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European Card Fraud: Winners and Losers

Martin-Warwick

How Fraud Technology Has Changed Criminal Activity
By Martin Warwick, FICO

The past five years have been a time of enormous upheaval for Europe’s banking industry, and this is particularly true in the area of credit fraud. Technology has brought about real change in the card fraud landscape, altering the types of attacks, the volume of crime and the countries targeted.marin global banking finance

To show these changes, FICO just released an interactive fraud map at www.fico.com/fraud europe. Based in part on data from Euro monitor International, this map shows changes in fraud type and amount, by country, from 2006-2011. Here are some of the biggest changes observed.

Fraud Levels Stay High in Europe as Criminals Seek New Opportunities
Fraud across Europe increased after 2006, peaking in 2008. However, 2011 levels are still high, at €121 million more than in 2006. A notable exception is the UK, which accounted for 45% of the total in 2006 and now accounts for 29% (a reduction of €177 million). This shows that criminals have shifted their focus to new opportunities within Europe as anti-fraud measures in the UK become stricter. Some countries have seen greater migration than others but none have been left untouched.

Another major area of attack is the card not present (CNP) environment, where criminals make use of Internet channels that carry less risk than being present in a shop when making a fraudulent purchase. Response to the CNP threat has been slow because most amounts lost by financial institutions are recoverable under Visa and Mastercard’s scheme regulations. Therefore, with no business case for addressing the threat – unlike counterfeit fraud losses, which go straight onto the bank’s P&L accounts – we now see that criminals are taking advantage of this channel while lenders have little incentive to fix the problem. The introduction of the 3D Secure protocol for online transactions has begun to shift CNP liability to the issuer in an attempt to close this gap.

Fraud Mix Evolving as Countries Crack Down on Traditional Threats
Following the UK’s introduction of Chip & PIN in 2006, many card fraudsters migrated to other regions, particularly France and Germany, with the latter seeing a 123% increase in fraud levels, for example.

The type of fraud attack typically attempted has changed significantly as the rollout of EMV Chip standards start to take effect on ‘face to face’ point of sale transactions.  Fraudsters have moved away from counterfeit skimming in Europe and migrated to cross-border attacks where non-EMV ATMs still exist in plentiful supply. These numbers are confirmed by FICO’s own analysis on 55 million active credit cards represented in the FICO® Falcon® Fraud Consortium for Europe, which showed that counterfeit fraud fell 60% between March 2009 and March 2011.

Card not present (CNP) fraud accounts for two thirds of total fraud and is likely to be a symptom of the industry not having had a well-enough defined fraud detection and prevention strategy in place at the time when the counterfeit solution was developed.

It is also interesting to note the difference in customer liability rules across the region, as this can play a major role in fraud control.  The UK’s consumer credit law protects consumers against fraud by stating that the bank is the loser and the cardholder only has to report that a transaction on their card is not their own.  However, Turkey has no such laws, driving a different attitude to fraud from the customer. The customer is seen to have a duty of care and so is more proactive in reporting fraud immediately to avoid liability being placed on them. Customers working with the banks make for an improved detection and prevention capability, as illustrated by Turkey’s low fraud rates.fraud map bankin europe

European Fraud Threat May be Greater Than It First Appears
The card industry often measures fraud threat levels in terms of ‘basis points’. A basis points level of 5 or less reflects a relatively low threat level from card fraud across the country. Between 5 and 10 basis points indicates a country may be seeing fairly active card fraud, with some issuers and card producers perhaps suffering more than others. Above 10 basis points indicates a significant fraud threat, requiring immediate attention from executive management at card issuers and lenders in the region.

However, basis points should not be considered in isolation. A country with relatively low basis points at a given time may still be vulnerable if fraud levels are increasing overall.

Two examples will illustrate this point. The UK, with around 5 basis points of fraud losses, has seen a massive change in its fraud losses over the last couple of years as a ‘tough on fraud stance’ has been fully embedded across all the banks. The UK had its lowest losses last year for a decade, and comparing 2011 to 2006 sees a downward trend of 30% while European fraud levels have increased by 10%. Every fraud type is down, with some significant reductions in areas such as counterfeit fraud, which peaked in 2008 when skimming and cross-border fraud took its toll on UK banks. However, policy and strategy were ramped up as banks made full use of the detection systems they had in place and migrated fraud attacks away from their products.

