Broken Windows and Card Payments Fraud

by Scott Loftesness on July 15, 2009

in Card Fraud, Scott Loftesness

Scott Loftesness

Last week, I was thinking a bit about the many issues of fraud in the card payments world and how the lack of a business case within the industry itself has slowed adoption of various technologies that could be deployed to reduce fraud. It struck me that the old but well proven idea about “broken windows” in policing had a potential role to play in thinking about these issues.

Late last year I was working on adding a module to our Payments Boot Camp series about the decision taken in the UK in the early years of this decade to migrate from mag stripe-based payment cards to Chip and PIN. During discussions with several participants involved in that process at the time, it was clear that there wasn’t a positive financial business case for making that decision – although there might have been forecasts of accelerated growth in counterfeit card fraud ahead and perhaps the need to make an earlier decision because of the deployment timeframe involved to react one a decision to move had been taken.

What was particularly interesting to me, however, were comments made about the influence of the UK government in raising concerns with the banks about the negative effects on society that growing card fraud was having within the country. Essentially, a “broken window” concern – that card fraud was leading to other forms of crime as well. In combination with the weak business case and concerns about deployment time, the broken window aspects help tip the decision in favor of acting rather than waiting. Essentially, an “externality” factor – an influence from outside the financial aspects within the industry itself – helped make the decision to move.

Dave Birch and I had a fascinating chat about this last week – Dave extends that discussion in his Digital Money Forum blog post here.

What do you think? Is there a broken windows problem with the current level of fraud in the card payments world?

4 Responses to “Broken Windows and Card Payments Fraud”

  1. I think everyone is going in the wrong direction. We are the only gateway that can guarantee you will be 100% protected from hackers who try to steal credit card data through our Gateway. If data is stolen from our gateway, we will pay the fine incurred from cardholder associations.

  2. David Snyder says:

    Very timely. The topic came up at the BayPay meeting Tuesday night. The attendees agreed there is no strictly financial business case to move to Chip and PIN in the US.

    As for the “broken window” concept, it reminds me of Malcolm Gladwell’s observations in his “Tipping Point” book about crime in the NY subways before and after they made a concerted effort to clean up grafitti on the trains. It’s not just a matter of tolerating crime. The fact that crime is tolerated encourages more, and of varied kinds.

    Here’s one more point about indirect impacts that might help make the case for trying to control fraud with Chip & PIN or other techniques. There seems to be increasing attention paid to fighting money laundering that feeds money to drug cartels and terrorist organizations. Perhaps some research is needed on quantifying how much credit card fraud goes to fund other crime?

    By the way, I like Dave Birch’s idea that we should be looking at a replacement for payment cards, instead of continuing to try to make old technology work.

    • Thanks for your comment.

      Your reminder about Gladwell telling the NYC story in Tipping Point is a good one.

      I think another important issue in the US is the lack of a decision making group that can actually decide. APACS played a key role in running the project office leading up to the UK decision and something similar happened with Interac in Canada. There’s nothing really similar (effectively “above V/MC”) in the US.

  3. Factchecker says:

    Late to comments, but a few notes here, the “broken windows” theory has its critics and rightfully so in that many cities have not had the same crime reduction even though they have been following new york’s lead. In addition zero tolerance policies in school have come under criticism, if somebody jaywalks in manhattan where car traffic is slow and not out of arrogance although lots of folks do that , that doesn’t mean that they are likely criminals. It depends on the situation.

    Credit cards can be tracked so using cash is the best way to commit fraud, atm skimming is common and pin and chip has its critics due to hacking.

    One can make a point that if issuers have no financial motivation to migrate then they won’t do it. But one can make the point that if the system works fixing it can make it worse. If we go to chip and pin, then how well the regular ATM networks migrate and compete with VISA/MASTERCARD in the debit arena.

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