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May 17, 2017

Two-factor authentication (3D Secure), card limits, risk score, liability shift, and insurance help mitigate payment risk for issuers

Two-factor authentication (3D Secure), card limits, risk score, liability shift, and insurance help mitigate payment risk for issuers

Issuers prevent payment fraud by implementing several risk-reducing strategies, such as contracts, card usage limits, fraud detection algorithms, blacklists, insurance, and 3D Secure verification.

  1. Using two factor authentication (3D Secure);
  2. Setting usage limits;
  3. Using fraud detection algorithms;
  4. Cardholders and acquiring side also have responsibilities;
  5. Speeding up escalation; and
  6. Using insurance.

Using two factor authentication (3D Secure)

To help reduce fraud, issuers may authenticate card holders with two factors (3D Secure). The first factor is the card number and CVC, and the second is, generally, the phone number or email address linked to the card holder, which is used to receive authentication codes.

Setting usage limits

Using private banking contracts or client-defined rules, banks can also limit the maximum amount a card is charged within a given period (e.g., a week or a month) or the regions from which charges can come (e.g., national or international). These limits also help reduce the likelihood of fraud.

Using fraud detection algorithms

Another layer of prevention for banks involves algorithms that can identify live transactions at risk for payment fraud. If these algorithms detect a risky transaction, alerts are triggered. These alerts may notify the bank or the client. At that point, there are three options: to deny, verify, or accept transactions.

Cardholders and acquiring side also have responsibilities

Issuers must know exactly what their liabilities are for each fraud subtype. Depending on those liabilities, they may shift the loss to the acquiring side or the cardholders. In both cases, because the issuer knows what its liabilities are, it does not “absorb” the losses.

Liability Reason
1 Acquiring side 3D Secure was disabled.
2 Client Client failed to rapidly discover the fraudulent charge and notify its bank.

In both cases, because the issuer knows what its liabilities are, it does not “absorb” the losses.

Speeding up escalation

Issuers may also implement internal mechanisms to speed up the detection and escalation of fraud. This matters because efficient escalation prevents the repeated occurrence of fraudulent trans- actions of the same type, which in turn reduces the overall risk and the likelihood that the issuer will have to “absorb” additional losses.

Using insurance

Finally, the issuers’ last line of defense is still insurance. By definition, issuers have a strong financial incentive to reduce their reliance on insurance because the price of premiums depend on the risk level; the lower that risk, the lower the premium price is.

References