U.S. banks losing ground on card security: report

By Ross Kerber

(Reuters) - U.S. banks are losing ground in the battle to combat credit and debit card fraud, a new report shows, underscoring the growing threat thieves and hackers pose for the financial system.

Globally, security is improving in the payment industry, according to data released this week by The Nilson Report, a California trade publication. For every $100 worth of credit and debit card transactions last year, 4.46 cents were lost to fraud worldwide in 2010, down from 4.71 cents in 2009.

But many of the security gains were at banks in Europe and Asia, which have adopted stricter security procedures such as issuing cards with computerized chips to help verify purchases, said Nilson Report publisher David Robertson.

Meanwhile, U.S. banks and merchants have balked at the expense of conversion. As a result, fraud in the United States accounted for 47 percent of global fraud losses last year -- up from about 46.5 percent in 2009 and 44 percent in the middle of the last decade, Robertson said.

"We have a disproportionate percentage of the global total, and a considerable part of that is because we have an old infrastructure," Robertson said in an interview. "The U.S. will account for a steadily rising share of the global total until it embraces chip-based card security."

Robertson said the trends reflect more than technical issues. For instance, some Asian financial institutions are more likely to decline a transaction that appears risky compared to U.S. institutions, which face more competition because their customers often carry multiple credit cards.

Total fraud losses worldwide were $7.6 billion in 2010, up 10 percent from 2009, his report found.

The banking industry has suffered from some high-profile breaches this year. Citigroup Inc <C.N> said in May that hackers broke into its network and seized data from some 200,000 Citi credit card holders.

Nonfinancial companies including Google Inc <GOOG.O> and Lockheed Martin Corp <LMT.N> also have suffered recent cyber break-ins, bringing scrutiny from regulators.

WIDER ADOPTION

Robertson's figures are in line with past trends, and he noted that the losses for U.S. banks are still manageable given how profitable their payment card operations have become. Retailers also lose far more to theft that does not involve payment cards, he added.

Still, banks in Europe and elsewhere have moved to deploy so-called "chip-and-pin" card systems that make it harder for thieves to produce counterfeit payment cards, a vulnerability for U.S. cards carrying data on magnetic strips.

After TJX Companies <TJX.N> suffered a massive breach at the hands of hackers that emerged at the start of 2007, executives at the retailer called for wider adoption of the chip-and-PIN cards.

U.S. merchants and banks will only spend the millions of dollars on such upgrades once it becomes worth their while, experts say.

According to Robertson's data, total global card losses have risen almost every year since 1994, when only about $1 billion was lost to card fraud.

But the everyday use of payment cards by consumers has also climbed, leading to a reduced fraud rate overall. Last year's losses of $7.6 billion were a small fraction of the $17 trillion that consumers worldwide transacted with plastic.

(Reporting by Ross Kerber; Editing by Richard Chang)