Two news items came out this week that caught my attention and got me thinking. The first was a report from LexisNexis - the 2009 LexisNexis True Cost of Fraud.The shocking headline figure in this report was that US merchants are paying $100 billion in fraud losses due to unauthorized transactions and fees/interest associated with chargebacks, nearly ten times the cost incurred by banks.
The second item was new findings announced by Moneris Solutions, Canada's largest payment processor. The findings revealed that merchants who processed greater than 40 per cent of total transactions using chip and PIN technology experience on average, up to four times fewer chargebacks than those who processed less than 40 per cent of total transactions using chip technology. Retailers reported 2.9 times fewer chargebacks while restaurants reported 1.8 times fewer chargebacks.
How much could US Merchants' save in chargeback costs if they gained the same benefits by using chip card technology? Well, if chargebacks could be reduced by something between that achieved by retailers and restaurants in Canada, say 2 times, the saving would be $50 billion. An end 2008 Tower Group report estimates the cost to update the whole of the US to EMV (cards and card payment network) at $18.2 billion. That looks like a good payback to me. The problem though is that banks also need an incentive to change. While they are able to charge back fraud costs to merchants and keep their own card fraud costs to a much lower figure ($10 billion) they are far less motivated to move.
What’s impossible to know about the fraud reduction seen in any country where chip-and-PIN has been introduced is how much of the reduction may have been possible simply by moving to using PINs for POS transactions – without issuing chip cards. The widespread introduction of PIN debit and an equivalent for credit transactions may have an equally significant impact on reducing US Merchant’s card fraud costs.