Meaning of liability shift

Liability shift is a way for card associations to reduce card fraud. The associations (Visa and MasterCard) insist on card companies issue cards that are chip cards. Chip cards are also referred to as smart cards. The information for the card account is held in the chip with a default for magnetic stripe.

With liability shift, associations like visa and MasterCard have insisted that card manufactures, card issuers and card acquirers get certified for EMV. All card participants must get on board and different regions all have different dates by which they have to have been certified. Banking in Kenya has also been affected by these developments in liability shift.

EMV certification is a very technical and expensive exercise. Most countries in Africa have missed the deadlines or will miss the deadline due to lack of capital resources to have EMV certification.

How liability shift works

Liability shift is a tool that is being used by the associations to ensure that the card industry is EMV certified which will reduce card fraud. The liability for fraud on a card is being shifted from the merchant to the issuer and acquirer. Where an issuer has give cards that are EMV or chip, these cards use Personal identification number (PIN) to verify card transactions.  Where a chip card has to default to magnetic stripe because the merchant POS or ATM is not EMV certified, the card transaction is verified using signature on a paper receipt.

Signature is less secure than PIN because the signature is not verified at the cardholders account level on the card management system. Pin verification means that the PIN keyed on the POS or ATM is verified by the card management system. Where the PIN is wrong, the transaction will not be authorised. Charge backs for EMV cards will be allowed for most reasons where the merchant is not ENV certified.

How liability shift affects you

As a individual cardholder, the liability shift does not affect you. If you have a corporate card, the liability shift migration does not affect you either. As a card issuer, if your cards are not Chip, you will have a problem of having merchants that accept your cards because merchants will not want to accept card transactions from non-EMV cards. As merchants and Acquirers, liability shift is very important because if the POS and ATMs are not EMV certified, charge backs on transactions become the responsibility of the Merchant or acquirer.

Issuers, acquirers and card processors must ensure that they comply with the associations to become EMV compliant within the given time frames. Failure to comply will mean losses as the liability shift for charge backs will act as income leakages leading to failed, bankrupt and closed card companies.

What is a Virtual Credit Card

Over the years this has been hampered by hackers who have used the system to fraud the online purchasers using the information they have obtained from the credit cards hence the introduction of the virtual credit card. A virtual credit card is a card which is a replica of the actual credit card and which a user can generate it online. This virtual credit card generated will only be used to make online purchase and not any other purchases. Like any other credit card the person must apply for this virtual credit card. All credit and lending elements will be taken into consideration by the company offering the virtual credit card.

The main characteristics of the virtual credit card which differentiate it from the physical credit card are as follows:

1. Virtual credit cards are only used for online purchases; one cannot make any other purchases using this card.
2. Virtual credit card may be a temporary card which can only be used to make this online purchase once and will not be used again as it will have expired once the transaction is successful.
3. Every-time one wants to make online purchases, then they have to enter the actual credit card information and a new number is generated for the virtual credit card which can then be used.
4. The virtual credit card does not reveal the actual account number and the account details of the actual credit card. These details are only visible to the account holder and the actual credit card provider.
5. The virtual credit card number which is generated and which can be seen is temporary and also useless and cannot be used to access the actual credit card account.
6. The virtual credit card since it generates a temporary number for a particular online purchase therefore there is no information and details of the actual credit card account. This ensures that the actual credit card is not used for fraud.

 Conclusion on virtual credit card

Since the world has become a global village, the introduction of the virtual credit card has brought a great revolution to online purchases. Curbing of fraud which had really been on the increase has also been enhanced by ensuring good data security systems while also giving the freedom to purchase online. Virtual credit card has revolutionised the concept of cards and their usage in this age.

Management of Credit Card Risks in Kenya

Credit Card Risks in Kenya

Credit card companies rely very heavily on the credit scoring bureaus and the information that is given on the application forms. Rarely do the card companies engage credit card risks management firms to assess the risks of running the cards business they engage in. The credit card risks are also not usually managed by the financial institutions’ risk management units. The banking industry in Kenya and indeed in the world has not appreciated the nature of credit card risks.Credit card applications are one area where credit card risks are most prevalent.

