False Dichotomy: Fraud Detection and Cardholder Relationships

By Patrick Davie

Events of the past few months have shown us just how challenging it can sometimes be to strike a balance. During the COVID-19 outbreak the number one priority, and rightly so, has been to keep people safe and healthy. You don’t need me to tell you that doing that has meant drastic but necessary changes to the way every single one of us lives our lives as we’ve gotten used to working remotely and homeschooling our children, keeping our physical distance from friends and extended family, forgoing business and leisure travel, and seeing bars, restaurants, malls, movie theaters and museums shuttered.

The impact of the lockdown on the economy and people’s livelihoods has been brutal, inevitably leading to heated debates as to when the measures put in place to flatten the curve of the disease can be fully lifted and life can return to some semblance of normalcy.

While not a similar matter of life and death, issuers and merchants’ approach to mitigating card fraud is also a delicate balancing act. Payments fraud continues to evolve, and the pandemic itself has presented new areas of opportunity for the fraudsters as online sales have spiked while physical retail locations remain off-limits. Understandably, issuers and merchants are laser-focused on staying one step ahead of the crooks and preventing fraud, but an overly aggressive approach can lead to unintended negative consequences.

I’m referring to the problem of false declines (or false positives). A false decline is a legitimate transaction that is declined because it is incorrectly suspected to be fraudulent. One in six cardholders has experienced false declines. And while robust fraud rules are important protections at times fraud is more prevalent, such as the holiday shopping season, or when a purchase is attempted that may seem out of character for the cardholder, there can be consequences for the issuer and merchant.

The true cost of false declines

In fact, an Aite Group report projects that losses due to false declines will increase to $443 billion by 2021.

Fiserv has conducted research in this area, and our study of 20 million US debit cardholders suggests that 20 percent of cardholders stop using a card after experiencing more than one false decline within a six-month period. This dip in spending is after the last false-positive denial—suggesting that around 20 percent of cardholders may stop using the card altogether after a false decline. In addition, the average monthly spending per card after two or more false positive denials drops by 15 percent, on average, over a six-month period after the last false-positive denial.

The risk as an issuer is not just the short-term loss of that particular transaction, but also losing future transactions and sacrificing the lifetime value of that customer.

Solving the conundrum

Fortunately, banks have options to address this problem as fraud analytics models and machine learning become more agile and sophisticated, and banks can even deputize cardholders into proactively helping them understand where transactions are legitimate and where potentially fraudulent activity might be better identified.

If a bank is struggling with false declines and the resulting consumer friction, it is possible to set and manage proprietary debit card fraud rules to allow for increased cardholder transaction approvals, greatly decreasing the amount of false declines while limiting the bank’s fraud exposure. With the change in fraud rule management, customers and members are requested to allow text message notifications and push notifications from their issuer’s mobile application for transactions, so any true fraud can be quickly identified.

Another key component is fraud loss management—determining a fraud “cap,” so fraud loss is shared between the bank and the vendor. The bank stands to gain revenue from fewer false declines, greater card usage, increased consumer engagement from push notifications, and larger customer lifetime value, all while managing fraud losses.

There can appear to be conflicting priorities when it comes to fraud strategy diligence and protecting the cardholder relationship. But it need not mean a Hobson’s choice of protecting against loss and declining legitimate purchases versus safeguarding that relationship but seeing higher fraud losses. The combination of advanced fraud rules, engaging cardholders with SMS alerts and push notifications and limiting a bank’s fraud exposure can lead to that healthy, yet often elusive, balance between fraud mitigation and positive cardholder experience.

Patrick Davie is vice president, product strategy, card services at Fiserv, a global provider of payments and financial services technology solutions. He can be reached at Patrick.davie@fiserv.com.

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