Take inventory in a store. The retailer locks up working capital to finance this inventory. Over time, some items become obsolete, some items are pilfered, some items cross their sell by date – all of which increase operating costs. Sounds like inventory is evil. But you can’t be in the retail business without inventory.
The situation is almost similar with credit card fraud. While fraud is not good, you can’t do credit card business without accepting some level of fraud.
There’s this old joke in the credit card industry:
A man loses his credit card. He’s totally unperturbed and goes about this life normally. A friend asks him why he has not reported the loss to his bank. He tells his friend, “the thief spends less than my wife”.
Although this joke is politically incorrect in the current zeitgeist, it makes a point that’s relevant even today: Fraud is not always bad.
Credit card fraud happens when Paul uses Peter’s credit card without Peter’s authorization. Preventing fraud would mean ensuring that Paul is not able to use Peter’s credit card. To do that, a process would need to be put in place to ensure that a credit card is being used by the owner of the credit card whose name is printed on the credit card. Such a process would entail a lot of things including identity verification. It would introduce extra steps in the checkout process, which is the moment of truth in sales, the stage at which a buyer hands over money or not. These steps cause friction, delay, lost business when the verification fails due to a glitch in the process, reputation loss when the genuine user of the credit card is declined the use of the credit card, and other problems. These problems introduce a cost.
While fraud has a cost, preventing fraud doesn’t come free.
Prudence lies in limiting fraud to the level at which the cost of preventing fraud exceeds the cost of fraud. With the prevalent technology and process, the only way to totally prevent fraud is to shut down the credit card business.
Globally, losses due to credit card fraud are less than 0.1% of transaction volume. I don’t have the figures for India but, due to tighter identity verification processes – aka two factor authentication – in India, I’d tend to think credit card fraud loss is lower in India than the global average.
However, I strongly suspect that the cost of lost revenues due to failed payments and other problems caused by 2FA is higher in India than the global average.
Mitigating fraud doesn’t pay the bills. Businesses make money and GDP happens only when credit card transactions go through. Not when they’re blocked as suspected fraud.