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Credit Card Fraud: A New Perspective On Tackling An Intransigent Problem

ABSTRACT1 This article offers a new perspective on battling credit card fraud. It departs from a focus on post factum liability, which characterizes most legal scholarship and federal legislation on credit card fraud and applies corrective mechanisms only after the damage is done. Instead, this article focuses on preempting credit card fraud by tackling the root causes of the problem: the built-in incentives that keep the credit card industry from fighting fraud on a system-wide basis. This article examines how credit card companies and banks have created a self-interested infrastructure that insulates them from the liabilities and costs of credit card fraud. Contrary to widespread belief, retailers, not card companies or banks, absorb much of the loss caused by thieves who shop with stolen credit cards. Also, credit card companies and banks earn fees from every credit card transaction, including those that are fraudulent. In addressing these problems, this article advocates broad reforms, including legislation that would mandate data security standards for the industry, empower multiple stakeholders to create the new standards, and offer companies incentives to comply by capping bank fees for those that are compliant, while deregulating fees for those that are not compliant. INTRODUCTION Credit card fraud, which is the use of another person's credit card or credit card information for the purpose of stealing, offers criminals one of the fastest routes to riches today. The windfalls, which can reach into the millions of dollars,2 have attracted a broad spectrum of criminals, ranging from foreign organized crime groups3 to local street gangs, such as the Los Angeles Crips.4 The problem has reached epidemic proportions. Credit card fraud exceeded $3.2 billion in 2007,5 which is thirty-five percent higher than in 2003. 6 One expert estimates that as many as "[h]alf of all credit card numbers are in the hands of organized criminals" and that "[h]alf of all computers have some form of malware on them,"7 or malicious software that infiltrates a computer program, records keystrokes, detects account numbers and credit card data, and sends this data to the hacker without the victim's knowledge. Credit card fraud can lead to identity theft,8 the cooption of another individual's personal information that is subsequently used to obtain new credit cards or bank accounts in the victim's name, costing the victim time, money, and aggravation, as well as damaging his or her credit history.9 Credit card fraud can also take a major toll on businesses. One study of 45 mid- to large-sized companies found that cybercrime cost each of them an average of $3.8 million per year.10 These figures do not include the staggering secondary costs of fraud, which can include a loss in stock value," litigation,12 and payment for the reissuing of breached credit cards.13 A. THE CRUX OF THE PROBLEM There has been an outpouring of creative ideas on how to curb credit card fraud, including many ideas from legal scholars and federal lawmakers. Few of these, however, focus on what we regard as the crux of the problem: the incentives built into the credit card industry14 to merely contain credit card fraud at "comfortable" levels rather than to attack it directly on a system- wide level. The credit card companies15 and banks have engineered an infrastructure designed for their selfbenefit that insulates them from the true costs of credit card fraud, thereby blunting their incentives to vehemently fight fraud. Few people realize that retailers - not card companies or banks - absorb much of the loss16 caused by scammers who shop with stolen credit cards.17 The banks that issue credit cards may appear to pay for fraud because they cover cardholders' unauthorized expenses. In fact, however, they pass many of these losses back to the retailer who sold the goods to the criminal. Further, the card brands18 and banks collect fees from every credit card transaction, regardless of whether it is fraudulent. …