By contrast, Germany has a lower basis point level, at 2.7, but has actually seen fraud rocket by 143% in the same period. In 2006, it represented just 4% of the total fraud for the countries listed, but by 2011 that had increased to 10%. Criminals have identified a great opportunity to target a country which has a large number of plastic cards. Card not present (CNP) fraud makes up 60% of Germany’s fraud and this has grown by over 300% since 2006. Card fraud losses did drop between 2010 and 2011, as leading issuers fought back by adopting best-in-class fraud detection  to combat the larger threat from cross-border skimming.fraud map europe 2012

The make-up of a country’s card landscape should also be taken into account. For example, Germany’s credit card market was close to 100 basis points in 2011, but the domestic debit card market, which is much larger and suffers proportionately less fraud, balanced this out to give a healthier overall picture.

These considerations show that fraud threats can be like an iceberg, seeming reasonably minor at first glance. However, it can be quite different when you dive below and see the dangerous outcrops that are hidden under the surface.

Data provided by Euromonitor International. Source: FICO Evolution of Card Fraud in Europe, www.fico.com/fraudeurope. © 2012 Fair Isaac Corporation.

Martin Warwick is a principal consultant at FICO for Europe, the Middle East and Africa. To explore the interactive European fraud map, go to www.fico.com/fraudeurope.

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Economic recovery likely to prove a ‘stuttering’ affair

Economic recovery likely to prove a ‘stuttering’ affair 1

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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European trading firms begin coming to terms with the new normal

European trading firms begin coming to terms with the new normal 2

By Terry Ewin, Vice President EMEA, IPC

In recent weeks, the phrase ‘never let a good crisis go to waste’ has received a large amount of usage. Management consultancies, industry associations and organisations, including the Organisation for Economic Co-operation and Development (OECD) have all used it in order to discuss how the current crisis, caused by the Coronavirus pandemic, presents an opportunity for new and worthwhile change.

The saying is also commonly used to indicate that the destruction and damage that is caused by a crisis gives organisations the chance to rebuild, and to do things that would not have previously been possible. This has the potential to impact financial trading firms, where projects that this time last year would not have made much sense now appearing to be as clear as day. In Europe, banks and brokers alike are beginning to think about what life will look like post-pandemic, and how their technology strategies may need changing.

We can think of three distinct phases when it comes to a crisis. Firstly, there is the emergency phase. This is followed by the transition period before we come to the post-crisis period.

Starting with the emergency phases, this is when firms are in critical crisis management mode. Plans are activated to ensure business continuity, and banks and brokers work to ensure critical functions can still take place so as to continue servicing their clients. With regards to the current crisis period, both large and small European banks and brokers were able to handle this phase relatively well, partly due to the fact that communications technology has reached the point where productive Work From Home (WFH) strategies are in place. For example, cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders from across the continent to keep working throughout lockdown. From our work with clients, we know that they were able to make a relatively smooth transition to WFH operations.

In relation to the current coronavirus crisis, we are in the second phase – the transition period. This is the stage when financial companies begin figuring out how best to manage the worst effects of the ongoing crisis, whilst planning longer-term changes for a post-crisis world. One thing to note with this phase, is that no one knows how long it will last. There is still so much we don’t know about this virus. As such, this has an impact on when it will be safe for businesses to operate in a similar way to how they were run in a pre-pandemic world. But with restrictions across Europe starting to be eased, there is an expectation that companies will start to slowly work their way towards more on-site trading. For example, banks are starting to look at hybrid operations, whereby traders come in a couple of times a week, and WFH for the rest of the week. This will result in fewer people in the office building, which makes it easier to practise social distancing. It also means that there is a continued reliance on the technology that enables people to WFH effectively.

Finally, we have the post-crisis period. In terms of the current crisis, this stage is very unlikely to occur until a vaccine has been developed and distributed to the masses. Although COVID-19 has caused mass economic disruption, many analysts are predicting a strong rebound once the medical pieces of the puzzles are put into place. It may not be entirely V-shaped, but the resiliency displayed by the financial markets thus far suggests that it will be healthy.

Currently, many European trading firms are taking what could be described as a two-pronged approach.

