Ecommerce / Retail
What is blockchain? Blockchain is beginning to get a lot of attention, so I thought it might be time to figure out what it is and what it means. Basically, a blockchain is a permissionless, distributed database that maintains a growing list of records (transactions) in a linear, chronological (and time-stamped) ledger. At a high level, this is how it works. Each computer connected to the network gets a copy of the entire blockchain and performs the task of validating and relaying transactions for the whole chain. The batches of valid transactions added to the record are called “blocks.” A block is the “current” part of a blockchain that records some or all of the recent transactions and once completed goes into the blockchain as a permanent database. Each time a block gets completed, a new block is created, with every block containing a hash of the previous block. There are countless numbers of blocks in the blockchain. To use a conventional banking analogy, the blocks would be a full history of every banking transaction for every person, and the blockchain would be a complete banking history. The entire blockchain is sent to everyone who has access, and every user validates the information in the block. It’s like if Tom, Bob and Harry were standing on the street corner and saw a cyclist hit by a car. Individually, all three men will be asked if the cyclist was struck by the car, and all three will respond “yes.” The cyclist being hit by the car becomes part of the blockchain, and that fact cannot be altered. Blockchain generally is used in the context of bitcoin, where similar uses of the structure are called altchains. Why should I care or, at the very least, pay attention to this movement? Because the idea of it is inching toward the tipping point of mainstream. I recently read an article that identified some blockchain trends that could shape the industry in coming months. The ones I found most interesting were: Blockchain apps will be released Interest in use cases outside payments will pick up Consortia will prove to be important Venture capital money will flow to blockchain start-ups While it’s true that much of the hype around blockchain is coming from people with a vested interest, it is beginning to generate more generalized market buzz as its proponents emphasize how it can reduce risk, improve efficiency and ultimately provide better customer service. Let’s face it, the ability to maintain secure, fast and accurate calculations could revolutionize the banking and investment industries, as well as ecommerce. In fact, 11 major banks recently completed a private blockchain test, exchanging multiple tokens among offices in North America, Europe and Asia over five days. (You can read The Wall Street Journal article here.) As more transactions and data are stored in blockchain or altchain, greater possibilities open up. It’s these possibilities that have several tech companies, like IBM, as well as financial institutions creating what has become known as an open ledger initiative to use the blockchain model in the development of new technologies that will enable a wider array of services. There is no doubt that the concept is intriguing — so much so that even the SEC has approved a plan to issue stock via blockchain. (You can read the Wired article here.) The potential is enough to make many folks giddy. The idea that risk could become a thing of the past because of the blockchain’s immutable historical record — wow. It’s good to be aware and keep an eye on the open ledger initiative, but let’s not forget history, which has taught us that (in the wise words of Craig Newmark), “Crooks are early adopters.” Since blockchain’s original and primary usage has been with bitcoin, I don’t think it is unfair to say that there will be some perceptions to overcome — like the association of bitcoin to activities on the Dark Web such as money laundering, drug-related transactions and funding illegal activities. Until we start to see the application across mainstream use cases, we won’t know how secure blockchain is or how open business and consumers will be to embracing it. In the meantime, remind me again, how long has it taken to get to a point of practical application and more widespread use of biometrics? To learn more, click here to read the original article.
