Payments companies in the United Kingdom are beating card fraud on some fronts, but those victories could have a hidden cost.
A reversal last year of rising card-not-present fraud rates in the UK suggests various online fraud-screening tools banks and merchants use are succeeding in blocking many potentially fraudulent transactions.
Even card-not-present fraud, including card fraud on transactions conducted online or by phone, declined 2.6% last year, to £220.9 million (US$350 million or 266 million euros) from £226.9 million in 2010, Financial Fraud Action UK announced March 7 (see story). Card-not-present fraud peaked at £328.4 million in 2008 and has been declining steadily since then.
But overly aggressive fraud-screening measures driving card-not-present fraud down also could be preventing legitimate e-commerce growth and frustrating cardholders, some observers suggest.
“The decline in UK card-not-present fraud may not add up to a completely positive situation if banks are turning down a high number of legitimate transactions in order to block fraud across the board,” Patrick Carroll, CEO of ValidSoft Ltd., tells PaymentsSource.
The UK-based firm sells tools designed to help merchants analyze, detect and prevent fraudulent online and face-to-face card transactions. And in recent months ValidSoft has discovered that some merchant clients are routinely declining “far too many” legitimate online card-not-present transactions in their efforts to prevent card fraud, he says.
“We’ve seen numbers where up to 98% of merchants’ declined transactions were false positives,” Carroll says. “Such aggressive policies will certainly reduce fraud, but what also follows is irate customers, costly phone calls and the likelihood that the declined card will move to the back of that customer’s wallet.”
The precise cost of overly aggressive fraud-blocking policies is difficult to calculate, Julie Conroy McNelley, senior analyst and fraud expert with Boston-based Aite Group, says.
“Merchants are getting more sophisticated with front-end fraud tools to weed out the bad guys at the gate,” she notes. “But on the other side, the more-aggressive merchants are with fraud mitigation, the more revenue they may be leaving on the table.”
Consumers also may recoil from certain banks’ policies requiring multiple steps to validate online transactions, McNelley suggests.
UK card issuer Barclays Bank PLC requires consumers to initiate certain card-not-present transactions in the UK using a peripheral chip card reader attached to a PC, McNelley notes. “It’s a horrible experience for consumers and puts a big damper on the process,” she says.
To determine the right balance of fraud-management needed for card-not-present transactions, merchants should closely examine their fraud rates and proportion of declined transactions, McNelley suggests. They also should evaluate the fraud filters they use “to ensure that fraud policies are blocking fraud and not getting in the way of actual business,” she says.
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