November 03, 2015 Articles

Understanding the Payment Card Fraud Liability Shift

New credit card processing technology has led to a change in liability rules for counterfeit transactions--one which turns on how quickly businesses adapt

by Edward A. Marshall and Maayan Lattin

Identity theft and payment fraud are at historically high levels in the United States. Countless data breaches have affected millions of cardholders, and in recent years, billions of dollars have been spent annually to protect against payment fraud and to absorb the costs of such fraud across the payments ecosystem.

In an effort to reduce incidents of payment fraud and mitigate the resultant costs, the payments industry is in the process of replacing the decades-old magnetic stripe technology (the same technology once used in eight-track tapes) currently used in payment cards and devices with more secure "EMV" technology. It has also instituted a new set of liability rules for "card-present" fraudulent transactions, which became effective October 1, 2015.

In brief, this counterfeit fraud liability shift means that as of October 1, both card issuers and businesses that accept payment cards (merchants) that have not updated their payment cards and terminals became potentially liable for fraudulent card-present payment transactions. To be clear, old magnetic stripe cards still work, and EMV-enabled point-of-sale (POS) terminals will continue to accept them, but if a noncompliant merchant is confronted with a fraudulent transaction, the financial consequences of continuing to use old magnetic stripe technology could be steep.

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