Ensure you’re protecting consumer data privacy Data Privacy Day is a good reminder for consumers to take steps to protect their privacy online — and an ideal time for organizations to ensure that they are remaining vigilant in their fight against fraud. According to a new study from Experian Consumer Services, 93 percent of survey respondents feel identity theft is a growing problem, while 91 percent believe that people should be more concerned about the issue. Online activities that generate the most concern include making an online purchase (73 percent), using public Wi-Fi (69 percent) and accessing online accounts (69 percent). Consumers are vigilant while online Most respondents are concerned they will fall victim to identity theft in the future (71 percent), resulting in a generally proactive approach to protecting personal information. In fact, almost 50 percent of respondents say they are taking more precautions compared with last year. Ninety-one percent take steps to secure physical information, such as shredding documents, while also securing digital information (using passwords and antivirus software). Many consumers also make sure to check their credit report (33 percent) and bank account statements (76 percent) at least once per month. There’s still room for consumers to be safer Though many consumers are practicing good security habits, some aren’t: More than 50 percent do not check to see if a Website is secure Fifty percent do not have all their Web-enabled devices password-protected because it is a hassle to enter a password (30 percent) or they do not feel it is necessary (25 percent) Fifty-five percent do not close the Web browser when they are finished using an online account Additionally, 15 percent keep a written record of passwords and PINs in their purse or wallet or on a mobile device or computer Businesses need to be responsible when it comes data privacy Customer-facing businesses must continue efforts to educate consumers about their role in breach and fraud prevention. They also need to be responsible and apply comprehensive, data-driven intelligence that helps thwart both breaches and the malicious use of breached information and protect all parties’ interests. Nearly 70 percent of those polled in a 2015 Experian–Ponemon Institute study said that the increased visibility and media reporting of breaches, including payment-related incidents, have caused their organizations to step up data security efforts. Experian Fraud & ID is uniquely positioned to provide true customer intelligence by combining identity authentication with device assessment and monitoring from a single integrated provider. This combination provides the only true holistic view of the customer and allows organizations to both know and recognize customers and to provide them with the best possible experience. By associating the identities and the devices used to access services, the true identity can be seen across the customer journey. This unique and integrated view of identity and device delivers proven superior performance in authentication, fraud risk segmentation and decisioning. For more insights into how businesses are responding to breach activities, download our recent white paper, Data confidence realized: Leveraging customer intelligence in the age of mass data compromise. For more findings from the study, view the results here.
Looking at true fraud rate I’ve talked with many companies over the years about their fraud problems. Most have a genuine desire to operate under the fraud prevention model and eliminate all possible fraud from their systems. The impact on profit is often the primary motivation for implementing solutions, but in reality most companies employ a fraud management schema, offsetting the cost of fraud with the cost of managing it. There are numerous write-ups and studies on the true cost of fraud. What most people don’t realize is that, for each item lost to fraud, a business operating on 10 percent net profit margins will need to sell 10 times the amount of product in order to recover the expense associated with the loss. These hard costs don’t include the soft dollar costs, such as increased call center expenses to handle customer calls. Recently, some organizations have started to add reputational risk into their cost-of-fraud equation. With the proliferation of social media, a few unhappy customers who have been victims of fraud easily can impact an organization’s reputation. This is an emerging fuzzy cost that eventually can be tied back to lost revenue or a drop in share price. Most companies say with pride that their acceptable fraud rate is zero. But when it comes time to choose a partner in fraud detection, it almost always comes down to return on investment. How much fraud can be stopped — and at what price? More informed organizations take all operational expenses and metrics into consideration, but many look at vendor price as the only cost. It’s at this point that they start to increase their acceptable fraud rate. In other words, if — hypothetically — Vendor A can stop only 80 percent of the fraud compared with Vendor B, but Vendor A costs less than 80 percent of what Vendor B costs, they’ll choose Vendor A. All of a sudden, their acceptable fraud rate is no longer zero. This method of decision making is like saying we’ll turn off the security cameras for 20 percent of the day because we can save money on electricity. On the surface, I understand. You have to be accountable to the shareholders. You have to spend and invest responsibly. Everyone is under pressure to perform financially. How many executives, however, take the time to see where those lost dollars end up? If they knew where the money went, would they change their view? We must be vigilant and keep our acceptable fraud rate at zero.
