In 2003, retailers may be able to reap the benefits of a continuing credit card price war. But it could come with added responsibilities and expenses for preventing fraud.
In the historic give-and-take relationship that most retailers have with their credit card service providers, few offer much hope for transaction fee relief. Some foresee change with recent aggressive pricing moves by American Express, Citibank's Diners Club and Carte Blanche. Those who anticipate a price war believe that long-standing price leaders Visa and MasterCard will cut rates to maintain a strong price advantage over smaller competitors.
Another key issue in the card arena is an impending battle pitting ATM-like cards against traditional credit cards. Customer PINs are considered better fraud-fighters than written signatures (a credit card's ID of choice). So why aren't the security-concerned credit card service providers pushing PIN usage? The credit card players don't control the debit networks; Star, NYCE and others do.
"The card issuers make a lot more money with a signature than with a PIN," explains Aaron McPherson, an IDC payment systems analyst and research manager. Perhaps even more importantly, McPherson adds that "the card issuers make more money off the signature than they lose from the higher rate of fraud."
This trend greatly concerns the traditional credit card players. If anybody doubted it before Visa's revelation that 2002 was the first year ever where debit transactions accounted for more money than those involving credit cards, they don't now.
While retailers traditionally hold little leverage against the massive credit card providers, the smarter ones will try to create leverage. The first-tier credit card players will be pitted against the second-tier players, or the credit card community will be positioned against the ATM folks.
This, of course, is not to say that retailers are going to be passive in the face of the upcoming battle. Many have already partnered with suppliers of fraud-prevention devices to help curb fraud-related losses.
Two months ago, the Army and Air Force Exchange Service (AAFES) formally implemented FraudWatch, Triversity's Web-based fraud and policy violation detection system. FraudWatch, which requires no additional hardware, is designed to reveal the sources of POS-related shrinkage, whether card-related or due to employee theft or other factors.
After a test run in 250 stores last year, AAFES rolled out FraudWatch at 1,200 stores in 32 countries a process that took only six months. The quick implementation and the system's flexibility were among the major reasons the retailer turned to Triversity. AAFES required a Web-enabled solution to distribute information easily and quickly to its loss-prevention professionals.
G+G Retail, a chain of 500 junior-specialty stores across the United States, also tapped Triversity's FraudWatch and slashed its shrinkage rate by a significant 34 percent.
"Before FraudWatch, the average cash refund fraud loss was $1,159. Now, it's just $129 a cost savings of more than $1,000 per incident," says G+G Retail director of loss prevention Cecil Frazier.
Identico Systems has also helped retailers reduce fraud, particularly those in the supermarket category. Attempting to "verify the person, not the paper," Identico's True ID system puts a face on every transaction by scanning, collecting and storing information from every photo ID in an electronic database. The next time that customer comes into the store, his or her ID is matched against the previously scanned information.
Hy-Vee, a 216-store midwest-based supermarket chain with annual sales of $3.8 billion, implemented True ID last year and gives it strong reviews. "It has helped us meet our goal of reducing losses simply by acting as a deterrent," says Dan Kozah, Hy-Vee's director of safety and security