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Credit Cards, Chip Cards, Fraud, and Rates

How Rates Are Affected by Your Fraud Risk

Posted Jan 25, 2018
When you use a chip credit card, you cut down the incidence of credit card fraud.

What am I paying for?  Who am I paying?
Is it too much?   Do I have options?

We get it! Fees are no joke and deciding who to work with, why they charge what they do, and even what you can negotiate is frustrating and confusing. Well, we are going to fix that.

Over the next four blogs, we will make it clear how fees are calculated, why rates are what they are, and even share some ideas that could help you lower them.

Let’s start with the basics. There are two types of credit card transactions.

Card-Present and Card Not Present or MOTO (mail order/telephone). Card-present transactions have the lowest rates because they are the safest. The risk for fraud is low, since the person is actually in the place of business using the card. You can validate visually that the person is actually the cardholder and not a thief.

When a card is not present, identify confirmation is easier to cheat. Providing a set of numbers over the phone or in an online transaction is comparatively easy for credit thieves to do. And so, these types of transactions have more risk that they will turn out to be fraudulent. The cost of such risk has to be paid for and so the transaction rates charged for MOTO purchases is higher.

Transaction risk drives the rate you pay.

EMV-enabled, or chip-enabled cards, are recent additions to the anti-fraud efforts that card issuers have instituted. They are another reason why Card-Present transactions are cheaper.

When the chip is presented to the card reader, the data is read and the transaction proceeds as we discussed in our last blog The Credit Card Transaction Process Is 5 Seconds Of Pure Magic.

But, once the transaction is complete, the card reader embeds a new code into the chip within the card. When that card is presented for its next purchase, the system reads that code to validate that the cardholder is indeed the rightful owner of the card. After this new transaction is completed, another fresh code is embedded in the chip, and so the process repeats from transaction to transaction.

Chip technology thwarts one type of fraud — fake card creation. Thieves can no longer steal your card number and name and then forge a new card. If the card is presented to an EMV-enabled device without the proper chip, that card would not be valid and the purchase will not succeed.

Please be aware that merchants are NOT required to use EMV/Chip card readers. But if a merchant does not use this technology, the cost of a chargeback is now solely the responsibility of the merchant. Before chip technology, that cost was born by the bank.

If you resist switching to EMV card readers,
you do so at your own financial risk.

Chip technology is fascinating and it’s been a game changer in the fight on fraud.

Another great fraud fighter is the use of the CVV/CVC code (that number on the back of the credit card) when dealing with MOTO transactions. The great value in this code is that someone who has simply skimmed credit card numbers, but doesn’t have the actual card in hand, cannot proceed with a transaction without that code.

In our next blog, we dig into how transaction fees are actually calculated.