Payments and the Internet of things has been colliding for a while now – and it surfaced again recently with Mastercard announcing that it is working with an array of partners including Capital One to launch payments in connected devices. The thinking here seems to be that payments is a function in the Marlow’s pyramid of needs for any new consumer device. I am conflicted on this point – not that I don’t believe the Internet of Things isn’t important, but that we may be overthinking in how payments is important to be shoved inside everything that has a radio baked in. And not everything will have a radio in the future, and the role of a smartphone as the center of the connected device commerce universe isn’t going away. It is important to keep perspective here – as this announcement is less about coat sleeves hiding NFC chips with tokenized credit cards – rather it’s the commerce enablement of devices that we may carry on our person so that they can be armed for payment. Though I may disagree on whether a coat sleeve or jewelry are essential end-points in commerce, a platform of capabilities to challenge, authenticate and verify, and ultimately trust and provision a tokenized representation of something, whether its a card or a fragment of a consumer's identity, to a device that itself represents a collection of radios and sensors is very exciting. It is exciting because as device counts and assortments grow, they each have their own residual identity as a combination of things and behaviors that are either deterministic or probabilistic. The biggest shift we will see is that the collective device identities can be a far better and complete representation of customer identity that the latter will be replaced by the former. Name-centric identities will give away to algorithmically arrived ones. As Dan Geer puts it, no longer will I need to announce that I am Cherian, but my collection of devices will indeed do so on my behalf, perhaps in consultation with each other. More over, none of these devices need to replicate my identity in order to be trusted and tethered, either. Coming back to Payments, today my Fitbit’s claim to make a successful payment is validated way before the transaction, when I authorized provisioning by authenticating through a bank app or wallet. What would be interesting is when the reverse becomes true – when these class of devices that I own can together or separately vouch for my identity. We may forget usernames and passwords, fingerprints may prove to be irrevocable and rigid, but we will always be surrounded by a fog of devices that each carry a cryptographically unique and verifiable signature. And it will be up to the smartphone, its ecosystem and the devices that operate in its periphery to individually negotiate and establish trust among each of them. So this is why I believe the MasterCard effort in tokenizing devices is important when you view it in conjunction with the recent launch of SwiftID from CapitalOne. Payments getting shoved in to everyday things like wearables, disguises the more important effort of becoming a beachhead in establishing trust between devices, by using tokenization as the method of delivery. As you may have gathered by now, I am less excited of pushing cards in to devices (least of all – cars!) and more about how a trusted framework to carve out a tamper proof and secure cache within an untrusted device, along with the process to securely provision a token or a signed hash representing something of value, can serve as the foundation for future device – and by extension – user identity. On a side note, here’s a bit about pushing cards in to cars, and mistaking them for connected cars. To me there are only two connected car classes today. One is Tesla where each car on the road is part of the whole, each learning separately and together as they examine, encounter and learn the world around them to maneuver safely. The other is a button in an app that I hit to have a car magically appear in front of me. Other than Tesla and Uber, there are no other commercial instances of a connected car that appeals (Google has no cars you can buy, yet).
Leveraging customer intelligence in the age of mass data compromise Hardly a week goes by without the media reporting a large-scale hack of sensitive personal or account information. Increasingly, the public seems resigned to believe that such compromises are the new normal, producing a kind of breach fatigue that may be lowering the expectations consumers have for identity and online security. Still, businesses must be vigilant and continue to apply comprehensive, data-driven intelligence that helps to thwart both breaches and the malicious use of breached information and to protect all parties’ interests. We recently released a new white paper, Data confidence realized: Leveraging customer intelligence in the age of mass data compromise, to help businesses understand how data and technology are needed to strengthen fraud risk strategies through comprehensive customer intelligence. At its core, reliable customer intelligence is based on high-quality contextual identity and device attributes and other authentication performance data. Customer intelligence provides a holistic, bound-together view of devices and identities that equips companies and agencies with the tools to balance cost and risk without increasing transactional friction and affecting the customer experience. In the age of mass data compromise, however, obtaining dependable information continues to challenge many companies, usually because consumer-provided identities aren’t always unique enough to produce fully confident decisioning. For more information, and to get a better sense of what steps you need to take now, download the full white paper.
Experian data shows consumers are more confident managing their credit since the recession. The Q3 2015 Experian Market Intelligence Brief was released today featuring data that highlights consumer credit card debt has now reached its highest level since Q4 2009. Credit card debt levels reached $650 billion in Q3 2015, the highest it has been since Q4 2009 when it was $667 billion. Credit card delinquency rates on outstanding balances 60 or more days past due have decreased 71 percent during the same time period. Combining those indicators with the national unemployment rate dropping 50 percent during the same span illustrates a positive economic outlook on credit card trends among lenders and consumers. “Overall credit card limits have increased 102 percent since Q4 2009 with $82 billion originated in Q3 2015,” said Kelly Kent, vice president of Experian Decision Analytics. “The increase in limits from lenders and the steady climb in credit card debt combined with exceptional delinquency rates signals greater confidence among consumers as they are showing more assurance in managing their credit since the recession. We expect to see credit card debt increase in Q4 based on historical seasonal trends driven by the holiday shopping season especially with the early positive holiday sales as a sign.” The Q3 2015 Experian Market Intelligence Brief report is now available.
