Fraud is one of the major ethical issues in the credit card industry. The main aims are, firstly, to identify the different types of credit card fraud and secondly, to review alternative techniques that have been used in fraud detection. The sub-aim is to present, compare and analyze findings in credit card fraud detection. This project defines common terms in credit card fraud and highlights key statistics and figures in this field. Depending on the type of fraud faced by banks or credit card companies, various measures can be adopted and implemented. The proposals made in this report are likely to have beneficial attributes in terms of cost savings and time efficiency. The significance of the application of the techniques reviewed here is in the minimization of credit card fraud. Yet there are still ethical issues when genuine credit card customers are misclassified as fraudulent.
For some time, there has been a strong interest in the ethics of banking (Molyneaux, 2007; George, 1992), as well as the moral complexity of fraudulent behavior (Clarke, 1994). Fraud means obtaining services/goods and/or money by unethical means, and is a growing problem all over the world nowadays. Fraud deals with cases involving criminal purposes that, mostly, are difficult to identify. Credit cards are one of the most famous targets of fraud but not the only one; fraud can occur with any type of credit products, such as personal loans, home loans, and retail. Furthermore, the face of fraud has changed dramatically during the last few decades as technologies have changed and developed. A critical task to help businesses, and financial institutions including banks is to take steps to prevent fraud and to deal with it efficiently and effectively, when it does happen (Anderson, 2007). Anderson (2007) has identified and explained the different types of fraud, which are as many and varied as the financial institution’s products and technologies, as shown in Figure 1.
The main aims are, firstly, to identify the different types of credit card fraud, and, secondly, to review alternative techniques that have been used in fraud detection. The focus here is in Europe, and soethical issues arising from other cultures are not taken into account; but for a discussion of these the reader is referred to Chepaitis (1997) and Gichure (2000). Indeed, transaction products, including credit cards, are the most vulnerable to fraud. On the other hand, other products such as personal loans and retail are also at risk, and have serious ethical implications for banks and credit card companies. Credit card fraud may happen in various ways, which depend on the type of fraud concerned; it encapsulates bankruptcy fraud, theft fraud/counterfeit fraud, application fraud and behavioral fraud. Each of these sub-fraud categories has its own definition and specificity. Techniques to fight against those are reviewed, and examples from European markets are presented.
Euromonitor International (2006) stated that, impressively, 120 million cards (i.e., debit cards, credit cards, and charge cards) were brought into use in 2004 in Germany, and that the total transaction value generated by cards reached some €375 billion in 2004, up nearly 4% from 2003, including cash withdrawals. Because of the increasing usage of cards for payments, the amount spent on sales and internet purchases with any kind of cards has jumped by 5% reaching €170 billion. However, cash withdrawals faced a lower growth. Those new patterns in customer payment behavior are probably correlated assuming that customers substitute cash payments for card-payments (Euromonitor International, 2006).
Focusing on the credit card business, in the German market, for example, the word “Kreditkarte” refers to both charge cards and credit cards. There is no clear distinction between the two, whereas in English the different products have their own terms. To distinguish between the two products, debit card and credit card, credit card banks have offered the possibility to their customers to revolve their credit through credit cards. This service or credit is also a way to attract them. However, even if customers have the possibility to revolve credit, not all of them use this service. Nevertheless, in 2004, credit cards enjoyed a faster growth than charge cards (Euromonitor International, 2006).
In 2005, as shown in Figure 2, the market of transaction products in Europe is split into two groups. The credit card group leads the market. This group includes some of the following countries: Spain, Belgium, Italy, and Greece. In two countries, credit cards have no competitors in terms of transaction product. Those two countries are the United Kingdom and Ireland. On the other hand, another group of country uses mostly debit cards; it is especially the case for Sweden. However, for this group, the standard deviation between the two types of transaction product is less visible than for the other group. As to Germany, for example, the German market appears to be underserved by credit cards. Indeed, payment by cards has been increasing in the German market over the past few years. The market for credit and charge cards is forecast to grow by 23.3% from 2004 to 2009, to reach a value of €56,477 million (Euromonitor International, 2006).
With this extensive use of credit card, fraud appears as a major issue in the credit card business. In the European Union, the first signs could have been seen in the United Kingdom in the 90s. In fact, total losses through credit card fraud in the United Kingdom have been growing rapidly (1997, 122 million; 1998, £135 million; 1999, £188 million; 2000, £293 million [Association for Payment Clearing Services London (APACS), no date]. Yet, in 2006, APACS reported £423 million losses, a decrease of nearly £80 million over the previous two years. The main reason for this improvement is the success of chip & PIN that has led to a decrease of face-to-face fraud. However, if mail-non-receipt fraud and lost and stolen card fraud are decreasing, counterfeit card fraud and card-not-present (CNP) fraud are increasing although they are increasing at £reducing rates (APACS, no date).
The explosion of credit card fraud is not only due to the constant increase of card usage but also to the ease of perpetuating credit card fraud. The complexity of credit card fraud is that it may be committed in various ways, including theft fraud, application fraud, counterfeit fraud, bankruptcy fraud. In 2005, stolen and counterfeit frauds dominated the European fraud market, as shown in Figure 3. By not paying enough attention to fraud prevention or detection, the risk for the bank is that “credit card fraud remains usually undetected until long after the criminal has completed the crime” (Caminer, 1985; Bolton & Hand, 2001). Therefore, it will generate irrecoverable costs for the bank.
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