There’s a hidden reason why banks warn credit card holders to guard their personal identification numbers (PINs) carefully. If a credit card is stolen and used with an unauthorised signature, the bank is responsible for the loss. But if it’s used without authorisation and the charges are made with a PIN number, then under certain circumstances, the cardholder may be held responsible.

With the increasing popularity of debit and microchipped cards, which require PIN numbers for purchases rather than signatures, that means the pendulum of fraud liability is swinging toward the card holder and away from the bank.

This is because transactions made via PINs are processed through the electronic funds transfer (EFT) system, which has different regulations from traditional signature-based card authorisations. These regulations hold that card holders may be responsible for part of the loss if they didn’t guard their PINs sufficiently.

Those circumstances include:
•    disclosing the PIN to someone else, including friends or family members;
•    listing the PIN unsafely, such as keeping it openly in a journal or cell phone which could be stolen along with the credit card; and
•    using a PIN that’s too simple or easily broken.

In such cases, the EFT regulations state the card holder may be held liable for all unauthorised transactions recorded before the issuing bank is alerted to the card’s theft. However, the financial institution remains responsible for any amounts exceeding the credit limit.

According to Philip Field, the banking and finance ombudsman, the issuing bank must prove “on the balance of probability” that the card holder did not maintain proper PIN security, or contributed to the losses by “unreasonably delaying notification” of the card’s loss or compromise.

Many card holders record their PINs, and often a friend or family member is involved in cases of fraud.

Mr. Field also warns that the ultimate amount of such liability may also be larger with PIN-based plastic.

“At least with a debit card, it’s the amount you have in your account [that’s at risk],” he said. “With a credit card, it’s potentially the amount up to the limit on your card.”

Source: http://www.smh.com.au/