In a perfect world, using a payment card at the point of sale would always be safe and seamless. While this is exactly what your members expect, the reality is that security at checkout is a hard-fought battle between fraudsters and financial institutions. And, outsmarting these sophisticated criminals remains an inexact science.
“On average, nine in ten transactions that get flagged today for fraud turn out to be legitimate,” said Nathan Rogers, senior manager, product marketing for CO-OP Financial Services. “While that false positive ratio may seem high, it gets even higher around the holidays and whenever consumers travel.”
According to Rogers, the holidays can be especially difficult for fraud analysts to navigate because consumers are frequently buying in higher dollar amounts than they normally do, which creates anomalies in fraud detection systems.
“Plus, they are often billing from one address and shipping to another,” he said. “Traveling also finds consumers out of their normal routines – and zip codes – which can lead to false positives as well.”
The problem is compounded from the member perspective, he adds, because both scenarios represent times when they rely on their cards the most.
“When members are falsely declined, their first thought is always that everyone around them thinks they just maxed out a card – not that their credit union is protecting them,” he said. “So the next thing they do is pull out another issuer’s card.”
Rogers adds that, in these instances, not only does the credit union lose the transaction and associated interchange, but it also loses top-of-wallet status with the member.
“If false positives happen often enough, credit unions can eventually lose the member relationship completely,” he said.
Better Safe Than Sorry
Rogers emphasizes that while false positives can be burdensome, fraud itself is much more damaging to members.
“It is always possible to lower the rate of false positives simply by writing fewer rules,” he said. “However, in doing so, credit unions expose their members to greater risk. The best way to reduce false positives is to invest in the most advanced technology, employ a team of highly skilled and responsive fraud analysts, and create very granular fraud strategy rules.”
The latter approach, he adds, drives CO-OP’s model, which is why the company has been so successful in this area.
In fact, CO-OP’s track record outperforms the industry by a wide margin, with a false positive ratio of approximately 5:1 – meaning five cases are created for each instance of confirmed fraud – versus an industry average of 9 – 12:1. For fraud denied in real time, CO-OP’s false positive ratio is 1.3:1 versus a national average of 3:1.
And, CO-OP’s fraud and risk management operation is poised for significant advancement in the year ahead, with deep investments being made in some of the industry’s most innovative new technologies.
“Our new fraud detection tools will allow us to zero in on fraud at a very local level, and will also allow individual institutions to write their own rules,” he said. “So, for example, if fraud is occurring at a single hardware store in Lexington, Kentucky, it can be addressed immediately without impacting other credit unions.”
On the Horizon: Machine Learning
Rogers adds that CO-OP’s product roadmap also calls for advanced machine learning technology, which will eventually complement and enhance the company’s fraud detection platform.
“Machine learning will allow us to both detect more incidents of fraud, and defend against them in real time – all with greater precision,” he said. “Which means we expect to generate fewer false positives as well.”
Ultimately, CO-OP machine learning will also aid in account fraud. “Our new solutions will enable us to immediately spot and address suspicious activity on an account, such as $50 withdrawals every half hour from the same POS terminal,” he said.
He continued, “This industry is advancing at the speed of light. Today we are only scratching the surface of the kind of innovation we will be leveraging in the future. Fraudsters, beware.”
To learn more about how to optimize today’s most advanced security innovations, download CO-OP’s newest eBook here.