effective card fraud prevention

As a result of the magnitude of fraud and the financial impact to issuers’ bottom lines, Fraud Management has become a mission-critical capability. Fraud management has implications to an issuer’s profitability in reducing financial losses while maintaining operational excellence, as well as impacting customer satisfaction through the right balance of fraud detection with minimal rejection of legitimate transactions.
It is important to note, however, that an effective Fraud Management solution includes not only a powerful software tool but also the set of business practices that allow an issuer to maximize the results from utilizing the tool.

The most radical technology being considered by issuers as a possible solution for fraud is the chip or smart card. While it is likely that chip cards may alleviate some of the risks associated with the use of payment cards – especially in Card-Not-Present transactions (e.g. Internet transactions), several major requirements need to be fulfilled before the technology will significantly impact fraud. First and foremost, chip cards involve major infrastructure changes at the issuer and merchant, as well as significant changes in consumer behavior. Hybrid cards with both Chip and magnetic stripe are likely to be in existence for the next 10 years at the least! AEME is also in the process of implementing a chip migration strategy to meet the liability shift deadline of January 1, 2006.
So whether smart cards will have impact over fraud reduction in the long term is yet to be seen; but in any case, it is clear that AEME, as a legacy partner, cannot exist without a Fraud Management tool to curb significant fraud losses.

There are several significant trends impacting card fraud in the Middle East today. These trends pose major challenges to payment card issuers, trying to detect fraudulent transactions and minimize their financial losses.It is important to note that payment card fraud is expensive. Industry data indicates that the total card fraud losses for the Middle East region reached over $ 45 Million in 2004.

In order to effectively address fraud and minimize its financial impact, fraud occurrences must be detected in time for the issuer to take action and prevent further losses. Naturally, additional spending on a card will most likely be truncated when the credit limit is reached. However, the challenge for issuers is to detect fraud before this point is achieved. This would prevent further fraudulent transactions against an account, and at the same time enable the customer to charge legitimate items against their available credit line.

Fraud is actually an uncommon event, accounting for only about one 20th of one percent of all payment card transactions. In addition to the ability to detect fraud quickly, it is also imperative that issuers identify and address new fraud types as soon as they emerge. “Flash fraud” – new fraud patterns that emerge and may or may not be used for a long period of time, need to be quickly identified and mitigated, with a set of rules written to address them. An effective fraud detection and prevention solution must be flexible enough to incorporate new rules designed to address flash fraud.

Another notable challenge for issuers is the impact fraud reduction efforts have on customer satisfaction. An ineffective practice may negatively impact customer retention while not yielding the desired fraud reduction results, while a robust fraud management solution could boost an issuer’s bottom line with minimal negative customer impact.

So to summarize, the requirements for an effective fraud detection and prevention solution for any card issuer must:

Detect large variety of fraud types – both related to different card types as well as detecting new fraud types quickly
Detect a significant portion of fraud volume, but with low false positive rates. So the objective should be to catch as much fraud with as few calls on legitimate transactions as possible. This will lead to minimal negative impact on customer satisfaction with maximum positive impact on catching fraud. In addition, the issuer’s objective should be to catch the higher dollar amount fraud transactions as soon as possible, being able to prioritize the more risky transactions.
The ability to adapt to changing fraud trends is also very important in minimizing fraud losses.
Finally, since incorporating new data and data types into fraud models may improve the performance of the models, issuers are looking to take advantage of new data as it becomes available. An effective solution must have the flexibility to add new data sources and incorporate it into the rules.