Banks are planning to issue their customers with handheld credit card readers under a new pilot scheme to combat online fraud.

The project is being pioneered by APACS, the UK payments association, to give customers greater protection when shopping on the internet or the phone.

So called ‘card not present’ fraud, which covers internet and telephone payments, is estimated to have cost £183.2m in 2005, while total credit card fraud in the UK was £439.4m. In the first six months of 2006, this type of card fraud totalled £95.3m.

When shopping online, customers place the card in the reader and input their pin. The reader then generates a passcode which verifies the transaction.

According to figures from APACS, while the introduction of chip and pin has helped to cut total card fraud losses, the increase in online card payments has led to an increase in CNP fraud online, with internet fraud accounting for a quarter of all credit card losses.

The scheme – developed in partnership with banks, card schemes, retailers, trade associations and systems vendors – will be rolled out later this year.