July 19, 2024


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What Is Credit Card Abuse

What Is Credit Card Abuse Credit card fraud stands out as a prevalent form of identity theft, a problem that gained significant traction during the COVID-19 pandemic. In fact, fraudulent credit card applications surged by 17 percent in just the first month of the pandemic. This concerning trend continued, with the UK witnessing a five-year high in credit card fraud during the last three months of 2021. In this context, it’s imperative to explore how financial institutions can shield themselves and their clients from the perils of credit card fraud and curtail its widespread impact on the global financial landscape.

Defining Credit Card Fraud: Credit card fraud entails the unauthorized utilization of a debit or credit card for making purchases or cash withdrawals. In 2021, the United States saw 389,845 reports of credit card fraud, and it’s notably the most common form of identity fraud among individuals aged 20-39, according to the Federal Trade Commission.

The Mechanics of Credit Card Fraud: 

What Is Credit Card Abuse
What Is Credit Card Abuse

Credit card fraud materializes when criminals pilfer another person’s credit card details and employ them for personal financial gain. While traditional credit card fraud involved physically stealing the card itself, contemporary iterations often involve the illicit acquisition of card details without possessing the physical card. There are two primary types of credit card fraud:

  1. Application Fraud: In this scheme, a fraudster uses illicitly obtained credit card information to open a new account under the victim’s name. These criminals may have procured the victim’s data through various means, including purchasing it on the dark web.
  2. Account Takeover Fraud: Here, perpetrators employ a victim’s personal identification information to gain control of their account and misappropriate funds.

Examples of Credit Card Fraud: 

What Is Credit Card Abuse
What Is Credit Card Abuse

Credit card fraud can be broadly categorized into two main segments:

  1. Card-Not-Present (CNP) Fraud: This category has become increasingly prevalent with the rise of digital payments. Once fraudsters gain access to stolen credit card details, they can execute multiple fraudulent transactions, primarily through online channels. Examples include making substantial online purchases, bulk buying the same item rapidly to exploit the time before detection, or completing payment forms with stolen details and emailing them to retailers. CNP fraud can also occur over the phone.
  2. Card-Present Fraud: While less common due to chip and PIN technology, card-present fraud still occurs. Examples include theft of credit cards from homes or individuals, accidental card loss (e.g., leaving a card in a taxi), card cloning through skimming at ATMs or in physical establishments, and intercepting new or replacement cards sent via mail.

Impact on Financial Organizations: 

What Is Credit Card Abuse
What Is Credit Card Abuse

Credit card fraud prevention should be a paramount concern for financial institutions, given its potential to drain resources, time, and tarnish the organization’s reputation. Failure to address disputes adequately may lead customers to report the institution to regulatory authorities, such as the Ombudsman.

In the United States, the Fair Credit Billing Act mandates that credit card companies refund customers for unauthorized purchases exceeding $50, provided they report the fraud within 60 days of discovery. Some companies have policies waiving this fee entirely. In the United Kingdom, the Consumer Credit Act absolves customers of liability for fraudulent credit card use. Nevertheless, banks may withhold the initial £50 if they believe the customer failed to safeguard their card details. For financial institutions, the burden rests on proving that customers were negligent in this regard.

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Detecting and Preventing Credit Card Fraud: 

What Is Credit Card Abuse
What Is Credit Card Abuse

As fraudsters continually evolve their tactics, companies must empower their customers to prevent victimization and report fraud promptly. Measures to encourage include:

  1. Implementing Strong Customer Authentication: Encourage multi-factor authorization, one-time passwords (OTPs), in-app approvals, and biometrics (e.g., voice and facial recognition).
  2. Regularly Reviewing Statements and Setting Transaction Alerts: Customers should routinely monitor their account statements and activate transaction alerts to stay informed.
  3. Safeguarding PINs: Advising customers to keep their PINs private and not record them.
  4. Protecting Personal Information: Encouraging clients not to carry their social security or national insurance numbers, avoid storing credit card details on websites (particularly the Card Verification Value), and refrain from conducting financial transactions over public Wi-Fi.
  5. Verifying Secure Websites: Customers should ensure retailer websites begin with “https://” to confirm their security.
  6. Vigilance Against Phishing: Educating clients about the dangers of clicking on links in suspicious emails or texts.
  7. Employing Security Software: Customers should use up-to-date antivirus software, anti-spyware, and firewalls.

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Furthermore, companies can advise retailers to enhance credit card fraud detection by recognizing warning signs such as unusual or large orders, courier collection requests for online or phone orders, shipping address changes, and distracting cashiers during purchase transactions.

Artificial intelligence (AI) and machine learning (ML) play pivotal roles in enhancing credit card fraud detection and prevention. ML tools efficiently process vast datasets, enabling the prediction of fraudulent transactions and emerging trends. This proactive approach helps maintain customer trust, safeguard brand reputation, and reduce costly chargebacks, ultimately benefiting financial institutions and their clientele.