7 ms·

One of the big issues with the credit card business is fraud. Fraud is around 1% of all credit card transactions. Fraud tends to be higher on online payments wh

One of the big issues with the credit card business is fraud. Fraud is around 1% of all credit card transactions. Fraud tends to be higher on online payments where the "card not present" rate that merchants pay is higher than the "card present rate" enjoyed by brick and mortar stores. In addition to fraud, credit card companies have to contend with the purchasing power of large companies (e.g., the Costco example ditching Amex) and also their own expenses as many people like concierge services and other "perks" that cost money and are becoming more standard on cards for people with higher credit and income. In practice, it's fairly difficult to offer much of an incentive beyond 2% cash back (which Fidelity Amex and the Capital One Visa Spark Card offer). However; these cards are closer to being loss leaders for their institutions as they want to incentivize you to do your banking with them as well (Fidelity does this fairly well as the cash back must be deposited into a Fidelity account). Charles Schwab was the first to have a 2% cash back card many years ago and they discontinued it, likely because they lost money on it. Travel-based rewards cards can get away with offering seemingly better incentives because of their margin. Starwood is a perfect example of this as hotels have a high fixed cost base and low variable cost base. The variable cost to stay at a high-end hotel is something like $50-60 per night if the room is vacant. So while Starwood seems to be paying out 2 cents on the dollar (e.g., 10,000 points for a $200 room), they are really only paying out 0.5 cents on the dollar. This is why the Starwood Amex is seemingly the best Credit Card. It's all about the economics of the company that brands it.

Scoundreller 11y ago
> Travel-based rewards cards can get away with offering seemingly better incentives because of their margin. They also de-value the points/miles on a regular basis and often expire them as well.
the_mitsuhiko 11y ago
> One of the big issues with the credit card business is fraud. Fraud is around 1% of all credit card transactions. Fraud tends to be higher on online payments where the "card not present" rate that merchants pay is higher than the "card present rate" enjoyed by brick and mortar stores. These are things that will change over time. 3DSecure is standard in Europe because the EU pushes transaction fees so low that credit card companies need to reduce fraud because they cannot afford it any more.
- lsc 11y ago
  Do consumers all have little usb smartcard things so they can use the smartcard to make online purchases? or does this mostly just make 'card present' transactions that much safer?
  - hrrsn 11y ago
    3D Secure basically redirects you to a webpage run by a third party (usually your bank) to enter additional details, like a seperate password. I find it much more annoying. My New Zealand (.co.nz) bank redirects me to a .co.uk domain with their logo (!!), where it doesn't even prompt me for any additional details, just forwards back to the original merchant.
    - lsc 11y ago
      huh. yeah, there's a 'verified by visa' thing that America has that is similar... I think it does some statistical something something. It sure looks a lot weaker than a public key transaction where the key never leaves the card. The 'verified by visa' site itself looks pretty fishy. In theory, a chip and pin solution where the user owns the reader is more secure than a transaction in the store where the vendor owns the reader. but, I guess that's too expensive and inconvenient or something.
      - cowsandmilk 11y ago
        "Verified by Visa" is 3-D Secure. https://en.wikipedia.org/wiki/3-D_Secure https://en.wikipedia.org/wiki/3-D_Secure
    - xyzzy123 11y ago
      It is likely that they are processing a risk score for your transaction, based on browser fingerprint, referer, ip, time of day and so on. That is, the "bounce" may not be entirely useless. If the risk score exceeds a certain threshold then they can then require additional security. While this may seem very weak, in practice a lot of fraud has pretty obvious signatures.
pbreit 11y ago
"Fraud is around 1% of all credit card transactions" No, card fraud rates are in the 5-20 basis point range (0.05%-0.2%).
- Artemis2 11y ago
  Do you have a source for that? I mostly hear about numbers around what your parent comments gives, or a bit over.
  - the_mitsuhiko 11y ago
    Some statistics from Europe: https://www.ecb.europa.eu/pub/pdf/other/4th_card_fraud_report.en.pdf https://www.ecb.europa.eu/pub/pdf/other/4th_card_fraud_repor...
  - pbreit 11y ago
    For example, from the Fed: "By number, the fraud rate for general-purpose cards was 3.60 basis points (3.60 unauthorized transactions per 10,000 transactions) and by value the fraud rate was 8.27 basis points." https://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf https://www.frbservices.org/files/communications/pdf/researc... Even the riskiest card-not-present/online merchant would rarely hit 1% or they lose their merchant account entirely. I'd be curious to see what numbers you're looking at.
    - Artemis2 11y ago
      I should clarify, I was only talking about online payments, which I know a lot better than physical transactions. From talking to some acquiring banks, I gathered that 1%-1.5% was the maximum fraud rate they would tolerate, depending on the value of your account. With fraud rates like that, you will not see volume discounts anytime soon either.
- nissehulth 11y ago
  It varies a lot depending on what kind of business you're running. For a typical e-commerce site, you could be right.
tyingq 11y ago
>>In addition to fraud, credit card companies have to contend with the purchasing power of large companies For online transactions, credit card companies have -0- liability for fraud. 100% of the costs come from the merchant's pockets. It's really a shame, because they are the ones with the broad access to data that would enable tools to reduce it. Of course, since there's no incentive on their end, nothing is provided.
- MichaelApproved 11y ago
  > 100% of the costs come from the merchant's pockets. I get that you're referencing the cash part of the transaction but the card companies still have to maintain code that detects fraud early, hire staff to support customers and investigate fraudulent transactions. That's not 0 cost to them.
  - chrischen 11y ago
    What's the incentive for them to do well on that part then?
  - tyingq 11y ago
    >>still have to maintain code that detects fraud early, hire staff to support customers and investigate fraudulent transactions In addition to sticking me with the bag for every online fraudulent transaction, they also levy an additional fee, which I assume offsets some or all of that cost. In fact, if it was a low-end purchase, they may make more on the chargeback fee than the original purchase. I see no evidence of "code that detects fraud early", at least for online transactions. Any merchants ever get a call from a cc company, or issuing bank saying "hey, you know that transaction we approved a few days ago? you might not want to ship that." ? Nope.
    - thaumasiotes 11y ago
      > I see no evidence of "code that detects fraud early", at least for online transactions. Any merchants ever get a call from a cc company, or issuing bank saying "hey, you know that transaction we approved a few days ago? you might not want to ship that." ? Nope. They definitely do do this. But when they see a likely-fraudulent transaction, they call the cardholder, not the merchant. I have received calls of this type.