It’s official. Millennials have surpassed Baby Boomers in population size, according to the US Census. And while they are quick to adopt the “selfie” and all things social, they have been slow to embrace the world of credit. Sure, there’s been increased regulation over the past decade, and coming into adulthood in the midst of the Great Recession hasn’t helped. But don’t count Millennials out of the credit game just yet. A deeper, more segmented view of this digital-dependent generation shows a very diverse population with plenty of opportunity for lenders. Plus, their sheer size in numbers and $200 billion in annual buying power demand financial institutions evolve to accommodate this massive market. As Gen Y comes of age, there is growing evidence they are open to building and growing their personal credit history. But if financial institutions wish to capture the attention and business of this demographic, they must adapt, leveraging deeper segmentation insights with more effective prospecting strategies to reach them. Experian's data reveals key trends in terms of how this generation is utilizing credit, tips and tools to find the most credit-ready individuals, and strategies to grow the thin-file Millennials as they come of age. “Given the significance millennials play in financial services and the credit marketplace, it is crucial to understand this influential consumer segment and how they use credit as a tool,” said Michele Raneri, vice president of analytics and business development. “While this generation may not look like they are on the right track financially, it’s important to keep in mind that credit scores are built on credit experiences, and while this generation has been slower to use credit, they have plenty of opportunities to build a positive credit history.” To learn more about Millennials and credit, visit Experian.com/millennials.
Customer Experience during the holiday shopping season During the holidays, consumers transact at a much greater rate than any other time of the year. Many risk-management departments respond by loosening the reins on their decision engines to improve the customer experience — and to ensure that this spike does not trigger a response that would impede a holiday shopper’s desire to grab one more stocking stuffer or a gift for a last-minute guest. As a result, it also is the busy season for fraudsters, and they use this act of goodwill toward your customers to improve their criminal enterprise. Ultimately, you are tasked with providing a great customer experience to your real customers while eliminating any synthetic ones. Recent data breaches resulted in large quantities of personally identifiable information that thieves can use to create synthetic identities being published on the Dark Web. As this data is related to real consumers, it can be difficult for your identity-authentication solution to determine that these identities have been compromised or fabricated, enabling fraudsters to open accounts with your organization. Experian’s Identity Element Network™ can help you determine when synthetic identities are at work within your business. It evaluates nearly 300 data-element combinations to determine if certain elements appear in cyberspace frequently or are being used in combination with data not consistent with your customer’s identity. This proven resource helps you manage fraud across the Customer Life Cycle and hinder the damage that identity thieves cause. Identity Element Network examines a vast attribute repository that grows by more than 2 million transactions each day, revealing up-to-date fraud threats associated with inconsistent or high-risk use of personal identity elements. Our goal is to provide the comfort of knowing that you are transacting with your real customers. Don’t get left in the cold this holiday season — fraudsters are looking for opportunities to take advantage of you and your customers. Contact your Experian account executive to learn how Identity Element Network can help make sure you are not letting fraudsters exploit the customer experience intended for your real customers. Learn more about the delicate balance between customer and criminal by viewing our fraud e-book.
Electronic signatures and their emerging presence in our Internet-connected world I had the opportunity to represent Experian at the eSignRecords 2015 conference in New York City last week. The concept of electronic signature, while not new, certainly has an emerging presence in the Internet-connected world — as evidenced by the various attendee companies that were represented, everything from home mortgages to automobiles. Much of the discussion focused on the legal aspects of accepting an electronic signature in lieu of an in-person physical signature. The implications of accepting this virtual stamp of approval were discussed, as well as the various cases that already have been tried in court. Of course, the outcome of those cases shapes the future of how to properly integrate this new form of authorization into existing business processes. Attendees discussed the basic concept of simply accepting a signature on an electronic pad as opposed to one written on a piece of paper. That act alone has many legal challenges even though it provides the luxury of in-person authentication through a face-to-face meeting. The complexities and risk increase exponentially when these services are extended over the Internet. The ability to sign documents virtually opens up a whole new world of business opportunities, and the concept certainly caters to the consumer’s need for convenience. However, the anonymity of the Internet presents the everyday challenge of balancing consumer expectations of greater ease of use with necessary fraud prevention measures. Ultimately, it always comes back to understanding who is actually signing that document. All of this highlights the need for robust authentication and security measures. As more and more legal documents and contracts are passed around virtually, the opportunity to properly screen and verify who has access to the documents gets more critical. Many organizations still rely on the tried-and-true method of knowledge-based authentication (KBA), while many others have called for its end. KBA continues to soldier on as an effective way to ensure that people on the other end of