Take a traditional approach to payment fraud detection. You make just about any large payment or take your card overseas and you’re running the risk of the bank is blocking the transaction because it thinks it could be fraudulent.
What then happens is important. If you’re in a DIY centre paying for your new kitchen, you might have to ring up the bank to verify who you are and it’s all a bit time-consuming and embarrassing.
If you’re abroad it could mean the immense hassle of finding your card doesn’t work at an ATM, so you’ve got to ring up the bank in order to release those dirhams, euros, zloty or whatever it is. It’s a pain for the customer but traditionally the bank didn’t mind as it’s nipping any potential fraud in the bud. Better safe than sorry, so the thinking has been.
And to be honest, customers were for the most part OK with this – they were used to waiting in line for 30 minutes to cash a check with a teller, or for a payment to take a week to clear. However, that’s now changed. In the always-on world of mobile banking and instant payments, the “block-first, ask-questions-later” approach doesn’t always cut it.
The problem for banks and issuers today is that these false fraud flags – false positives – are a big threat to their ability to please customers.
In fact, false positives could be just as big a threat to issuers as fraud. Wrongly declined transactions push customer loyalty to the brink and many may consider moving to another provider.
According to a Javelin Strategy & Research report in August last year, 15 percent of US cardholders had a transaction wrongly declined in the previous year. And among these people, four in ten (39 percent) said they had “abandoned their card” as a result.
“Issuers must invest in high-quality authorization solutions and strategies to improve card authorization practices. Failing to live up to cardholder standards may encourage customers to, at best, decrease their card usage or, at worst, to stop their use of the card entirely,” said Al Pascual, director of Fraud & Security at Javelin. “Cardholders expect authorization perfection from their issuers and will not stand for fraud or false positives.”
Merchants can also suffer as customers, particularly in the online space, will simply abandon the transaction. This has a chilling effect on authentication and security as the merchants are not keen on doing anything that makes the buying experience anything but smooth and seamless.
Traditionally, it’s been hard to get the balance right. Either you employ a soft attitude to authorization to make things convenient and risk losing money to fraud; or you tighten up and risk your relationships with honest customers.
However, the balance is shifting in favor of issuers with the rise of intelligent fraud detection systems. Not only can these be the difference for issuing banks, but they also create a positive knock-on for merchants and customers.
Fraud detection platforms that use machine learning and real-time data analysis can drive down false positives considerably and increase the accuracy of spotting genuine frauds.
There is a problem, however, as banks have failed to invest properly in these systems. The huge number of false positives would indicate this but figures from CEB Towergroup lay bare the facts.
It found that at the largest banks, card fraud management systems are older than core banking systems, with 40 percent reporting their solutions were installed prior to 2006.
“Best-in-class players, however, constantly evolve their offerings to adapt to change; some provide comprehensive turnkey solutions, while others might require the purchase of additional modules,” CEB said in its report.
“Although machine learning is certainly a strong aspect, an effective operation will also have trained staff to make command decisions, test parameters, and design expert rules.”
Card fraud is a major and growing problem for banks, but taking too tough and inflexible a line on security poses just as many risks with the modern customer. With consumers valuing convenience and security in equal measure today, we can expect more issuers to scale up their investment in fraud detection in the coming years.