Card Problems Cost U.S. Issuers Hundreds of Millions Overseas

U.S. payment card issuers missed out on nearly $4 billion in charge volume in 2008, including $78.7 million in interchange, because of problems cardholders had with their cards while traveling abroad, according to a new report by Aite Group LLC. The default response when travelers have a card problem is to use cash, but the negative consequences for issuers and others in the payments industry can come home, Boston-based Aite concludes in the report, “The Broken Promise of Pay Anytime, Anywhere: The U.S. Cardholder Abroad.” Aite collected its data in September by polling 1,019 U.S. residents online who took 2,223 trips abroad between 2006 and 2009. Western Europe was the biggest destination, though respondents had traveled nearly everywhere else. (Americans who had traveled only to Canada, Mexico, and the Caribbean were excluded because of the similarity of the payment card transaction experience in those countries to that in the U.S.) Most issues Americans have with their cards while traveling can be divided into “hard” problems such as declined transactions at the point of sale or “soft” problems that often rankle cardholders but are to be expected when traveling, such as foreign-exchange fees or fear of fraud or being mugged while paying. Credit and debit card issuers can address nearly two-thirds of the problems, according to Aite. Issuers often decline authorization when a cardholder's legitimate request originates abroad. That's because their fraud-monitoring systems flag a transaction as risky since it's coming from an atypical location. “The false positives are what's problematic over there,” Aite senior analyst Nick Holland tells Digital Transactions News. False positives could be reduced if issuers invited cardholders to notify them before traveling so they could adjust their fraud-control systems or even found a way to coordinate the physical location of the cardholder's cell phone, which is possible, with the locations of authorization requests, he says. That would give the issuer more assurance the real cardholder actually is traveling. When encountering a problem with a card, some 61% of cardholders reported switching to cash and 29% pulled out another card?bad news for the first issuer. Problems also changed longer-term behavior, Aite found. After a trip in which they had a card problem, some 40% of respondents said they relied on cash more often when abroad; 19% said they used the problematic card less; 16% said they relied on travelers' checks more; 13% carried more cards when traveling, and 12% used cash more even in the U.S. Some 38% of respondents said the experience did not change their behavior. But Aite also concluded that problems while traveling caused some cardholders, particularly younger ones, to shop around for a new card. Using its own findings and U.S. Commerce Department data about the number of Americans traveling abroad, Aite estimates that card problems translated into $3.9 billion in charge volume that didn't occur last year, or more than $700 per traveler. That volume would have generated an estimated $250.4 million in interest income, $118.1 million in foreign-exchange fees, and $78.7 million in interchange. The research also touched on an issue that is likely to become bigger every year and may require a multibillion-dollar retrofit of U.S. payment card infrastructure: the increasing rejection of the magnetic stripe abroad. After about 40 years, the mag stripe still dominates American payment cards, but issuers in Western Europe and the developed countries of Asia have or are in the process of switching to so-called EMV chip-and-PIN cards. While not invulnerable, EMV cards are much less fraud-prone than mag-stripe cards. Traveling Americans so far are having relatively few problems specifically attributable to their mag-stripe cards being rejected in EMV countries. Asked about 18 factors that could deter them from using U.S.-issued cards abroad, only 15% of Aite's respondents cited “unable to use cards because terminal does not accept magnetic-stripe cards.” That factor ranked 12th, with “foreign-exchange fees charged by my credit card company” coming in first, cited by 49% of respondents. But the problems for U.S. mag-stripe cards will grow as foreign merchant acquirers install more POS terminals that read only chips, Holland predicts. “It's early days,” he says. “It's only going to get worse. You're getting a situation now where you have people working at McDonald's in rural France that have never swiped a mag-stripe card in their life.” Ultimately, the issue could force the U.S. payment card industry to adopt EMV cards, which Canada is doing. Holland notes that not only will Americans have problems with their mag-stripe cards abroad, but also travelers to the U.S. won't be able to use chip cards that don't have magnetic stripes. “It's going to affect U.S. commerce from Europe,” says Holland. Aite says its results are reliable at the 95% confidence level.