Measuring the real costs of identity theft

One of the best-held secrets in the German credit card industry was inadvertently revealed last night at an informal press dinner hosted by Bayern Card Services, an acquirer jointly operated by Bayerische Landesbank and the Bavarian community-owned savings and loan banks (“Sparkassen”). Asked just how much money banks were losing from credit card fraud, Monika Kummer, head of risk management for BCS, blurted out a figure of between 0.2 and 0.3 percent of total card turnover. When pushed for further details, she clamed up, but the genie was already out of the bottle.

After that, the math was simple. BCS handles the card business for about 70 percent of the 438 Sparkassen in Germany and reported total revenues of 16 billion Euros last year, so its member banks lost roughly 36 million Euros through identity theft.

Yeah, that's peanuts for a banking group that does more than a trillion Euros turnover. But wait! Most of those 36 million goes to the retailers, who pay anywhere from 3 to 6 percent to the issuing bank. Take off the various fees charged by middlemen such as BCS, and only about 1.2 percent actually remain as bank revenue. So 0.2 percent of the total turns out to be about one-fifth of the money banks earn from their credit card business. Peanuts indeed!

And things could get even worse for the banks if the European Union follow through on its threats to impose strict controls of the so-called interchange fees that banks charge whenever a cardholder purchases something in a foreign country. In Europe, where the next border is never more than an hour’s drive away, people can run up substantial interchange fees, and banks rely on them to boost the gross.

In December 2007, the EU forced Mastercard to submit a new pricing model for its interchange business. In March 2008, it was Visa’s turn when the European Commission opened anti-trust proceedings which could carry a hefty fine.

Finally, in April 2009, Mastercard agreed to temporarily reduce its interchange fees by a significant margin pending a final decision by the European High Court. In return, the Commission promised not to open further proceedings. Whatever the outcome of these legal maneuverings, banks must brace themselves for painfull losses. But just how big will they be? Shall we say one percent? If so, then most banks will soon be bleeding money from their credit card business.

In Germany, where most people carry Maestro debit cards around with them, credit cards are still a rarity. In fact, only about 14 percent of all consumers actually own one. That averages out to about 0.6 cards per bank customer, about one-sixteenth of the U.S. On the other hand, the banking industry strongly believes that the number of credit cards in German wallets will grow enormously in the next few years, so the potential losses will increase, too. Unless, that is, someone comes up with a way to reduce identity theft.

And BCS appears to have a few cards (pardon the pun!) up its sleeves. Monika Kummer reported that BCS is currently testing a system that will automatically send a text message to the cardholder’s mobile phone every time he or she makes a purchase exceeding a stipulated amount. In theory, the cardholder could then immediately ring up their bank and report a fraudulent transaction.

Another neat idea BCS is working on involved allowing customers to block payments from certain countries. If you never plan to travel to Kazakhstan anyway, anyone using your card there would have to be Borat or one of his henchmen, wouldn’t they?

Well, now that we know the dirty little secret about credit cards it becomes clear why banks are so eager to increase consumer awareness on the issue of identity theft. As long as only few Germans actually own and use a credit card, their level of concern will remain low. But if the banks are right and credit cards are on their way to the mass market, things will change. And the sooner the better, I say.



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