the wire are who they say they are by asking questions that — presumably — only they know the answers to. In most cases, KBA is viewed as a “check the box” step in the process to satisfy the lawyers. In certain cases, that’s all you need to do to ensure compliance with legal policy or regulatory requirements. It starts to get tricky is when there’s more on the line than just “check the box” actions. When the liability of first- or third-party fraud, becomes greater than simple compliance, it’s time to implement tighter security, while at the same time limiting the amount of friction caused by the process. Many in attendance discussed the need for layers of authentication based on the type of documents that are being processed and handled. This speaks directly to the point that one size does not fit all. As the industry matures and acceptance of e-signatures increases, so too does the need for more robust, flexible options in authentication. Another topic — that was quite frankly foreign to everyone we talked to — was the need for security around the concept of account takeover. When discussing this type of fraud, most attendees did not even consider this to be a hole in their strategy. Consider this fictional scenario. I’m responsible for mergers and acquisitions for my publicly traded company. I often share confidential information via electronic means, leveraging one of the many electronic signature solutions on the market. I become a victim of a phishing attack and unknowingly provide my login credentials to the fraudster. The fraudster now has access to every electronic document that I have shared with various organizations — most of which have been targets for mergers and acquisitions. Fraudsters are creative. They exploit new technologies — not because they’re trendsetters, but because oftentimes these new technologies fail to consider how fraudsters can benefit from the system. If you are considering adopting e-signature as a formal process, please consider implementing: Flexible levels of authentication based on the risk and liability of the documents that are being presented and what they are protecting FraudNet for Account Takeover, which enhances security around access to these critical documents to protect against data breaches Not only the needs and experiences of your own business, but customer needs as well to enable to the best possible customer interactions If you haven’t considered implementing e-signature technology into your business process, you should — but be sure to have your fraud team present when considering the implementation.
Hello from the other side ... While Adele scores big on the Billboard Hot 100 by crooning of coming to terms with a lover from the past, a new Experian “State of Credit” reveals we are officially on the “other side” of the recession – at least if you’re looking at the nation’s credit scores. While the bottom of the Great Recession was reached in the second quarter of 2009, steady job growth was not seen until 2011, and even since, some economists claim it has been a "Tortoise Recovery.” But key findings from Experian’s 6th annual study, ranking top and bottom cities across the nation in regards to credit, suggests the U.S. is strong. “If I were to give a grade to the overall picture of credit in the United States, I would give it an A minus,” said Michele Raneri, Experian’s vice president of analytics and new business development. “I’m optimistic about the state of credit as we are seeing more loans being extended, late payments are decreasing and consumers are continuing to gain more confidence in originating loans. There definitely is growth and momentum — we’re back to prerecession levels in nearly every category, which means lenders are in a prime position to capitalize on this market and foster business growth.” Which states topped the credit charts? As in previous years, Minnesota continues to shine with three of its cities — Mankato, Rochester and Minneapolis — leading with credit scores of 706, 705 and 704, respectively. Greenwood, Miss. and Albany, Ga. ranked the lowest with scores of 612 and 622. While still at the bottom of the list with a score of 612, Greenwood, Miss., residents did improve their score by three points, more than any other city in the bottom 10. Overall, the report reveals the national credit score increased by three points over the last year (and by five points since 2013) and the 10 cities with the highest credit scores in the nation increased their scores by an average of 1.8 points. Additionally, bankcards, retail cards and mortgage lending showed significant growth, making this year’s study an indicator of the nation’s confidence in the credit market. Just in time for the election year, this year’s study includes insight into how residents of these top and bottom metropolitan statistical areas (MSAs) identify politically. The study found that half of the highest-scoring cities have residents whose views skew more middle of the road, while residents of lower-scoring cities are more likely to lean conservative. The full lists of the top 10 and bottom 10 cities are featured (scores are rounded to the nearest whole number). Detailed study highlights include the following changes over the last year: The national VantageScore® credit score is up by three points, from 666 to 669. Bankcard lending continues to increase, with new bankcards up 7.7 percent. The average number of bankcards per consumer is up 2.8 percent to 2.24 cards. Retail card lending also is on the rise, with a 10.8 percent increase in new originations. The average number of retail cards per consumer is up 0.3 percent to 1.55 cards from last year and up by 7 percent since 2013. Instances of late payments (includes bankcard and retail) decreased by 4.4 percent over the last year and by 17.3 percent since the height of the recession in 2010. Average debt2 is up 2.1 percent to $29,093 per consumer. Mortgage originations increased by 42.5 percent. For a more complete look at the above cities as well as the other MSAs studied, visit http://www.livecreditsmart.com to view a fully interactive map and infographic. Purchase The Experian Market Intelligence Brief, a quarterly report that includes more than 70 charts and data trends on loan originations, outstanding loans and delinquency performance metrics spanning three years.
