As the extent of the Target data breach continues to trickle out and new revelations of similar violations at other major retailers come to light, one thing is crystal clear: the antiquated U.S. payment system is broken and needs a major upgrade.
Credit cards remain one of the most fraud prone payment options in our wallets today. Why is this? It’s essentially because there is no financial incentive for the banks to improve a system that relies on 40-year old technology. Take for instance, the two largest credit card brands, Visa and MasterCard. They control 80% of the marketplace and as a result get to call all the shots when it comes to how consumers’ account information is protected and who pays for the fraud. Given that they pulled in $7.7 billion in combined after-tax profits in 2013 and rarely end up absorbing the losses from fraud, they are just not motivated to take on the costly expense to update the system.
It’s ironic that the United States lags so far behind the rest of the industrialized world given that we have long led the way when it comes to technological innovation. Nevertheless, we are one of only a few developed countries that still rely on a magnetic stripe to hold all the pertinent financial information needed to make a purchase by credit or debit card. This makes us a magnet for fraud.
Right now, the banks are content to sit back, enjoy their excessive profits and address the fraud after it has already happened. But data breaches, both large and small, will continue to occur and consumers and merchants will continue to pay the price until the banks make the proper investment and take a more pro-active role in preventing the fraud from occurring in the first place.
For a detailed analysis, see David Dayen’s article, “Your Credit Card Has a Dangerous Flaw That the Banks Refuse to Fix,” in The New Republic here.
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