Credit card fraud and photo ID

Does asking consumers for photo ID before accepting a credit card purchase help reduce fraud? Perhaps but the question is moot because doing that is a violation of the card network-merchant agreement, as made clear in a series of Consumerist posts. Actually it is more subtle: Visa and Mastercard make this a bit tricky for merchants. They are allowed to ask for identification, but they can not decline a purchase if the shopper refuses to show one.

This convoluted compromise must have been the result of conflicting incentives between the network and the merchants, with Visa/MC deciding to make a concession. On one side, merchants want to reduce the possibility of fraud because they risk getting stuck with charge-backs. Strangely enough bricks-and-mortar stores are in a better situation here because the would-be-criminal must walk in the door, produce the card and risk having their mugshot appear on hundreds of surveillance cameras. That’s much higher bar than the card-not-present or “CNP” type of transactions such as mail-order and Internet where the physical possession of the card can not be verified. The plastic is reduced to a bunch of easily phished digits and the fraudsters can sit comfortably in a different jurisdiction halfway around the world. Without proof that the customers was in possession of the card, the merchant is forced to issue the charge-back and absorb the loss. (In principle a bricks-and-mortar retailer is off the hook with a signed receipt; the issuing bank eats the loss.)

On the other side, card networks want to make the purchase experience as convenient and hassle-free as possible for card holders. Any transaction that does not complete is revenue missed out on the interchange fee. The card network recognizes that downside and does not want the merchant to arbitrarily prevent shoppers from using the card.

The result is the current mess: “you can ask for  ID but you can not require it.” This is banking on consumer ignorance or cooperation: the assumption is most people will either not know the rights granted by the merchant agreement or will simply choose to cooperate as the path of least resistance. If that is the plan, retailers need to do a better job at educating employees. More incidents of consumers threatened and cards confiscated can only lead to greater awareness, upsetting this uneasy truce.


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