Profile of an online fraudster I recently read a study about the profile of a cybercriminal. While I appreciate the study itself, one thing it lacks perspective on is an understanding of how identity data is being used to perpetrate fraud in the online channel. One may jump to conclusions about what is a good indicator for catching fraudsters. These very broad-brush observations may result in an overwhelming number of false positives without digging in deeper. Purchase value A single approach for understanding the correlation between purchase value and fraud does not work to best protect all businesses. Back in 2005, we saw that orders under $5 were great indicators of subsequent large-ticket fraud. For merchants that sell large-ticket items, such as electronics, those same rules may not be effective. To simply believe that the low dollar amount is the extent of the crime and not just a precursor to the real, bigger crime indicates a lack of understanding of how fraudsters work to manipulate a system. For some merchants, where fraudsters know they can go to do card testing against their business, low-dollar-amount rules may apply. However, for other businesses a different set of rules must be put into place. Time of day We have been tracking fraud time of day as a rule since 2004, but the critical point is a clear definition of which time of day. For the merchant, 3 a.m. is very different than 3 a.m. for a fraudster who is in Asia or Eastern Europe, where 3 a.m. merchant time is actually the middle of the online fraudster’s day. FraudNet is designed to identify the time from the user’s device and runs its rules from the user’s time. We find that every individual business will have a very specific threat profile. Businesses need to build their individual fraud strategy around their overall attack rate taking into account the strength of the defense and the ability to be flexible to accommodate the nuances for individual consumers. A general approach to fraud mitigation inevitably results in a system that begins to chase broad averages, which leads to excessive false positives and mediocre detection. That’s what drives us to do the job better. The proof of every fraud solution should lie in its ability to catch the most fraud without negatively impacting good customers.
What the EMV Shift means for you I recently facilitated a Webinar looking at myths and truths in the market regarding the EMV liability shift and what it means for both merchants and issuers. I found it to be a very beneficial discussion and wanted to take some time to share some highlights from our panel with all of you. Of course, if you prefer to hear it firsthand, you can download the archive recording here. Myth #1: Oct. 1 will change everything Similar to the hype we heard prior to Y2K, Oct. 1, 2015, came and went without too much fanfare. The date was only the first step in our long and gradual path to EMV adoption. This complex, fragmented U.S. migration includes: More than 1 billion payment cards More than 12 million POS terminals Four credit card networks Eighteen debit networks More than 12,000 financial institutions Unlike the shift in the United Kingdom, the U.S. migration does not have government backing and support. This causes additional fragmentation and complexity that we, as the payments industry, are forced to navigate ourselves. Aite Group predicts that by the end of 2015, 70 percent of U.S. credit cards will have EMV capabilities and 40 percent of debit cards will be upgraded. So while Oct. 1 may not have changed everything, it was the start of a long and gradual migration. Myth #2: Subscription revenues will plummet due to reissuances According to Aite, EMV reissuance is less impactful to merchant revenues than database breaches, since many EMV cards are being reissued with the same pan. The impact of EMV on reoccurring transactions is exaggerated in the market, especially when you look at the Update Issuer provided by the transaction networks. There still will be an impact on merchants, coming right at the start of the holiday shopping season. The need for consumer education will fall primarily on merchants, given longer lines at checkout and unfamiliar processes for consumers. Merchants should be prepared for charge-back amounts on their statements, which they aren’t used to seeing. Lastly, with a disparate credit and debit user experience, training is needed not just for consumers, but also for frontline cashiers. We do expect to see some merchants decide to wait until after the first of the year to avoid impacting the customer experience during the critical holiday shopping season, preferring to absorb the fraud in the interest of maximizing consumer throughout. Myth #3: Card fraud will decline dramatically We can look to countries that already have migrated to see that card fraud will not, as a whole, decline dramatically. While EMV is very effective at bringing down counterfeit card fraud, organized crime rings will not sit idly by while their $3 billion business disappears. With the Canadian shift, we saw a decrease in counterfeit card loss but a substantial increase in Card Not Present (CNP) fraud. In Canada and Australia, we also saw a dramatic, threefold increase in fraudulent applications. When criminals can no longer get counterfeit cards, they use synthetic and stolen identities to gain access to new, legitimate cards. In the United States, we should plan for increased account-takeover attacks, i.e., criminals using compromised credentials for fraudulent CNP purchases. For merchants that don’t require CVV2, compromised data from recent breaches can be used easily in an online environment. According to Aite, issuers already are reporting an increase in CNP fraud. Fraudsters did not wait until the Oct. 1 shift to adjust their practices. Myth #4: All liability moves to the issuer EMV won’t help online merchants at all. Fraud will shift to the CNP channel, and merchants will be completely responsible for the fraud that occurs there. We put together a matrix to illustrate where actual liability shifts and where it does not. Payments liability matrix Note: Because of the cost and complexity of replacing POS machines, gas stations are not liable until October 2017. For more information, or if you’d like to hear the full discussion, click here to view the archive recording, which includes a great panel question-and-answer session.
