Filtering False Positives While Fighting Fraud

This is bonus from “When Good Cards Go Bad” from the August 2017 issue of Credit Union Management magazine.

Falling victim to card fraud is a deeply distressing experience, yet it is an all too common occurrence—costing U.S. card issuers around $8 billion annually. This makes preventing fraud such a serious business that sometimes-legitimate transactions are incorrectly identified as fraudulent.

Incidents in which bona fide customers are mistaken for fraudsters are known as “false positives,” and these can also prove costly. Javelin estimated in 2015 that 15 percent of all cardholders surveyed had at least one transaction incorrectly declined in the prior 12 months, representing almost $118 billion declined annually. This can damage the relationship between the consumer and the card issuer; according to Javelin, almost four out of 10 (39 percent) cardholders who experienced a false positive subsequently abandoned that particular card after the declined transaction.

Credit unions and other financial institutions face a difficult balancing act between detecting suspicious and fraudulent activity and needlessly inconveniencing consumers to the point that they will no longer be willing to use your card. How do you help the good guys while foiling the bad guys?

Smart Analytics, Intelligent Rules and Willing Allies

Minimizing the risk of financial losses, while avoiding, where possible, declining genuine consumer transactions, requires a layered approach to fraud prevention. Here are three best practices credit unions can follow:

1. Add sophisticated data analytics and risk scoring. Use predictive models, scorecards and decision trees to identify fraudulent transactions, with ongoing reviews and modification as necessary to, in time, learn the “normal” behavior of the cardholder. The better the model knows how money is spent, the more effective it will be at identifying a transaction likely to be fraudulent.
2. Implement rules aligned with risk strategies to quickly evaluate and effectively generate action on suspicious transactions. These sophisticated decision rules often incorporate at least one model score, as well as specific elements of the transaction itself. Incorporating these rules as part of a multi-layered approach helps speed the decision cycle and answer the question, “Does this transaction look dubious enough that the risk of approving it outweighs the risk of generating a false positive? Or is the risk of the transaction being originated by fraudsters low enough to approve, but perhaps necessitates a follow-up conversation with the cardholder to confirm it’s legitimate?”
3. Give cardholders tools to engage in protecting their cards from fraudulent activity. Available mobile apps enable users to receive real-time notifications and alerts when their cards are used, switch off cards not in use and prevent transactions during that time, set spending thresholds, limit card transactions within certain geographic locations, and restrict transactions to certain merchant types. Using such tools, cardholders have much greater control over where, when and how their cards are used. Cardholders who help credit unions by vigilantly monitoring their own card use create a bond of trust that can help those institutions approve transactions they otherwise might not, reducing the risk of false positives.

Hurt Fraudsters, Not Your Consumers

Many smart financial institutions are leveraging technology to account for typical increases in spending, monitor fraud trends and block fraudulent transactions in real time. With expert fraud rules, predictive models target fraudulent payments at the lowest false positive and highest detection levels. At the same time, skilled risk professionals continually monitor the performance of fraud strategies to ensure those positive outcomes continue. By teaming with cardholders in the joint fight, credit unions can ensure they are guarding against the ever-present threat of fraud on multiple fronts, while still providing a first-rate customer experience.

Patrick Davie is VP/risk solutions/card services for CUES Supplier member Fiserv, Brookfield, Wis.