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Credit Card Fraud - How to Prevent Theft- Why it Occurs - What Security Systems are in Place

Updated on December 12, 2012

The Financial Burden

In most cases, merchants or financial institutions bear the risk of loss when fraudulent transactions take place. Merchants have risk of loss of the value of their goods or services if the financial institution initiates a chargeback. In the event that the financial institution does not have chargeback rights, then the merchant has no liability thus leaving the loss to the financial institution.

Understanding Security Implementations

Both Mastercard and Visa employ additional levels of security for online transactions through the “Mastercard SecureCode” and “Verified by Visa” programs.These programs require the cardholder to create an additional password to use for online transactions.There are some drawbacks to these programs but overall it can help to protect merchants against unauthorized transaction chargebacks.The merchant would have to purchase these products in order to utilize the protection that they offer and in many cases it can be very expensive.In many cases, there are several fees to be incurred by the merchant which can include setup fees, monthly fees, and per-transaction fees.These fees can be well worth it to many merchants because the use of these programs can limit the amount of chargebacks by adding an extra level of security to each transaction.

Additionally, credit card companies have large information systems set up to monitor transactions for fraud. Many of the systems use complex algorithms to score each transaction based on the cardholder’s usual spending habits, location of the purchase, and amounts of each transactions. When a transaction is authorized that scores too high as a result of these criteria, it flags the transaction for possible fraud so that it can be further investigated. The ways at which the transaction is further examined can vary. Many companies attempt to reach out to their clients by giving them a call to verify and go over the suspicious transactions. If the credit card company is unable to gain contact with the client, then depending on how suspicious the transaction appears they may choose to place the card on a restricted status. With the restricted status placed upon the card, no transactions would be approved until the client gains contact with the processor to go over the suspicious transactions.

Some financial institutions such as Citigroup offer “virtual account numbers” through their online services. These virtual account numbers work in that they are limited in use and work by using a temporary account number which is different than the number on the front of the card. Many cardholders use these feature when making online or over the phone payments because with the rampancy of fraud today; payments made through these methods are more susceptible to having card information taken. The advantage of using the limited virtual account number is that if by some means a fraudster acquires the virtual account number they will be limited if not completely prevented from making any sort of purchase. It also saves the cardholder and credit card company time and money because there will be less effort devoted to disputing the transactions and creating the cardholder a new account.

The Final Cost

Overall these fraud prevention and mitigation systems are necessary to the continued business of both PayPal and credit card companies. With credit card fraud being reported at $5.55 billion in 2011, there is much at stake for both the consumer and the firm itself. Through the use of information systems, these payment processing firms have greatly reduced the amount of risk they face.


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