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Chip Cards Breach, Debt Soars and Online Lending Sputters

The passion. The drama. The pageantry. The thrill of victory, the agony of defeat.

You think we’re writing about the Olympics – which, given the current events in Rio, is a fair guess. But of course, we’re talking about payments and commerce last week – which in our opinion was every bit as much a nail biter, though admittedly with fewer water sports or impressive aerial gymnastics.

But for action, there is little to beat the big bit coin heist that set the standard for the week’s adventures – and the news followed apace. Visa and MasterCard both announced big real time P2P payments plays. Visa also announced its new initiative to stop loyalty hacking and both MasterCard and Visa announced deployments of their faster EMV chip technology.

Ready to dive deeper?

The Chip Card’s Mag Stripe Problem

Despite what some headlines reported – the very good news is that hackers have not actually found a way to break the chip technology that underpins EMV and the chip card technology.

The bad news – they may not need to as long as chip cards have mag stripes on them.

According to new data released by researchers at NCR, credit card thieves can apparently rewrite the mag stripe such that the card looks to be chipless when run through a card reader machine.

That shouldn’t happen – what should happen is that the card readers should boot back the transaction and instruct the user to insert the chip.

The upshot is that fraudsters – by adding an additional step – can continue to clone magstriped EMV cards – which kind of defeats the purpose of chip cards.

The hole is made possible, according to reports, because retailers don’t encrypt their transactions as part of their EMV upgrade.

“There’s a common misperception EMV solves everything. It doesn’t,” noted Patrick Watson, one of the researchers.

This issue rises as various voices in the retail sector are arguing that EMV is as expensive as it is useless.

The NRF has complained that the expensive upgrade ($25 billion) has done little to make retailers safer since unencrypted transactions are essentially just as hackable as they’ve ever been.

But that opinion is not universal – Randy Vanderhoof, director of the U.S. Payments Forum, weighed in on the research, noting that this hack is not so easily possible as some reporting indicates.

“This is not an attack on EMV technology, it’s an attack on the magnetic stripe. If the data on the magnetic stripe is altered it might fool the terminal, but when the authorization request gets to the issuer, they can recognize it was altered because they know what information should be on the magnetic stripe, and will therefore reject the transaction. These kinds of risks with magnetic stripe cloning or altering are exactly the kind of problem that EMV is best at preventing.”

As for the encryption issue – terminal makers Ingenico and Verifone both affirm that they offer point-to-point encryption, but also note that retailers and their partners must choose to turn it on.

Credit Card Debt On The Rise

Credit card and revolving debt are on the uptick according to recent reports. The newest figures clock credit card debt in the U.S. as having jumped to $18 billion in just the last three months – making some wonder if Americans have gotten a bit too debt-happy as the U.S. is looking at potential economic uncertainty.

By the numbers, credit card loans are up by 10 percent per year at Wells Fargo, 12 percent at Citigroup and 16 percent at US Bank. SunTrust led the pack – with 26 percent growth to $200bn for the Atlanta-based lender.

And as of right now, the card business is a good one to be in – lenders charge between 12 and 14 percent interest annually – and borrower defaults remain historically low.

Will they remain that low?

“In the present environment it’s probably a safe strategy, but as we saw with housing in 07/08, that environment can change very rapidly,” said Nancy Bush, banking analyst at Georgia-based NAB Research. “They need to be very careful.”

“Times are pretty good right now, but it’s questionable how long it’s going to last,” noted Bob Hammer, a credit-card consultant.

And fault lines are appearing – Synchrony Financial, the largest supplier of store-branded cards in the US, increased its credit loss forecast in June. And they aren’t the only ones predicting a loss uptick – or preparing for one.

Capital One added $375 million to its loan loss reserve for its domestic card business and JPMorgan Chase added a $250m loss allowance for its credit-card portfolio

And speaking of losses…

Investors Eschew Online Lending

While likely not terribly surprising given the recent run of headlines – a new report from PitchBook Data, Inc. suggests that funds flowing to online lending have slowed – dramatically.

All in, funding for online lending fell 44 percent in the first half of 2016 to $2.1 billion. That compares to $3.8 billion in the year-earlier period. What’s more, the report found investments in online lending during the second quarter were the lowest since last year’s second quarter. Investors were put off partly because of Lending Club and its recent string of rather dramatic reversals.

As has been widely reported, the online lender has been buffeted by claims that improper lending practices were in place, with document falsification as well. In the wake of those revelations, the CEO of the firm, Renaud Laplanche, resigned earlier this year.

CEO Scott Sanborn has been attempting to right the ship since taking over in June – Sanborn’s main work has been rebuilding investor confidence.

The picture at Lending Club has been less than pretty since Laplanche’s exit. Shares were down 61 percent this year as of the end of June, and investor interest in the platform has plummeted. “The primary concerns center around investor appetite, transparency, fraud and diversity of capital,” the report says.

Online lending companies – even those not beset by scandals – have been suffering from declining loan volume and customers who are finding money in different places. This has pushed some lenders toward looser underwriting, which has the unfortunate side effect of upping delinquencies and loan defaults.

According to PitchBook, online lending startup companies were able to raise $12.6 billion since 2011, encompassing 463 deals. The peak of the investment cycle was in 2015, when 132 companies raised a total of $5.2 billion.

So what did we learn this week?

EMV Chip cards work great – but as long as they are attached to cards with magnetic strips, they could be vulnerable. We learned that marketplace lending is not place to be right now, as investors are fleeing and borrowers are seeking other options. And the big question for credit cards is with the debt fairy out of the bottle and making a big appearance in the lives of Americans – will the default fairy be far behind?

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Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The July 2019 Pay Advances: The Gig Economy’s New Normal, a PYMNTS and Mastercard collaboration, examines pay advances – full or partial payments received before an ad hoc job is completed – including how gig workers currently use them and their potential for future adoption.

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