Amex Aims to Outsmart Counterfeiters

Stung by a sharp rise in counterfeiting, American Express is fighting back with tools designed to thwart credit card scams.

Bogus cards now make up the biggest category of fraud at Amex, accounting for 29 percent of losses, up from only 5 percent in 1990. By contrast, use of "lost" or stolen cards, which made up 54 percent of fraud losses in 1990, has fallen to just 22 percent this year.

South Florida is the source of 45 percent of card fraud, placing it ahead of the combined total for the U.K. and Japan, and earning it the nickname "Skim City." The New York/New Jersey region places a distant second at 20 percent, followed by California at 12 percent. Restaurants are the most common point of compromise (38 percent), followed by gas stations (27 percent), retail stores (15 percent) and hotels (4 percent).

Unfortunately, the problem won't go away on its own. "The growth rate of counterfeit skimming has slowed, but I would not write it off as being a threat," said G.P. Singh, vice president of fraud risk management at American Express, speaking at a risk management symposium sponsored by Retail Decisions.

Eliminating that threat will likely require the participation of industry participants across the payment landscape. Long-term solutions may involve either chip-based cards or a "magna" solution that derives a unique identifier from a magnetic stripe card. "Both are extremely expensive to implement," said Singh. "We're going to have to do one or the other-there isn't a business case for both."

The magna solution relies upon the physical properties of the magnetic card, which apparently has a unique fingerprint based on magnetic particle noise. "It is repeatedly and reliably detectable," said Singh. "This represents a strategic long-term opportunity."

To implement a magna solution, card issuers would have to scan and record each new card's magnetic fingerprint at the point of issuance. Then, authentication would require point-of-sale terminals to include magna readers. Even if the magnetic fingerprint were compromised through eavesdropping or other means, it would be difficult to clone it onto a counterfeit card; it's much more than just an embossing job.

But chip-based smart cards have their own tangible benefits. "Smart cards, from what we know today, are almost impossible to compromise," said Singh. "The problem is the high cost of implementation. The cost of upgrading point-of-sale infrastructure-it's almost prohibitive."

In the meantime, Amex has relied upon other types of innovation to help its merchants. For example, cashiers at a major electronics retailer have begun to capture the printed Card Identification Number (CID) at the register for real-time authentication. Consequently, fraud losses were reduced by over 95 percent across 600 retail establishments.

As the largest issuer and acquirer, American Express is uniquely positioned to observe the information flow between issuer, acquirer, cardholder and merchant-a big benefit when it comes to fighting fraud. "It's become an absolute necessity to leverage all four constituents of the network," said Singh. "Within our environment, we have the benefit of sitting in the middle of it all."

Still, thieves are smart and determined, and adept at using technology. For example, Singh describes a card skimmer with built-in memory for 100 stolen card numbers, which dishonest employees use to steal card numbers from customers. "You can actually build this in your garage," said Singh.