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Electronic Brain Helps Cut Credit Card Fraud

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Electronic Brain Helps Cut Credit Card Fraud

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Electronic Brain Helps Cut Credit Card Fraud

Electronic Brain Helps Cut Credit Card Fraud

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Credit card fraud is on the decline largely because credit card companies scrutinize electronic transactions seconds before being approved. The fraud-prevention system checks purchases against previous ones to determine whether the charge is legitimate.

RENEE MONTAGNE, host:

On Mondays, our business report focuses on technology. Today, how an electronic brain is helping to cut credit card fraud. We have been hearing a lot about identity theft lately, so it's a bit surprising to learn that credit card fraud is actually declining. The industry says sophisticated software and other security tools have made it increasingly difficult to use credit cards or card numbers that were stolen or obtained fraudulently. It now takes less than two seconds from the time you swipe your card for banks and merchants to tell whether the transaction you're trying to make is legitimate or not. NPR's Wendy Kaufman reports.

WENDY KAUFMAN reporting:

An average of 6,000 times every second, American consumers whip out their Visa credit card to make a purchase at gas stations, clothing stores, speciality retailers and supermarkets like this one in suburban Seattle.

Unidentified Man: Please swipe your card across the top there.

KAUFMAN: Nearly all transactions for Visa, MasterCard, American Express and others are scrutinized electronically before they're approved. David Robertson, publisher of the credit industry's Nilson Report, explains.

Mr. DAVID ROBERTSON (Nilson Report): While it's going through their system for authorization, it's also being checked against information about your previous spending.

KAUFMAN: So if you use your card in Seattle in the morning and someone tries to use the same account an hour later in New York, the security system will send up a big red flag. Credit card companies use what is essentially an electronic brain, aided by a form of artificial intelligence known as neural networks. The brain keeps track of every purchase you make and sorts them into patterns and categories and compares your spending habits to others and to credit card activity linked to fraudsters. Then it makes predictions about whether a transaction is legitimate or not.

Mr. TED CROOKS (Fair Isaac Company): It has certain stereotypes. One obvious one is the traveling salesman. That stereotype has a certain spending pattern and it knows how much every customer is like a traveling salesman.

KAUFMAN: Ted Crooks is in charge of fraud prevention for credit scoring giant Fair Isaac Company. It created the most widely used credit card security scoring system.

Mr. CROOKS: It also knows how much that customer is like a do-it-yourselfer. It learns a lot of different aspects of how that person's behavior is similar or different from others. And then once it knows that, it can make pretty good judgments about what kind of transactions might be out of pattern.

KAUFMAN: That explains why if you bought a very expensive computer and you've never bought one before, you might get a phone call the next day from your credit card company asking if you really bought that piece of hardware. And it explains why if you've never traveled abroad and you try to rent a car in Rome, the transaction may not be approved. Fraudulent purchases made on the Web are more difficult to detect. Both industry officials and consumer advocates say these steps have significantly reduced the fraud-related losses reported by credit card companies. It's down both in total dollars, $790 million last year, and as a percentage of sales. Rosetta Jones of Visa says fraud within their system is at historic lows.

Ms. ROSETTA JONES (Visa): Just 5 cents out of every hundred dollars transacted, and that's half of what it as 10 years ago.

KAUFMAN: Last month, over 40 million card accounts were exposed to potential fraud because of a security breach at a third-party payment processor, and while that's disturbing, most industry experts say there's a big gap between a compromised account and the ability to use it successfully. Far more troubling to observers like Beth Givens of the Privacy Rights Clearinghouse is the identity theft of names, addresses and Social Security numbers.

Ms. BETH GIVENS (Privacy Rights Clearinghouse): Any breach that involves the Social Security number is something that we really do need to be concerned about. That's because with a Social Security number, the thief can attempt to open up new credit accounts in the individual's name.

KAUFMAN: And she says the victims probably won't know it. Givens urges identity theft victims to contact the major credit reporting agencies and put a fraud alert on their accounts. Then the electronic brain in the authorization process will pay special attention to any activity on any account with their name. Wendy Kaufman, NPR News, Seattle.

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