-PIN. A similar sequence of events is expected in the U.S. as banks issue EMV, or chip, cards to replace the less secure magnetic-stripe predecessors in time for the October liability shift deadline.
With over 500 million credit and charge cards issued in the United States, replacing all of them with chip cards won’t happen overnight, but the issuing banks are expected to make quick progress. Aite Group estimates that 70 percent of credit cards in the U.S. will have EMV capabilities by the end of this year. The share of EMV cards is then forecasted to reach 91 percent in 2016 and 98 percent by 2017.
Aite Group additionally forecasted the growth of CNP credit card fraud in the U.S., which was influenced by the rapidly growing share of EMV-capable credit cards and the expectation that this will drive more fraud online. Their forecast calls for a minimal increase in CNP fraud this year at $3.1 billion, but quickly takes off to more than double by 2018. While Aite Group estimates CNP fraud will increase to $3.8 billion in 2016 the biggest jump in fraud is expected in 2017, increasing by more than one-third to $5.2 billion in losses. Card Not Present fraud is expected to increase by more than 20 percent again the next year, reaching $6.4 billion in 2018.
While eCommerce sales continue to grow each year, they aren’t doubling between now and 2018. Mobile eCommerce is growing more rapidly, but total CNP card processing volumes will not keep pace with the expected growth in fraud. This means merchants operating in the CNP channel need to be prepared to handle the increased fraud activity relative to normal total transaction volume growth and ensure that fraud and chargebacks rates don’t exceed the acceptable limits.
This includes several considerations around a merchant’s current risk management strategy. Will more fraud attempts lead to more transactions requiring manual review or will automated screening be adjusted to auto-decision more orders and keep the number of reviews constant? Should new risk management tools or techniques be considered that can improve detection with automated screening? Could adding more tools and data sources for manual review agents to use increase their efficiency and performance?
Merchants may also want to consider ways to limit their fraud liability and exposure. There are ways organizations can combat fraud and hedge against fraud losses when they do occur. This includes Consumer Authentication programs like Verified Visa and MasterCard Secure Code that offer a liability shift against covered transactions for certain fraud reason codes. There are also fraud screening vendors that offer a guarantee and will reimburse merchants for fraud losses on orders the merchant sends them and they accept. Also keep in mind that organizations can be selective on when to use such services, as they are often assessed on a per transaction basis, and reserve additional authentication or third party verification for questionable orders that would otherwise not be accepted.
History and patterns tend to repeat themselves. It is very likely that CNP fraud will increase significantly in the coming years, and merchants should already be preparing.
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