New Fraud Protection is a Start, But Visa and MasterCard Need a Long-Term Solution to Survive

In the wake of some of the worst financial data breaches in history, MasterCard (NYSE: MA  ) recently announced it was extending its zero-liability policy to include ATM and PIN-based (debit) transactions as well as those made with credit cards. Basically, this means that if an unauthorized charge occurs at an ATM or point-of-sale terminal with a PIN number, the cardholder will not be held financially responsible whatsoever. While this could boost consumers' sense of security for the time being, it is by no means a long-term solution to the problem of fraudulent card usage.

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Zero-liability is a start
Traditionally, zero-liability policies have only applied to credit cards, and any fraudulent use of a debit card was tougher to have reimbursed. As a result, many consumers had been reluctant to use their Visa (NYSE: V  ) and MasterCard-branded debit cards for purchases, especially in places like gas stations and non-bank ATMs where theft of card information is more common.

One of the most common ways card information is stolen is with devices known as "skimmers" attached to a point-of-sale credit card reader, which steals the information when a customer swipes their card. These devices need to be installed discretely, which is why they are more commonly used at gas stations, ATMs, and other places where consumers swipe their own cards.

MasterCard's new policy extends the zero-liability policy to debit transactions, which means account holders will not be held responsible for any unauthorized transactions whatsoever. As of this writing, Visa's policy doesn't include PIN-based transactions, but I wouldn't be at all surprised if this changes in the very near future in response to MasterCard's policy change.

A long-term fix is needed
As a result of the massive December breach of Target's (NYSE: TGT  ) computer systems in which 40 million debit and credit card numbers were compromised, as well as smaller breaches at other companies like Nieman Marcus and Michaels, both Visa and MasterCard have renewed their joint effort to adopt microchip technology into U.S. credit and debit cards.

The theory is that by no longer using the magnetic strip technology currently on the backs of credit cards (which are relatively easy to replicate and steal), a large portion of credit card fraud would be eliminated. The microchips don't really address the security of online transactions, but it would definitely be a move up in card technology, and would catch us up to Canada, Mexico, and most of Western Europe, where chip technology is already widely used.

Chips are safer than magnetic strips because they use a one-time code to process a transaction and transfer data, which even if stolen would be useless. Furthermore, chip-based cards are almost impossible to copy, unlike magnetic stripe cards, which can be literally scanned and printed in seconds.

The recent breaches could kick-start the process
Stores had been reluctant to adopt the new technology because of concerns about cost and the complexity of the systems that would handle the new cards. However, after the recent breaches, it seems retailers are becoming more supportive of the new systems.

For example, Target is implementing a $100 million plan to integrate chip-based card technology into all of its stores, and will have new payment terminals up and running in September. In addition, Target is going to issue its own chip-based cards in a joint effort with MasterCard, making it the first retailer to do so.

As if theft wasn't a big enough reason to complete the upgrade of technology, there is set to be a "liability shift" in October 2015. Basically, after that time, the costs incurred from card theft will fall to the party with the least advanced (and most vulnerable) technology. So, if the bank issuing the cards has chip technology, but the retailer doesn't, the retailer will be responsible for the costs involved.

Looking long-term
One thing is clear – consumers need to feel secure with their method of payment for goods and services, or they'll find another one to use. For example, an Associated Press poll conducted in February found 37% of Americans had made a conscious effort to pay for purchases in cash, rather than use credit or debit cards, in the wake of the data breaches. Nearly half of those surveyed said they were extremely or very concerned about retail stores' ability to keep their information safe.

If this attitude toward card usage continues, it could be very bad news for Visa and MasterCard, as well as for the banks that issue their cards. That's why the shift toward the latest and greatest technologies and security methods are absolutely imperative if the credit card industry is to continue to thrive in the United States.

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  • Report this Comment On June 08, 2014, at 7:08 PM, PhilipCohen wrote:

    “Are MasterCard And Visa In Apple's Crosshairs?”

    “My theory, which I stick by today, is that AAPL’s end game is to develop a broad-reaching e-commerce engine that will compete not only with PayPal, but also [with] traditional credit card companies. More recently, some of the pundits that cover AAPL have arrived at similar conclusions.”—Paul McWilliams, supposed “technology stock expert”.

    “Back in 2012, I wrote that Apple would eventually kill off Visa and MasterCard on”—Forbes Contributor, Richard Saintvilus.

    “Apple, or any future competitor that has already built a base of trust, could begin tomorrow and charge half the commission of eBay, Visa, or MasterCard, … and the concept of real competition [for eBay’s “PreyPal”] in the space is farfetched for the next few years.”—John Ford, SeekingAlpha Contributor (either an eBay shill or, more likely simply, a fool) …

    What a load of nonsense! Do any of these commentators have any understanding of how the retail banks’ payments system actually works, or how eBay’s clunky “PreyPal” actually works (or, too often for the merchant, does not work)?

    The safe way: Payer’s Bank > Credit/Debit Card > Merchant’s Bank.

