Fraudsters turn to the internet as chip and Pin reduces 'swipe' crime

Six months on from the mandatory introduction of chip and Pin cards, increasing theft on the internet is forcing banks and retailers to trial new technology to combat card fraud.

Although counterfeiting of cards and ID theft has fallen, fraudsters have continued to concentrate their efforts on 'card-not-present' (CNP) fraud - by phone, internet and mail - and are increasingly defrauding UK cardholders overseas, according to the Association of Payment Clearing Services (Apacs). Last year CNP fraud soared 21 per cent to £183m, according to Apacs, which compiles the figures, and continued to rise in the first half of this year.

'Chip and Pin has had an impact on domestic fraud in the first six months of the year with the number of losses from counterfeit cards and lost and stolen cards continuing to fall,' says Katy Worobec, head of fraud control at Apacs. 'Fraudsters are, however, migrating to other areas, in particular 'card-not-present' as well as non-chip and Pin environments outside of the UK.'

In an effort to combat the growing problem of online fraud, a number of high-street banks will start to offer customers hand-held devices early next year for use online. These will electronically generate a one-off password to be used in addition to the normal security checks carried out by a bank or retailer when someone logs into their account or shops online.

'The cardholder will put their card into a handheld reader, key in their Pin, the reader will then generate a one-time password to the retailer which the retailer can check with the card issuer,' says Worobec. 'These devices will be built to an industry standard so that card holders can use it with any bank.'

Barclays said last week that it was ready to roll out its version of the card reader in early 2007, and indications are that LloydsTSB, which has been trialling a similar device, will do the same.

Figures from Apacs show that 11 million chip and Pin cards were still to be issued by the end of June, only one million fewer than on 14 February. Unlike holders of chip cards, users of the old-style magnetic-stripe-only cards have no protection against 'skimming', when fraudsters clone the card at a cash machine equipped with a false front. However, even chip and Pin card holders are not protected against fraud once the duplicate card leaves the UK. 'Fraudsters are now taking the cloned cards to use overseas in countries where chip and Pin has not been introduced,' says Jemma Smith, spokeswoman for Apacs.

Despite an overall reduction in fraud, the introduction of chip and Pin has raised fears of 'shoulder surfing'. This is when fraudsters look over someone's shoulder while they input their Pin number and later steal their card.

Boots is trialling a new device that its University of Warwick designers say will combat this problem as well as making entering a Pin number easier for the visually impaired. The device looks similar to existing card readers except for a hood which incorporates a magnifying glass. Crucially, the device distorts the view available from any other angle by a casual observer or hidden cameras.

'We observed the point of sale and noticed how long people took to look for their glasses,' said Neil Radford, an Enterprise Fellow at the University of Warwick and co-designer of the product. 'For every additional second at the point of sale there is a net cost to the retailer, so if they can make that faster it can save them money.'

A major oil company has also agreed to trial the device, as has a UK bank.

Many cardholders with visual impairments or who are otherwise disabled are eligible for a 'chip and signature' card. The number of chip and signature cards in issue has increased by 10,000 since February, but some of the charities representing the elderly and those with disabilities complained last February that card issuers were not making customers aware they may be eligible for these cards, though this situation appears to have improved. 'We are representing one gentleman who approached the Norwich and Peterborough building society at the beginning of the year to get a chip and signature card - he is having to wait until September. We were having similar problems last year with a couple of the major banks, but these have been resolved,' says a spokesperson for the RNIB. N&P says it is launching chip and signature cards to all of its eligible customers next month.

Since the roll-out of chip and Pin there are also signs that banks and building societies are getting tougher on customers affected by fraud. 'We have seen a rise in the number of cases where a card provider is not willing to settle a dispute because they think in some way the consumer is involved,' said Emma Parker of the Financial Ombudsman Service. 'The additional technology inherent in chip and Pin has given banks more confidence that they can win a case.'

Often cases revolve around customers who have given someone their Pin as a one-off and that person has continued to use the card. Customers are often found negligent in these cases but the situation will depend on whether the card is a debit or credit card. Anyone who is a victim of fraud while using their credit card, even if negligent, is not liable for anything more than the first £50 of losses under the Consumer Credit Act.

Apacs says it is going to alter the Banking Code next year so it includes an industry standard set of guidelines on how customers should be treated if they claim they have been a victim of fraud.