While walking through a toy store in search of the perfect gift for a nephew, I noticed the board game Risk, which touts itself as “The Game of Global Domination.” For those who are unaware, the game usually is won by players who focus on four key themes: Strategy — Before you begin the game, you need a strategy to attack new territories while defending your own Attack — While you have the option to sit back and defend your territory, it’s better to attack a weakened opponent Fortify — When you are finished attacking, it’s often best to fortify your position Alliances — While not an official part of the game, creating partnerships is necessary in order to win These themes also are relevant to the world of real-life fraud risk prevention. The difference is that the stakes are real and much higher. Let’s look at how these themes play out in real-life fraud risk prevention: Strategy — Like in the game, you need a strategy for fraud risk detection and prevention. That strategy must be flexible and adaptable since fraudsters (your enemies) also continuously adapt to changing environments, usually at a much quicker, less bureaucratic pace. For example, your competitors (other countries) may improve their defenses, so fraudsters will mount a more focused attack on you. Fraudsters also may build alliances to attack you from different vectors or channels, resulting in a more sophisticated, comprehensive strike. Attack — As the game begins, all players have access to all competitors (countries). This means that fraudsters might have the upper hand in a certain area of the business. You can sit back and try to defend the territory you already “own,” where fraudsters have no traction, but it’s best to be aggressive and attack fraudsters by expanding your coverage across all channels. For example, you might have plenty of controls in place to manage your Web orders (occupied territory), but your call center operations (opponents’ territory) aren’t protected, i.e., the fraudsters “own” this space. You need to attack that channel to drive fraudsters out. Fortify — In the game, you can fortify your position after a successful move — that is, move more troops to your newly conquered territories. In real life, you always have the option to fortify your position, and you should constantly look for ways to improve your controls. You can’t afford to maintain on your current position, because fraudsters constantly are looking for weaknesses. Alliances — In business, we often are hesitant to share information with our competitors. Fraudsters use this to their advantage. Just as fraudsters act in a coordinated fashion, so must we. Use all available resources and partners to shore up your defenses Leverage the power of consortium data Learn new methods from traditional competitors Always team up with internal and external partners to defend your territory If you apply these themes, you will be positioned for global domination in the fight against fraud risk. You can read more about fraud-prevention strategies in our recent ebook, Protecting the Customer Experience. As a side note, I’m always ready for a game of Risk, so contact me if you’re interested. But be forewarned — I’m competitive.