The first part of this consists of planning for the possibility of an extension to phase two. Medical experts have suggested that there could be some seasonality to the virus, with the threat of a second wave of COVID-19 cases in the Autumn meaning that the risk of new restrictions remains. If this comes to fruition, there would be a need for organisations to fine-tune their current WFH strategies and measures, and for them to take greater advantage of the cloud so as to power communications apps.

The second component consists of firms starting to think about the long-term needs of their trading systems. Simply put, they are preparing themselves for the third phase.

It is in this last sense, that the idea of never letting ‘a good crisis go to waste’ resonates most clearly.

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Currency movements and more: How Covid-19 has affected the financial markets

Currency movements and more: How Covid-19 has affected the financial markets 3

The COVID-19 pandemic has been more than a health crisis. With people forced to stay indoors and all but the most essential services stopped for multiple weeks, economies have suffered and financial markets have crashed. Perhaps the most public and spectacular fall from grace during the early stages of the pandemic was oil. With travel bans in place around the world and no one filling up at the pumps, the price of oil plummeted.

Prior to global lockdowns, US oil prices were trading at $18 per barrel. By mid-April, the value had dropped to -$38. The crash was not only a shocking demonstrating of COVID-19’s impact but the first time crude oil’s price had fallen below zero. A rebound was inevitable, and many traders were quick to take long positions, which meant futures prices remained high. However, with stocks piling up and demand sinking, trading prices suffered. Unsurprisingly, it’s not the only market that’s taken a knock since COVID-19 struck.

Financial Markets Fluctuate During Pandemic

Shares in major companies have dipped. The Institute for Fiscal Studies compiled a round-up of price movements for industries listed by the London Stock Exchange. Tourism and Leisure have seen share prices drop by more than 20%. Major airlines, including BA, EasyJet and Ryanair have all been forced to make redundancies in the wake of falling share prices. The automotive industry has also taken a knock, as have retailers, mining and the media. However, in among the dark, there have been some patches of light.

The forex market has been a mixed bag. As it always is, the US dollar has remained a strong investment option. With emerging markets feeling the strain, traders have poured their money into traditionally strong currency pairs like EUR/USD. Looking at the data, IG’s EUR/USD price charts show a sharp drop in mid-March from 1.14 to 1.07. However, after the initial shock of COVID-19 lockdowns, the currency pair has steadily increased in value back up to 1.12 (June 25, 2020). The dominance of the dollar has been seen as a cause for concern among some financial experts. In essence, the crisis has highlighted the world’s reliance on it.

Currency Movements Divide Economies

Currency movements and more: How Covid-19 has affected the financial markets 4

In any walk of life, a single point of authority is dangerous. Indeed, if reliance turns into overreliance, it can cause a supply issue (not enough dollars to go around. More significantly, it could cause a power shift that gives the US too much control over economic policies in other countries. Fortunately, other currencies have performed well during the pandemic. Alongside USD and EUR, the GBP has also shown a degree of strength throughout the crisis. However, these positive movements haven’t been shared by all currencies.

The South African rand took a 32% hit during the early stages of the pandemic, while the Mexican peso and Brazilian real dropped 24% and 23%, respectively. Like the forex market, other sectors have experienced contrasting fortunes. Yes, shares in airlines and automotive manufacturers have fallen, but food and drug retailers have seen stocks rise. In fact, at one point, orange juice was the top performer across multiple indices. With the health benefits of vitamin C a hot topic, futures prices for orange juice jump up by 30%. The sudden surge had analysts predicting 60% gains as we move into a post-COVID-19 world.

Looking Towards the Future through Financial Markets

The future is always unknown and, due to COVID-19, it’s more uncertain than ever. However, the financial markets do provide an indication of how things may change. The performance of USD and EUR in the forex markets suggest there could be a lot more trade deals negotiated between the US and Europe. The surge in orange juice futures suggest that health and wellness will become a much more important part of our lives. Even though it was already a multi-billion-dollar industry, the realisation that a virus can alter the face of humanity has given more people pause for thought.

Then, of course, there’s the move towards remote working and socially distance entertainment. From Zoom to Slack, more people will be working and playing from home in the coming years. The world is always changing, but recent have events have made us appreciate this fact more than ever. The financial markets aren’t a crystal ball, but they can offer a glimpse into what we can expect in a post-COVID-19 world.

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