Prudent management of Credit card risks in Kenya -The Application screening process.

The cardholder is required to complete an application form for which he signs that the information he has availed to the card company is correct. It is not usual to have the cardholder do a face to face interview for a credit card. Where an application is suspect, the application is declined and usually the applicant is not interviewed or arrested. Information of this fraudulent application may not be sent to the credit reference bureau. This means the applicant would just approach another financial institution.

We have many cases where the applications with credit card risks are approved as the applications are not well screened. The staffs that are screening application forms do not understand credit cards risks and so do not know what to look out for. The management of credit card risks requires training, experience and also exposure to real life cases and/or case studies on the same.

When not adequately screened and monitored, many fraudulent applications are successfully processed. This is a major revenue leakage and more so because the credit card may never even be paid for since the applicant is fraudulent.

Credit card risks in Kenya and the role of credit rating bureaus

Financial institutions should ensure to make use of credit rating or scoring bureaus to ensure that they catch some of the fraudulent applications before credit cards risks are experienced by the bank. Prevention is definitely better than cure. The credit reference bureaus have to ensure that they keep updated and accurate information in their data. If the integrity of the bureaus is compromised, then credit card risks management would become harder to frustrate and contain to manageable levels.

It is therefore extremely important for the financial institutions to consider the losses they incur due to weak or nonexistent credit card risks in Kenya management department or unit that is involved in vetting credit card application forms.

Fraud may be corruption, theft, misuse of funds, insider trading, tax evasion counterfeiting, forgery, conflict of interest to name but a few.

Why is fraud committed

There are three main reasons why fraud is committed. These are Motive, Rationalization and Opportunity.

Motive to commit fraud

Motive means the reason behind the action. In banking fraud, fraudsters are motivated by

• Greed because they want to have it all and more that anyone else
• Peer pressure especially where the peers have done very well financially
• Personal financial difficulties like gambling, drug abuse or alcoholism, habits that must be supported and which are very expensive.
• Revenge or grudges will motivate one to commit fraud
• Dishonesty or perceived behavioural norm
• Intimidation or threats will lead you to commit fraud because of fear
• Unrealistic targets that cannot be achieved
• Lenient penalty given to those who have been caught committing fraud will encourage others to attempt fraud since they will get away lightly

Rationalisation of fraud

These are the excuses we give to get away with our actions.

• Fun. Fraud is sometimes explained as a game by those who are fraudulent
• Taking from the rich to give and distribute to the poor. Fraud is excused as a way to ensure that there is equal distribution of wealth, so it is not wrong
• It is the order of the day and everybody is doing it. So to be like everybody else, you must join in the action.
• I will not be caught and so I will go ahead and continue with the activity. Sometimes you may think that nobody will ever know what you have been doing
• I am testing the system and control is a good excuse. The results of the fraudulent activity are never disclosed to the authorities in the bank after the ‘testing’ has succeeded
• I am being underpaid and so I must get my cut or fair pay even if I have to commit fraud to get even.

Opportunity for Fraud

• Absence of procedures. The rules that govern how the company is run are not there so the employees and the customers do what they want or think should be done. There is no precedence which creates opportunities for fraud to be perpetrated
• Inadequate or lapses in controls though better than having any procedures, is still lacking since fraud can still be perpetrated easily
• Inadequate supervision or lax management. When the management is not alert or too harassed to adequately supervise the staff and ensure the procedures are adhered to, fraud opportunities are created.
• Inadequate auditing procedures, control checks and surprise checks will lead to creation of fraud opportunities. The bank must ensure that checks are done periodically.
• Inadequate training and knowledge. Without knowledge the opportunities to commit fraud are unlimited since the fraud detection mechanism is also absent
• Inadequate staff hiring practises to ensure vetting of prospective employees. The Human resources department must ensure that the employees are vetted adequately to filter out the undesirable staff compliment.
• Inadequate physical security. It is very important that the bank ensures that physical security like safes, locks, security cameras and security guards etc are available and working. Physical security discourages fraud opportunities

Banks and other organisation must ensure that they put in place measures to counter fraud and reduce their loses.