Article
Credit card fraud killer
Experts say credit-card fraud is high in restaurants, but high-tech pay-at-the-table terminals can eliminate the problem.
January 24, 2007
Most American adults know about the crime of credit card fraud, but few know so much of it occurs at restaurants. Whether at a fine-dining spot or a quick-service burger joint, the opportunity for theft exists whenever a card leaves the hand of the customer.
Wayne Steiger is president of CTS Consulting Group, a group that has worked for the past several years to stop credit-card fraud with high-tech tools. The problem in restaurants, he said, ranges from adding a few dollars to a credit card tip after the customer has paid, to organized crime rings defrauding thousands of customers of millions of dollars. (Read also our exclusive report, Speedy, secure electronic payments done tableside)
"We know there are crime syndicates, formed commonly of illegal immigrants, going city to city, using their skimmers while working in a restaurant," said Steiger. Skimmers are small magnetic-stripe readers that capture card information for fraudulent use. "It used to be that skimmers could hold just 50 cards, but now it's 300. And when that person leaves the restaurant, he goes home and, in two minutes, he's downloaded that information to a personal computer. Then he puts it on Internet and sells it."
According to Visa, of all card fraud perpetrated at the retail level, 40 percent occurs in restaurants. Steiger said that for all cards, he's seen that number as high as 70 percent in restaurants.
Yet according to CTS surveys, most American restaurateurs aren't alarmed about the problem. While a few large restaurant chains either have employed card fraud prevention technology or are studying available options, the majority of all restaurants, most notably independents, don't believe card fraud is a problem. Additionally, most operators believe they bear no personal liability if card fraud occurs in their operation.
"Since the majority
of the fraud comes from in this area of tip adjustments, a lot in the industry consider it to be minimal," he said. "These operators don't even want to use the word 'crime' for something like that. Some even say, 'Does it really hurt if it's just three or four dollars? Doesn't the credit card company take care of that?'"
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Personal experience, high-tech solution
Steiger takes fighting card fraud personally because one of his was compromised by a restaurant server in 2003. Already a software solutions company, CTS set out to develop anti-fraud middleware that protects a restaurant customer's cards with a pay-at-the-table (PATT) solution. By bringing a wireless payment terminal to the table, the card stays in the customer's hands throughout the payment process, and it is "closed" when the customer completes the transaction, not at the end of a shift when a server or manager closes it. It's in that "open" period that fraud occurs, such as when a tip is augmented or a number is stolen.
"If you think about it, where else do we allow someone to take our card and walk away for 10 minutes — and we're perfectly happy to let them do it?" said Jim Melvin, chief strategy officer for POS manufacturer PAR Tech. The company has deployed PATT solutions at several restaurant companies. "It's kind of absurd that we let that happen without much thought. The result is card fraud is rife in foodservice."
Rapid development in PATT solutions have yielded handheld terminals that servers can leave at the table. The customer swipes her own card, adds a tip and closes the transaction. (Software on the terminal even calculates suggested tips based on the check total, something Melvin called exceptionally helpful in cities attracting a lot of foreign tourists.)
A PATT terminal uses a secure wireless signal (encrypted under the WPA2 standard used by the United States government for transmitting sensitive data) to send all sales and tip data to the POS system, which then seeks authorization for the card separately. By not using the wireless terminal for authorization, the cardholder's information never is exposed to a hacker looking for that information on a phone line or on the Internet.
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"The wireless terminal has no ability to connect to that payment processor, so it waits for the POS system to handle the authorization and communicate back that it has been approved," Steiger said. "We call it an extension of the POS system that comes to the table. It's only used for payment, not ordering or anything else."
Adam Greenberg, owner of Potomac Pizza in Potomac, Md., is using at PATT system in one of his four restaurants. Ironically, when offered the terminal, many of his customers told servers they were not only aware of card fraud in restaurants, they were so fearful of it they'd switched to paying with cash.
So far, he said about 95 percent of the customers using the PATT terminal "were very positive about it once we showed them how to use it." The only group reluctant to use it was seniors, he said. "Most of them wanted nothing to do with it. I suppose that the older they are, the less tech-savvy they are. And if they don't understand something, they tend to avoid it."
Melvin said field tests revealed similar hesitance to using PATT terminals, but that it could be dispelled when servers offered to conduct the transaction right at the table.
"They have a couple sentence schpeel: 'This is for your protection, but if you'd like, I'm more than happy to do it myself, right here, to show you your card will never leave my presence,'" he said. "We've never had the client disagree at that point."
Greenberg added that once his servers became comfortable with the using the terminals, they love them. Melvin added that service staffs he's studied have seen their tips go up because of the increased speed of service.
And what about pay-at-the-door for pizza delivery? The technology exists, but field trials have been limited.
Costs are coming down
Depending on the POS system and the number of handheld terminals a restaurant needs, Steiger said the cost of adding a PATT system ranges between $12,000 and $20,000. Melvin added that individual handheld terminals cost about $700 each, but that "substantial discounts are given for quantity."
Steiger said he understands such an expense shaves an operator's profits, but he said the investment can pay for itself steadily several ways. Since the majority of restaurant customers use debit cards to pay for meals, operators who offer PIN-verified transactions slash their card transaction costs.
Better yet, he added, field tests have shown that table turns increase in restaurants using PATT terminals because customers don't wait for the server to return with their card. Servers also stay busy caring for other customers. Melvin said that a fine-dining chain using PAR's solution realized an additional seating per night, "which boosted sales substantially."
"For a restaurant doing $2 million or more a year in sales, (return on investment) takes four to six months, which is pretty good considering the added level of security you're offering your customers," Steiger said. "Restaurants that do $1 million or less in sales, their ROI gets extended
farther out."
farther out."Several large quick-service chains are testing drive-thru- and counter-mounted, customer-facing payment terminals that accomplish the same purpose. Full-service chains, such as Darden Restaurant Group (owner of Red Lobster and Olive Garden) have major field deployments of PATT terminals.
Despite the expense, both Steiger and Melvin believe it's only a matter of time before the rest of the industry jumps on the bandwagon — either for the right reason of protecting the customer, or because legislation forces them.
"There is a strong reluctance in the industry to acknowledge there's a problem," Steiger said. "The U.S. also is lagging so far behind other countries that have already implemented customer self-pay that it proves our industry doesn't see the value of this service. It's going to take a real education to help operators see the benefit to the customer first and then the benefit to themselves."
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