Scoundreller 11y ago

> Travel-based rewards cards can get away with offering seemingly better incentives because of their margin. They also de-value the points/miles on a regular basis and often expire them as well.

the_mitsuhiko 11y ago

> One of the big issues with the credit card business is fraud. Fraud is around 1% of all credit card transactions. Fraud tends to be higher on online payments where the "card not present" rate that merchants pay is higher than the "card present rate" enjoyed by brick and mortar stores. These are things that will change over time. 3DSecure is standard in Europe because the EU pushes transaction fees so low that credit card companies need to reduce fraud because they cannot afford it any more.

lsc 11y ago
Do consumers all have little usb smartcard things so they can use the smartcard to make online purchases? or does this mostly just make 'card present' transactions that much safer?
- hrrsn 11y ago
  3D Secure basically redirects you to a webpage run by a third party (usually your bank) to enter additional details, like a seperate password. I find it much more annoying. My New Zealand (.co.nz) bank redirects me to a .co.uk domain with their logo (!!), where it doesn't even prompt me for any additional details, just forwards back to the original merchant.
  - lsc 11y ago
    huh. yeah, there's a 'verified by visa' thing that America has that is similar... I think it does some statistical something something. It sure looks a lot weaker than a public key transaction where the key never leaves the card. The 'verified by visa' site itself looks pretty fishy. In theory, a chip and pin solution where the user owns the reader is more secure than a transaction in the store where the vendor owns the reader. but, I guess that's too expensive and inconvenient or something.
    - cowsandmilk 11y ago
      "Verified by Visa" is 3-D Secure. https://en.wikipedia.org/wiki/3-D_Secure https://en.wikipedia.org/wiki/3-D_Secure
  - xyzzy123 11y ago
    It is likely that they are processing a risk score for your transaction, based on browser fingerprint, referer, ip, time of day and so on. That is, the "bounce" may not be entirely useless. If the risk score exceeds a certain threshold then they can then require additional security. While this may seem very weak, in practice a lot of fraud has pretty obvious signatures.

pbreit 11y ago

"Fraud is around 1% of all credit card transactions" No, card fraud rates are in the 5-20 basis point range (0.05%-0.2%).

Artemis2 11y ago
Do you have a source for that? I mostly hear about numbers around what your parent comments gives, or a bit over.
- the_mitsuhiko 11y ago
  Some statistics from Europe: https://www.ecb.europa.eu/pub/pdf/other/4th_card_fraud_report.en.pdf https://www.ecb.europa.eu/pub/pdf/other/4th_card_fraud_repor...
- pbreit 11y ago
  For example, from the Fed: "By number, the fraud rate for general-purpose cards was 3.60 basis points (3.60 unauthorized transactions per 10,000 transactions) and by value the fraud rate was 8.27 basis points." https://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf https://www.frbservices.org/files/communications/pdf/researc... Even the riskiest card-not-present/online merchant would rarely hit 1% or they lose their merchant account entirely. I'd be curious to see what numbers you're looking at.
  - Artemis2 11y ago
    I should clarify, I was only talking about online payments, which I know a lot better than physical transactions. From talking to some acquiring banks, I gathered that 1%-1.5% was the maximum fraud rate they would tolerate, depending on the value of your account. With fraud rates like that, you will not see volume discounts anytime soon either.
nissehulth 11y ago
It varies a lot depending on what kind of business you're running. For a typical e-commerce site, you could be right.

tyingq 11y ago

>>In addition to fraud, credit card companies have to contend with the purchasing power of large companies For online transactions, credit card companies have -0- liability for fraud. 100% of the costs come from the merchant's pockets. It's really a shame, because they are the ones with the broad access to data that would enable tools to reduce it. Of course, since there's no incentive on their end, nothing is provided.

MichaelApproved 11y ago
> 100% of the costs come from the merchant's pockets. I get that you're referencing the cash part of the transaction but the card companies still have to maintain code that detects fraud early, hire staff to support customers and investigate fraudulent transactions. That's not 0 cost to them.
- chrischen 11y ago
  What's the incentive for them to do well on that part then?
- tyingq 11y ago
  >>still have to maintain code that detects fraud early, hire staff to support customers and investigate fraudulent transactions In addition to sticking me with the bag for every online fraudulent transaction, they also levy an additional fee, which I assume offsets some or all of that cost. In fact, if it was a low-end purchase, they may make more on the chargeback fee than the original purchase. I see no evidence of "code that detects fraud early", at least for online transactions. Any merchants ever get a call from a cc company, or issuing bank saying "hey, you know that transaction we approved a few days ago? you might not want to ship that." ? Nope.
  - thaumasiotes 11y ago
    > I see no evidence of "code that detects fraud early", at least for online transactions. Any merchants ever get a call from a cc company, or issuing bank saying "hey, you know that transaction we approved a few days ago? you might not want to ship that." ? Nope. They definitely do do this. But when they see a likely-fraudulent transaction, they call the cardholder, not the merchant. I have received calls of this type.