Credit Cards: The Good, the Bad & the Ugly
This is intended to be the first of a series of short pieces on highs and lows of innovations in credit cards currently emerging or expected to arrive in 2013, as well as some advice about what to do regarding old ways that still exist1.
According to the Reserve Bank of Australia’s April 2011 Credit Card Statistics, there were:
• 14.85 million credit card accounts in Australia;
• The national credit card balance totaled $49.4 billion;
• The average credit card balance was $3,326;
• The credit card balance accruing interest totaled $36.4 billion (74% of the total Australia collective credit card balance is accruing interest).
With this many credit cards, accounts, users and money involved, it is important to have some idea about the risks and advantages associated with credit card use and the current and emerging technologies.
One old technology that has well-and-truly had its day is the magnetic strip card.
Credit Cards and Charge Cards with Magnetic Strips
If you still have a debit or credit card that uses magnetic strip technology as its only means of protection, it is time to visit your financial institution (bank, building society or credit union) and request a change.
The majority of forged credit cards are of the old magnetic strip variety and couriers working for organised crime groups still move forged cards around the world in bulk. Magnetic strip readers have been around for decades and allow criminals to actually read and duplicate the information contained on the strip.
This makes forging an exact copy of a magnetic strip card easy for organised criminal groups. The equipment required to forge an exact copy has been reduced to the size of a large briefcase and can be easily transported by the card forgers.
Also known as EMV (Europay, MasterCard & Visa), cards using Chip and Pin technology have existed for several decades overseas and many of you will already have had some experience with the technology as it has rolled out here in Australia.
So why has it been slow to the market in Australia? You can ask your bank, but don’t expect a straight answer. A lot of it has to do with the fact that banks and card companies have been able to pass on the cost of card fraud to the public for decades.
Credit card fraud typically falls into two main groups – counterfeit cards and card-not-present (CNP) fraud. According to the website australia.creditcards.com, in 2008 counterfeit credit cards cost Australians $49 million, while CNP fraud cost $71 million. This included fraudulent mail, telephone and internet transactions. As it has now been over four years since those amounts were recorded they are likely to now be significantly higher.
It has only been with the growth of internet use and identity fraud awareness that banks and card companies in Australia have had to adapt to the new technology.
With EMV credit cards, banks use a “chip and pin” or “chip and signature” authentication system. This system is significantly more secure than the traditional magnetic strip. This is because the chip produces a unique code for each transaction, making it easier to trace and easier to crack down on fraud.
Super-secure mobile payments
According to Forbes Magazine, mobile phone payments have the potential to be more secure than any payment system yet designed. Contrary to popular fears, paying with your smartphone is a way to guarantee the security of your transactions.
Mobile payments allow for a variety of authentication mechanisms, ranging from passwords to location services to serial numbers and even on-demand QR codes (a QR code [abbreviated from Quick Response Code] is the trademark for a type of matrix barcode (or two-dimensional bar code) first designed for the automotive industry in Japan).
With that many varying authorisation points of available, it is increasingly difficult for criminals to crack the code on an individual phone. Yes, if you lose your smart phone or you don’t secure it with a password, you may be vulnerable. That said, most people are more conscious of where their phone is than where their credit cards are. You are therefore more likely to quickly notice that your phone is missing and actually take action to inform the right people.
‘Show-rooming’ has been described by some as a ‘slap in the face’ for full service merchants who have the added expense of maintaining a shop front and paying staff to serve customers. For the last few years, such merchants have been complaining loudly about the problem of show-rooming. Show-rooming occurs when a person walks into a retail store, checks out an item in-person, selects the right size, style, colour and options – and then goes online and buys the same item at cheaper ‘internet price’, usually from a merchant who does not have the added costs of maintaining retail premises.
Let’s be clear. Show-rooming is not illegal. Many argue that it is just sound economics while others claim that it is driving retail stores to the wall. As usual, the truth lies somewhere in between. If everyone show-rooms, then shop-front retailing is likely to eventually be something from “the good old days” that we tell our grandchildren stories about. There are a number of downsides to show-rooming, not the least of which is that you have to wait days and sometimes even weeks for delivery.
Hyper-Connected Bricks and Mortar
So how do retailers combat show-rooming? As the Internet matures and becomes more sophisticated, so consumers will expect sellers to provide more information about stock, including availability on a localised basis. The idea is for retailers to combine the in-store experience with the on-line experience to enhance the service they provide to their customers.
Wouldn’t it be great if you could get a bargain and be able to pick it up locally on the same day? With new advances in stock management and on-line publishing in real-time, you should be able to expect that your shop-front retailer will be able to tell you what they have in stock and where it is located. Furthermore, they should also be in a position to roll-out loyalty programs and on-the-spot discounts to regain and keep your custom. All they have to do now is actually employ in-store staff who care enough about customers to actually serve you when you walk in the front door!
“Mobile Wallet” Applications
The concept of the electronic “mobile wallet” has existed for years now. The problem has been that there are a number of systems around and no single system has been able to dominate the marketplace. That is probably a good thing as it gives the consumer the choice and it is choice that ultimately ensures competition. This in turn keeps prices down. There is something to be said for having a range of options available to you to pay for your purchases. So the next time you are encouraged to sign up for the ‘one-stop-shop’ of payments, don’t just think about what you might be gaining. Also think about what you might be losing in the way of choice and cost!
On-line Funds Transfers
The banks will tell you that direct credits and on-line funds transfers are as safe as houses. Think again. For a start, the banks almost always take your money out of your account straight away. They don’t, however, deposit it into the receiver’s account at the same time.
So what do they do with it in the intervening period? Well, if you play with enough people’s small transfers in this way, you can make quite a bit of small change on the short-term market. The banks will officially tell you otherwise, but use your own commonsense.
There are also numerous examples of funds simply being sent to the wrong account, the wrong branch and even the wrong bank, despite the sender having done everything correctly. And it usually ends up being the parties to the transaction who actually have to track things down, because banks simply don’t employ the staff to get involved in such low-level problems unless compelled by law. Stay tuned, as there are indications that the law may be catching up with the banks in this area in 2013.