Fraud is a very serious issue, especially for card payments. The Nilson Report estimates that card payment fraud costs consumers, businesses, and card issuers $15 billion per year. A considerable share of this burden rests with the issuing financial institutions.
As credit card companies and banks resort to increasingly aggressive methods to tackle this growing problem and reduce losses from fraud, the risk also increases for genuine transactions to be mistakenly flagged as fraudulent.
False Positives Turn Away Legitimate Business
In a poll conducted by CreditCards.com in May 2015, 43 percent of respondents said that they had been contacted by their bank because of a transaction being blocked as suspected fraud. Among those notified, while 28 percent reported that all of the notifications were linked to fraudulent purchases, a much higher proportion, 39 percent, said that all of the blocked transactions were false alarms.
These false alarms, known as false positives, occur when transactions meet a minimum number of criteria set by financial institutions even though the transactions are not fraudulent. A false positive in fraud prevention represents a potentially loyal customer who was rejected by an ineffective fraud prevention system. Javelin Strategy & Research released a report in August 2015 estimating that 15 percent of all U.S. cardholders have experienced at least one false positive in the last year, representing a loss of $118 billion annually.
The amount of lost sales is of great concern. However, what cannot be estimated is the potentially greater amount of lost future revenue from customers that choose to abandon the cards as a payment option due to false positives. Javelin reported that 39 percent of declined cardholders abandoned their card after being falsely declined.
Striking the Right Balance
Clearly, card payment fraud must be addressed, however, what is the best approach? Card issuers are facing a tough decision, as they must be careful of either going too far or not far enough in terms of implementing tougher security measures. If issuers are too lax with card authorization strategies, they risk losing revenue to fraud. If they use authorization rules that are too strict, they risk losing legitimate revenue when client stop using their cards.
When card issuers put fraud detection systems in place, the rate of false positives is still extremely high with only 20 percent of declined transactions at the point of sale actually being fraudulent. As a result, many card issuers are choosing to accept higher losses, especially from high-net-worth cardholders, in order to prevent alienating clients and losing business due to abandonment.
Now, thanks to advances in modern technology, including the availability of big data, there is new alternative data and tools available to help businesses make informed decisions when it comes to detecting and preventing fraud. These new tools can reduce the number of false positives and improve the overall customer experience.
Selecting the Right Tools
One approach that is gaining more widespread use is an interactive system that sends out real-time alerts of suspicious purchases to cardholders to let them determine if fraud is actually occurring. In some cases, the cardholder is shown the transaction in a text message and asked if it is legitimate. If the cardholder answers, “yes,” then the transaction is approved immediately. Visa has launched a mobile location service that will confirm that the cardholder is actually using the card when the transaction is taking place. In addition, MasterCard is running a pilot program that allows consumers to use biometric data – such as facial and voice recognition and fingerprint matching – to authenticate themselves and verify their transactions.
So far, the solutions mentioned are focused on point-of-sale transactions where the card is physically present at the time of purchase. What about card-not-present transactions, where the rate of fraud is expected to skyrocket as criminals concentrate their efforts on online merchants following the U.S. rollout of chip-and-PIN cards?
For eCommerce, a multifaceted approach is advisable. Behavioral analysis tools can examine spending patterns and flag suspicious transactions. Online identity verification can weed out fraudsters by checking personal information that is not typically found with stolen credit card numbers.
“Consumers expect the payment process to be seamless and smooth,” said Jon Jones, President of Trulioo. “Online identity verification minimizes false positives and improves the eCommerce experience for consumers, preventing frustration and a horrible shopping experience.”
What is your business doing to protect its bottom line from false positives?