    The other way: Payer’s Bank > “PreyPal” > Credit Card/ACH > Merchant’s Bank?

    The professional payments networks, the "bankcards", Discover (~2%), MasterCard (~33%) and Visa (~52%), plus Amex (~12%), still process ~99% of the world's payments business between them, and the "bankcards" already offer an "instant loan" model; for what otherwise is a "credit" card? And, Amex will have difficulty growing its market share any further because it has little chance of ever matching the vast merchant coverage of MasterCard/Visa until it matches the lower merchant discount fees of MasterCard/Visa …

    So, notwithstanding the constant talk of “disruption”, it appears that nothing has yet “disrupted” the two major bankcards; and I have no doubt that absolutely nothing in Apple’s “mobile” plans (short of buying their own bank, which still does not automatically give them interactive access to payers’ funds in other banks) will disrupt the existing bankcards. The fact is, Apple does not now have interactive access to depositors’ funds in retail banking accounts, nor is Apple, or anyone else, ever likely to get that access, except via MasterCard/Visa; any other way is at the users’ peril, as the many negative stories about “PreyPal” all over the internet attest.

    Like all the other pretenders, “Apple Payments” will always be riding on the back of those same retail banking networks—as they currently do, via their own retail banker, as simply another, albeit very large, "Credit Card Merchant Account" operator. And, any credit that Apple might offer to supply will still have to be provided via an agreement with a licensed and regulated credit provider (eg, a real bank), as is already the case with that other "payments pretender", eBay's infamous "PreyPal" …

    Even if these payments middlemen make use of direct debits via the ACH system (as “PreyPal” prefers to do to more cheaply access payers’ funds), the access is not interactive: there is no immediate acceptance of the debit by the bank nor any guarantee that, the following day, the bank won’t reverse the debit due to an insufficiency of funds; the simple fact is, direct debit via ACH is not a suitable medium for physical point-of-sale transaction payments where the goods involved are going to immediately walk out the door (nor was the relatively primitive ACH system ever intended to be used as a mechanism for middlemen to access funds for any form of non-credit transactions); the only safe route for a merchant for such transactions (credit or debit) is via a retail bank Credit Card Merchant Account with its interactive linking to the retail banking system …

    Choice of the payment vehicle, from those offered by the merchant, is driven by the payer who directly bears none of the cost of such choice. Sensible payers have their funds stored in a prudentially regulated financial institution; world-wide these institutions issue MasterCard/Visa credit/debit cards—and now “digital wallet” extensions thereto—to enable depositors to easily access such funds on- or off-line. People should therefore stop kidding themselves; not Apple nor any of the other "payments pretenders" (including Bitcoin) are ever going to have a noticeable effect on the “bankcards”, MasterCard/Visa—with their new “digital wallet” extensions—other than to make MasterCard and Visa even better long-term investments ...

    What then about Bitcoins? Obviously, I’m missing something, but why would any buyer choose to complicate any transaction by paying with Bitcoins, which are a volatile “foreign” currency requiring an FX conversion at either end—even for a local transaction, and no transaction dispute moderation process?

    And what about eBay’s “PreyPal? Well, next time you visit The Home Depot, ask a cashier how "Pay Here With PayPal" is going—LOL ...

    “… with the company [Apple] being privy to payment card details of hundreds of millions of iTunes users”

    With the advent of the new, professional, “digital wallets” from both MasterCard and Visa, I suspect that it is only a matter of time before such “credit card details” (ie, card numbers) will not be useable for making a payment (or will come with a higher discount fee, as is currently the case sometimes with “card not present” transactions), for it is the possible fraudulent use of these card details that is the real, and costly, ongoing weakness of the card system. From a security point of view, I see such card details becoming nominal only and the likes of the “MasterPass” and “” digital wallets (accessed via mobile or plastic card, or online) becoming the dominant vehicle for all transactions—on- and off-line—with much improved efficacy and security for all stakeholders …

    Regardless, finger print reading or no, for Apple to continue to eschew NFC, if indeed they ever really have done so, is insanity; but, regardless, an NFC chip or finger print reading only makes a smart phone a little smarter; a “payments system” it does not make.

    Methinks there are no long term “spoils” in “payments” for Apple or any of the other middleman payments pretenders—only for those that we trust to keep safe our surplus funds—the licensed, prudentially regulated, retail banks …

    Yes, there are presently some anachronistic features of the credit card system; the operational card details imprinted on the card and recorded on the card’s primitive mag strip are serious, fraud enabling, anachronisms and, undoubtedly, those anachronism will be phased out following the implementation of the approaching mandated Chip+PIN regime, and the new MasterCard/Visa digital wallet extensions thereof.

    Apple (and “PreyPal”) fanboys—dream on …

  • Report this Comment On June 09, 2014, at 5:24 PM, PhilipCohen wrote:

    "David Marcus Stepping Down as Head of eBay Inc.'s PayPal Business"—eBay Inc.

    What's up David, you get tired of being surrounded by so many headless turkeys?

    eBay Inc, where the incompetent mingle with the malevolent and the criminal, and the just plain stupid ...

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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