A recent banking magazine headline asked, "Will Fraud Grind Debit's Growth to a Halt?" It is a fair question to ask in light of the string of high-profile data compromises that have stung the industry over the past two years. The latest was the enormous data theft that TJX Cos. reported earlier this year.
There is no denying debit's meteoric rise over the past decade. In fact, as reported in ATM&Debit News, overall debit purchases exceeded overall credit card purchases last year.
Likewise, there is no denying that crooks are using industry data extremely effectively. Fraud rings worldwide are growing more sophisticated in their acquisition, warehousing, sales and use of stolen data.
Debit-industry players must begin to use their own data as effectively as fraudsters to regain the upper hand and manage fraud. Many fraud decisions today are made without the business intelligence that lay buried in portfolio data. The challenge is to extract, organize and analyze data in a meaningful way that yields actionable outputs.
Easier said than done? No. It is being done right now by various banks and processors. Two key areas of analysis-purchase-limit evaluation and cardholder-behavior analysis after a mass data compromise-are yielding real business intelligence that can be used to achieve measurable portfolio risk reduction, minimized fraud losses and maximized debit-portfolio profitability.
Analyzing data to set appropriate purchase limits can greatly reduce the incidence and dollar volume of debit fraud and significantly cut portfolio fraud risk. A comparison of nonfraud behavior data with information on fraudulent behavior over a sample of several hundred banks suggests that most debit cardholders use only a fraction of the daily purchase limit allotted to them, while fraudsters tend to use it all.
In fact, we have observed portfolios where more than 50% of the fraud risk can be squeezed out of a portfolio by significantly reducing the daily purchase limit, and without any cardholder impact.
Reviewing the impact to spending behavior and profitability when cardholders are affected by a fraud event or card reissuance is another area where available debit data should be used to manage risk. Most debit card issuers are making reissuance decisions without adequately quantifying the impact on cardholder behavior.
Indeed, our analyses shows that a measurable segment of active debit cardholders who are reissued cards after a mass data compromise never use their cards again. In fact, we have observed a decrease in activation rates across all segments of a reissued portfolio.
Add to that the cost of up to $14 per reissued card, and it becomes clear that a decision to reissue is not always the optimal response. Analyzing a portfolio after one compromise can help portfolio managers get smarter and prepare a strategic, data-driven response in time for the inevitable next compromise.
Further, combining managed purchase limits with behavior-analysis intelligence results in an even more powerful fraud-reduction approach.
Fraudsters will continue to steal, warehouse, sell and use debit data in ever more-sophisticated ways, costing the industry millions in losses and untold reputational damage.
Isn't it about time debit issuers and processors started digging into their own data to reveal the business intelligence they need to effectively manage debit fraud?
Jeff Trachtman is vice president and manager of Analytic Innovations LLC's fraud risk analysis division. Based in Chicago, Analytic Innovations provides data-driven risk-management and marketing services. Trachtman can be reached at jefft
(c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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