The real cost of credit card fraud

The June issue of The Nilson Report included a startling report on the true cost of credit card fraud in the U.S. As you know, credit card issuers often have "zero fraud liability" programs that leave them stuck with the fraudulent expenses. But how much money are we really talking about?

According to the Nilson Report, American Express, Discover, MasterCard and Visa incurred $1.14 billion in fraud losses in 2005. That is up from $823.6 million in 2004. While this number is staggering, I find it hard to really quantify dollar amounts that high. To clarify, that amount would equal a cube of dollar bills more than 20 feet tall and 50 feet long and is equal to the amount that 400 people would earn in their lifetimes.

The $1.14 billion figure calculates to 6.25¢ per every $100 in credit card volume. A pretty significant loss amount no matter how you look at it. Although the total amount of fraud losses increased in 2005, the percentage of total volume declined. Credit card fraud peaked in 1992 at 15.71¢ from every $100. And here's the scariest part:

A greater contributor to last year's uptick in fraud was competition among top issuers. In the fight for market share, issuers are likely to authorize a transaction made to accounts help by good customers, even if that transaction has been flagged as risky by a neutral network because it diverges from the customer's ordinary spending pattern.

The Nilson Report article ends with the prediction that: "As long as fraud doesn't go up above 7¢ per $100 in volume, issuers will continue to favor consumer convenience over security."

What do you think about this report on credit card industry fraud losses? Are you willing to choose convenience over security? Share your feedback in the comments section below.

Comments

[Liz S.]

What I'd be interested in is verifying that number. Doesn't the retailer ultimately lose out when something is declared fraudulent? My FIL owns a business and had someone order something on what turned out to be a stolen credit card. The transaction was approved and he shipped the product. Later, the cc company took back the money, stating it was on a stolen card and he lost out.

If this is the way the cc companies handle fraudulent transactions, it would make sense that they are less interested in security and can assume more risk because they're sharing the burden. They may lose out on cash advances and such but if you notice, cash advances usually have a bit more security than most everyday purchases.

I'd rather up the security, especially if it meant that criminals would have a harder time profiting from everyone else's good intentions.

[EmilyPeters]

These statistics don't include the losses absorbed by merchants or from debit cards. It's just straight credit card issuer losses.

I would love to hear more about fraud responsibility policies from some business owners!

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