Beyond prevention, early detection is the best weapon against credit card fraud, according to a recent report from Financial Insights, Framingham, MI.
   The report looks at the case of United Kingdom-based HFC Bank, which has been able to detect potentially fraudulent card applications more quickly, reducing the ultimate financial loss. HFC Bank anticipates an almost 500 percent return on investment using its new predictive modeling technology.
   "Identity theft ­ of which fraudulent card applications are a significant part ­ is growing rapidly," said Aaron McPherson, Research Manager for Payments in Financial Insights' Retail Financial Services group. "Card issuers need analytic tools to identify potential fraud early ­ before the majority of the damage is done."
   Fraud is not a static problem, but constantly evolves, McPheson added. Implementation of an analytic application like the one used at HFC Bank can actually increase the work for fraud detection analysts, but the additional cost is more than offset by the return on investment.
   Card skimming remains one of the favored devices of fraud artists, the report added. A credit card skimmer reads the data on the magnetic stripe, which then can be used to create a duplicate card that functions exactly like the real one. Criminals can also use the card information to make online purchases.
   Card application fraud is a part of a much larger problem ­ identity theft ­ which is rising all over the world as information technology becomes more pervasive. Financial Insights expects identity theft to grow rapidly in the United States over the next four years, with the rate of fraud rising at a faster rate.
   Identity theft victims can expect to pay $808 in telephone charges, mailing expenses, lawyers' fees and lost timer, according to estimates by the University of California at San Diego.
   Technologies like Verified by Visa help only if the card itself hasn't been obtained fraudulently, the report added. Smart cards have yet to be widely adopted, so the problem will continue to grow.
   If a business is found to be a source of fraud, it will be subject to higher interchange rates. In a worst-case scenario, the processor could drop the merchant's business, and other processors may refuse it as well. So it's important for the ISO to keep the merchant aware of fraud-fighting advances as well as new fraud attempts by criminals.
   The continuing fraud problem is, in some ways, leading to the implementation of biometric devices at a growing number of merchant locations.
   In the summer, BioPay, LLC installed its Paycheck Secure biometric identification system in BI-LO supermarket locations throughout the Charlotte, N.C. area. The 26-store deployment was part of a six-month pilot program that began in June.
   "We offer check cashing as part of our commitment to meeting the needs of our good customers," said James Wiles, BI-LO's loss prevention director. "Unfortunately, fraud has become a costly issue that can't be ignored."
   When a customer cashes a check for the first time, the person gives the BI-LO clerk his/her driver's license for inputting into the BioPay database. At the same time, the customer's two index fingers are scanned and an electronic photo is taken of the customer. All information is stored within the BioPay system. A repeat customer need only use their finger image to complete future transactions.
   When a subsequent check is presented, the customer places their finger on the biometric reader. Paycheck Secure then searches for a match, identifies the customer and then delivers to the BI-LO clerk a history of transactions associated with that person. If the person has any negative transactions with any other BioPay merchant in the country, advanced alert mechanisms warn the clerk, enabling the transaction to be declined before it is processed, saving BI-LO money it may have otherwise lost. A customer with a history of positive transactions allows BI-LO to cash the check with confidence.
   New fraud-fighting methods are available for online merchants as well. Dallas-based Paymentech is offering Internet and catalog merchants and other retailers that process transactions in a non face-to-face environment a new fraud management tool, merchant selectable response. The tool is available through Paymentech's Orbital suite of e-business solutions, which allows merchants to establish automated, secure online transaction processing.
   The merchant selectable response feature enables merchants to set automatic acceptance or rejection parameters for payments based on a combination of authorization codes, address verification and card number verifications for the transaction. Merchant selectable response is customizable ­ merchants can select which combination of verification codes they would like to receive ­ and they can change that selection at any time.