Financial institutions continue to make significant strides in their ability to identify illegitimate transactions. Unfortunately, fraudsters still hold one unfair advantage- in addition to the obvious one of their willingness to break the law, that is. They know that card issuers are often reluctant to deny a transaction, even one with a high probability of being bad, if it risks souring a customer relationship.
A new concept gaining traction in the fraud prevention arena is the Customer Offense Rate. Most commonly applied in card authorization situations, it is increasingly being applied to check and ACH settings as well. There isn’t yet a set formula for this metric, but its intent is clear enough. FIs need to determine the level of frustration they’re willing to cause their customers in the pursuit of fraud prevention.
The Short Fuse at the Point of Sale
The retail point of sale of course poses the most daunting challenge. Issuers have a split second to make an approve/deny decision while their account holder stands waiting in the checkout aisle. The growing field of e-commerce is just as complicated; although the remote consumer may tolerate a slightly longer processing time, the fraud risks are heightened as well. Checks and ACH payments are less likely to involve customers waiting in real-time- especially now that checks have largely vanished from the point of sale- so there is more time to make a considered decision.
One venue where checks still require an instant decision is at the teller window. This is particularly loaded since the face-to-face interaction involves the bank’s own customer, who oftentimes may not realize he/she is trying to deposit a bad item. A key goal in this setting should be to equip tellers with the tools to discern a proper course of action, without turning them into de facto risk analysts. Ironically remote check deposit, viewed by many as a risky proposition, can arguably be more secure in that it affords additional time to interrogate questionable transactions.
A Lost Relationship Tomorrow Versus Lost Dollars Today
Another cruel irony is that most declined transactions are in fact legitimate. Detection systems are very good at narrowing down a pool of suspicious charges, but not at pinpointing the individual items with total precision. Casting too wide a net will ensnare more false positives, leading to cardholder embarrassment and inconvenience. Since most consumers carry multiple cards, too many such experiences can easily lead to loss of “top-of-wallet” status for a given card. This is why some issuers opt to approve even suspect transactions rather than risk losing a valuable cardholder.
Although no one’s concerned about offending a fraudster, more often than not it’s an unwitting customer who gets declined- creating an awkward situation even when there’s ample reason for questioning a transaction. By considering factors such as geo-location and account type data, customer lifetime value and even non-financial info such as social media profiles, issuers can sharpen such decisions. This requires smart, powerful systems paired with a workflow that gets the proper data into analysts’ hands for real-time action.
There isn’t one correct answer- each issuer can establish their own comfort level balancing fraud risk and customer offense, which itself may vary by customer segment/value. The key is to make these decisions with as much information and strategic mindfulness as possible. The customer offense rate is a logical step in that direction.
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