Credit vs Debit: Economic Principles Impact Card Fraud

Often when we talk about card fraud we lump together credit and debit cards. But while this is convenient, it’s maybe not always telling the full story.

The reason is that there are subtle variations between the two, in terms of how they’re used, the transaction limits and so on. In other words, a debit card and a credit card represent two very different propositions for the fraudster.

Latest figures from the Federal Reserve in the US suggest something that perhaps we should already know – PIN debit cards suffer less fraud than signature credit cards.

“Among general-purpose cards, single-message (or PIN) debit card transactions (including both purchases and ATM cash withdrawals) in 2012 had the lowest fraud rates by both number and value,” the US central bank states.

In the US, PIN debit cards saw a fraud rate of 0.89 transactions per 10,000. That was a lot lower than the 3.92 figure reported for credit cards requiring a signature. Hardly surprising, but then the credit card figure was also significantly higher than that of signature debit (3.07 per 10,000 transactions).

So why would this be? Obviously fraudulent PIN transactions are going to be a lot harder to carry out than something needing a signature at the point of sale. But why the variation between the two signature types?

What it could suggest is that the way we use our signature debit cards varies considerably from the way we use our signature credit cards and that this is having an impact on fraud. People tend to use their debit card at the ATM, but seldom would they insert their credit card into one.

Card skimming ought to mean that signature debit cards (non-EMV) are more prone than credit cards in as much as there is an added potential point of compromise. Yet clearly this is not the case.

Instead we have to look to the relative value of each fraud – the amount that fraudsters are stealing each time. Here we can see how the economics of card fraud – it is a business like any other – matters.

Credit cards often have limits of thousands of dollars, but how many of us have this much in our current account? A criminal can steal a lot more money in one transaction from a credit card than a debit card. There is also the possibility that credit card firms require a higher value to flag a suspect transaction than debit card providers because again the way these are used varies (people tend to spend higher value amounts on their credit cards, although even this is changing to a degree).

Clearly credit cards are a more attractive proposition to the fraudsters and this means they are devoting more attention to this sector. Card issuers need to ensure they adjust their fraud detection strategies to keep up.

Written by David Divitt