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.

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.