E-commerce fraud emanating from cards within the Single Euro Payments Area (SEPA) : a comparative analysis

Abstract

Purpose: The purpose of this study is to analyse fraud levels across SEPA countries, with further focus on credit card fraud. A case study is presented illustrating fraud identification techniques through a rule-based approach in identifying fraudulent transactions from clean transactions. The aim of the study is to recommend a way forward to reduce future frauds levels. Methodology: A quantitative, historical, comparative research approach is adopted using secondary data obtained from the European Central Bank, Eurostat, a regulated Maltese bank and other publicly available data sources. Explanatory country factors which separately or jointly account for fraud are identified and a cross sectional regression analysis is conducted. Fraud identification techniques and a rule based approach are implemented via the case study. Data for the case study is provided by a regulated Maltese bank. Findings: Seven independent variables are determined as being fundamental towards the countries fraud levels. These are; internet purchases (%), internet as a fraudulent channel (%), phone as a fraudulent channel (%), SMEs providing web sales (%), sending or receiving emails as a purpose of internet use (%), downloading media such as games as a purpose of internet use (%) and trust in public authorities (%). The main findings from the variable and regression analysis are that the independent variables separately are not coherent with a priori expectations and insignificant at the 10% level of significance however jointly such variables have an explanatory effect on fraud levels at the 5% level of significance. Ten rules emerged from the case study. All had different outcomes and are proven to capture fraudulent transactions. Conclusion: Based on the findings of this study, it is evident that countries and financial institutions may implement more safeguards to reduce fraud levels. At a country specific level, more should be done in educating the people on what might be deemed to be a fraudulent activity and how to avoid from being caught up in a fraudulent situation. Financial institutions dealing with card payments should invest in developing an internal system that learns from previous fraudulent patterns and implements rules to counter fraudulent transactions and play their part in reducing fraud levels.