What will the EMV shift really mean for consumers and businesses here in the U.S.? Businesses and consumers across the U.S. are still adjusting to their new EMV credit cards. The new credit cards are outfitted with computer chips in addition to the magnetic strips to help prevent point-of-sale (POS) fraud. The new system, called EMV (which stands for Europay, MasterCard and Visa), requires signatures for all transactions. EMV is a global standard for credit cards. In the wake of the rising flood of large-scale data breaches at major retailers – and higher rates of counterfeit credit card fraud – chip-and-signature, as it is also called, is designed to better authenticate credit card transactions. Chip-and-signature itself is not new. It has been protecting consumers and businesses in Europe for several years and now the U.S. is finally catching up. But what will the EMV system really mean for consumers and businesses here in the U.S.? There is the potential for businesses that sell both offline and online, to see an increase in fraud that takes place online called Card Not Present (CNP) fraud. Will credit card fraud ever really be wiped out? Can we all stop worrying that large-scale point-of-sale breaches will happen again? Will the EMV shift affect holiday shopping and should retailers be concerned? Join us as we explore these questions and more on an upcoming Webinar, Chipping Away at EMV Myths. Our panel of experts includes: David Britton, Vice President, Industry Solutions, Experian Julie Conroy, Research Director, Aite Group Mike Klumpp, Director of Fraud Prevention, Citibank Moderated by: Keir Breitenfeld, Vice President, Product Management, Experian
Understanding and managing first party fraud Background/Definitions Wherever merchants, lenders, service providers, government agencies or other organizations offer goods, services or anything of value to the public, they incur risk. These risks include: Credit risk — Loosely defined, credit risk arises when an individual receives goods/services in exchange for a promise of future repayment. If the individual’s circumstances change in a way that prevents him or her from paying as agreed, the provider may not receive full payment and will incur a loss. Fraud risk — Fraud risk arises when the recipient uses deception to obtain goods/services. The type of deception can involve a wide range of tactics. Many involve receiving the goods/services while attributing the responsibility for repayment to someone else. The biggest difference between credit risk and fraud risk is intent. Credit risk usually involves customers who received the goods/services with intent to repay but simply lack the resources to meet their obligation. Fraud risk starts with the intent to receive the goods/services without the intent to repay. Between credit risk and fraud risk lies a hybrid type of risk we refer to as first-party fraud risk. We call this a hybrid form of risk because it includes elements of both credit and fraud risk. Specifically, first party fraud involves an individual who makes a promise of future repayment in exchange for goods/services without the intent to repay. Challenges of first party fraud First party fraud is particularly troublesome for both administrative and operational reasons. It is important for organizations to separate these two sets of challenges and address them independently. The most common administrative challenge is to align first-party fraud within the organization. This can be harder than it sounds. Depending on the type of organization, fraud and credit risk may be subject to different accounting rules, limitations that govern the data used to address risk, different rules for rejecting a customer or a transaction, and a host of other differences. A critical first step for any organization confronting first-party fraud is to understand the options that govern fraud management versus credit risk management within the business. Once the administrative options are understood, an organization can turn its attention to the operational challenges of first-party fraud. There are two common choices for the operational handling of first-party fraud, and both can be problematic. First party fraud is included with credit risk. Credit risk management tends to emphasize a binary decision where a recipient is either qualified or not qualified to receive the goods/services. This type of decision overlooks the recipient’s intent. Some recipients of goods/services will be qualified with the intent to pay. Qualified individuals with bad intentions will be attracted to the offers extended by these providers. Losses will accelerate, and to make matters worse it will be difficult to later isolate, analyze and manage the first party fraud cases if the only decision criteria captured pertained to credit risk decisions. The end result is high credit losses compounded by the additional first party fraud that is indistinguishable from credit risk. First party fraud is included with other fraud types. Just as it’s not advisable to include first party fraud with credit risk, it’s also not a good idea to include it with other types of fraud. Other types of fraud typically are analyzed, detected and investigated based on the identification of a fraud victim. Finding a person whose identity or credentials were misused is central to managing these other types of fraud. The types of investigation used to detect other fraud types simply don’t work for first-party fraud. First party fraudsters always will provide complete and accurate information, and, upon contact, they’ll confirm that the transaction/purchase is legitimate. The result for the organization will be a distorted view of their fraud losses and misconceptions about the effectiveness of their investigative process. Evaluating the operational challenges within the context of the administrative challenges will help organizations better plan to handle first party fraud. Recommendations Best practices for data and analytics suggest that more granular data and details are better. The same holds true with respect to managing first party fraud. First party fraud is best handled (operationally) by a dedicated team that can be laser-focused on this particular issue and the development of best practices to address it. This approach allows organizations to develop their own (administrative) framework with clear rules to govern the management of the risk and its prevention. This approach also brings more transparency to reporting and management functions. Most important, it helps insulate good customers from the impact of the fraud review process. First-party fraudsters are most successful when they are able to blend in with good customers and perpetrate long-running scams undetected. Separating this risk from existing credit risk and fraud processes is critical. Organizations have to understand that even when credit risk is low, there’s an element of intent that can mean the difference between good customers and severe losses. Read here for more around managing first party fraud risk.