Fraud Scoring Systems- Are They Outdated Part 3 of 3

In part one of this article, I examined why fraud scoring systems currently used could be considered outdated.

The tools and the manner that the thieves use to steal financial data vary and are ever changing. Because most fraud fighting relies on automated checks as outlined in the previous two parts of this article, thieves are able to recognize changes in the fraud systems that are suppose to protect purchases.

Protection needs to start with the cardholder. (I use the term cardholder to describe the person or company whose financial information is being used to make the financial transaction.) Cardholders need to make sure that they keep their financial data safe and report any inconsistencies or problems. Merchants need to be observant when accepting the various payment methods. For most merchants the days of “know you customer” are gone and they only rely on the point of sale terminal to validate the customer. This can and does cause losses for that merchant. Financial institutions and credit card companies must develop line of defense that helps merchants and cardholders protect the transaction by utilizing purchasing patterns of the individual cardholder.

Nearly every fraud or theft case I have reviewed has one thing in common. The cardholder never participated in or made the questionable transaction. They never were physically at the merchant that the transaction(s) were made. They never ordered from the company over the phone or online. They never authorized the card or a purchase or financial information to make a wire. This list and reasons are numerous. After taking the time to review the cardholders’ information and reviewing information from the required sources involved in the transaction the end results are mostly the same, the transaction was fraudulent and someone other than the cardholder has a financial loss. This has resulted in tens of billions of dollars being lost to the thieves.

If credit card companies, financial institutions, and companies with fraud fighting systems would consider utilizing a multi-level and multi-dimensional system that also utilizes an automated secondary system for anomalies, this could reduce not only losses but the tens of thousand of hours spent by companies yearly in trying to resolve fraudulent transactions.

This system needs to use the granular information gathered when a financial transaction is being conducted and a comparison against all the transactions performed by the individual cardholder or company. This can be achieved by the use of many of the same current rules currently used, as well as adapting some of the current rules to recognize individual cardholder’s transactions. New rules could easily be developed for specific companies and individual transactions. Reviewing transactions to determine if the financial data used by the cardholder was ever used at the assigned MCC code, (Merchant Category Code) as well as if the cardholder made any financial transactions at that merchant, at a similar merchant, in that city, in that state, or ever in that country. Cardholders and companies make the same or very similar transactions over a period of time and yet this information is not used to its full potential.

In 2001 I wrote about trying to use a multi-level system to address the problem of fraud. Ever since this time I have used this to evaluate various systems to help companies reduce fraud losses. In time I understood that in order to address the need of the many types of companies that were suffering from losses this system needed to be multi-dimensional.  Helping a company or financial institution reduce not only the losses they suffer but the amount of time they need to spend trying to recover those losses is paramount in reducing the overall losses and stopping the thieves. In order to reduce the manual needs of fraud fighting, as well as account for purchases by cardholders and companies outside of their normal purchasing patterns, an automated secondary system for anomalies is needed and this can also be automated to handle the acceptance of purchases as well as develop the high degree of protection needed.

Protection for the future will require an overhaul of the current fraud system processes. Protecting the Cardholder, Merchants, Financial Institutions, and Credit Card companies from the ever increasing monetary losses and from the ever persistent ways thieves steal, a granular approach to fraud fighting should be implemented. I have taught many people to review data as follows, “What’s wrong with this picture” and “If it does not look right it probably isn’t”. Automation of these two statements could go far in reducing losses and increasing profits for companies and merchants worldwide.

Al Cameron

612-367-7679