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As the nature of card fraud continues to evolve, issuers and credit unions are forced to walk an increasingly precarious tightrope between guarding against consumer fraud losses and causing cardholder friction. Of course, fraud mitigation is critically important to both credit unions and their members, but equally undesirable is having legitimate purchases declined not due to insufficient funds or an incorrect PIN being entered, but because risk rules in place have erroneously identified fraudulent activity. This is known as a false decline or false positive.
Data breaches lurk as an ever-present threat in the background so it is understandable that a "better safe than sorry" approach has been taken, but the only sure-fire way to prevent 100% of fraud would be to approve no transactions, which is clearly no solution at all. However, even the "better safe than sorry" strategy has serious drawbacks – particularly the lost revenue and negative impact on the member experience.
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An Aite Group report projected that revenue losses due to false declines will grow to $443 billion by 2021 – an amount greater than the losses caused by the original issue of fraud. Separately, Fiserv research has found that 20% of cardholders stop using their cards after experiencing more than one false decline in a six-month period. In addition, the average monthly spending per card after two or more false positive denials drops, on average, by 15% over a six-month period. If you've ever experienced a false decline as a cardholder – and at some point this has happened to one in six of us – you know how frustrating and embarrassing it is. It makes you think twice about ever attempting to use that particular card again.
Online shopping has boomed as more consumers shop from home due to the COVID-19 pandemic. This is a trend that unscrupulous fraudsters have inevitably tried to exploit, and could therefore see a greater tendency for transactions that are regarded as suspicious or uncharacteristic of the purchaser to be rejected, increasing the incidence of false declines.
Finding the Right Balance
Fortunately, the perceived choice between protecting the consumer relationship versus protecting against loss is a false dichotomy. It is still possible, through a combination of cognitive artificial intelligence, comprehensive data and enhanced analytics to significantly reduce fraud losses while keeping false alarms to a minimum.
Financial institutions can automatically generate machine-aided fraud rules based on specific data and within the defined fraud hit rate and false positive ratios. This real-time feedback loop of fraud in the authorization system allows credit unions to run automated rule generation as often as they like to keep rules performing optimally based on their data. The machine-aided rules provide cognitive AI which, upon inspection, clearly displays the underlying reasons and data that supports why rules are recommended.
Uncharacteristic consumer purchases may be denied with an alert delivered asking for transaction validation. With an automated exemption service, after an alert is closed as no fraud, an exemption can be automatically applied to risk applications and rules, allowing for future transactions to be completed without any inconvenience or additional intervention.
Help Your Cardholders Help You
The best line of defense against fraud – and knowing what types of legitimate purchases they typically make – are cardholders themselves. Card management capabilities provide cardholders the ability to receive transaction alerts and actively manage credit and debit card usage by defining where, when and how their cards are used.
Generally, alerts can inform cardholders of specific types of transactions. They can be sent when a card is used, when a transaction is approved exceeding permitted use policies, or when a card transaction is attempted but declined. Alerts are sent in real time, immediately after the transaction happens or has been declined. Alerts for declined transactions should include a reason to help users understand why the alert occurred.
Control features add more self-service capabilities that allow cardholders to take the fight directly to the fraudsters, including location controls that can restrict transactions to merchants located within a certain range of the cardholder's location (using the phone's GPS); merchant controls for specific categories including gas, hotel, travel, restaurants and groceries; transaction controls that monitor in-store purchases, e-commerce, mail/phone orders and ATM transactions; and spending limits that allow transactions up to a certain dollar value and decline transactions when amounts exceed predefined thresholds.
Strong Cards to Play
As fraud trends and consumer behavior evolves, sophisticated fraud prevention coupled with intelligent data that maximizes good cardholder spend emerges as a distinct competitive advantage. Fraudsters exploit uncertainty, but with preparation, informed cardholders and advanced risk mitigation tools and services, consumers can spend with confidence.
Understandably given what is at stake, there is a tendency to pull the plug when fraud is detected – blocking entire countries or groups of merchants to stem the bleeding. However, when such a wide net is cast, many legitimate transactions are blocked as well. Striking the right balance lowers the risk that the cardholder loses trust in a particular card and creates trust with a competitor. Reducing false positives not only boosts revenue as more good transactions are approved, but ensures that card remains top of wallet.
Charlotte Ritonya Charlotte Ritonya Vice President, Card Services Fiserv Brookfield, Wis.
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