Real-time Fraud Detection: Are You Ready for 2022?

It’s a sure sign that year-end is fast approaching when stores start to display their holiday merchandise and decorations before Hallowe’en is even over.

As you start planning for a successful 2022, and focus on payment security and frictionless customer experience, consider the global financial, regulatory and economic factors that will impact your business.

Evolving cyberattacks, privacy laws, customer expectations, and increase in digital-first services layer a huge load on financial institutions and merchants. If your team is responsible for fraud prevention and a secure, seamless banking or shopping experience, how can you prepare for what’s to come and maximize the security of payments?

Here are a few things to keep in mind when planning your payment fraud prevention and detection strategy for 2022.

i) Can You Keep Payments Secure in the Era of Open Banking and Open Finance?

Open Banking has become a global reality that creates opportunities and risks.

According to a research done by Accenture, 76% of banks worldwide expect customer adoption and Open Banking API usage to increase by 50% or more in the next three to five years. It gives financial institutions the opportunity  to leverage customer data by offering highly personalized products and services.

In Canada, for example, the concept of “consumer-directed finance” is used to describe the future of financial services, envisioning a framework where consumers have complete control over their financial data and grant third-party financial services providers access to this data.

While some may view Open Finance, or consumer-directed finance, as either a threat or a challenge (or both), increased access to data and data-sharing among institutions can help mitigate the risk of fraud and money laundering. The problem is that innovation still relies on customer trust in the system: your clients have to be sure that their data is being protected and that their funds are secure.

Things to consider:

  1. How effective is your customer education program? Is it measurable? Do your clients feel that their funds are protected?
  2. Do you have unlimited access to payment transaction data in real-time so you can move faster than the financial criminals?
  3. Do you use customer behavioral analytics to gain valuable insights into how customer use your products and services?
  4. Does your fraud detection system use supervised and unsupervised machine learning to detect both known fraud attacks and spot anomalies on the fly, detecting new, unknown patterns?

II) How precise are your payment fraud detection and blocking solutions?

As a payment transaction passes through multiple points in the payment ecosystem, certain data loss can easily happen. For example, a merchant may have deployed device fingerprinting and behavioral biometric solutions containing a rich set of data that issuers, acquirers, and payment processors never see. Fraudsters are looking to take advantage of such gaps in the payment journey and they exploit weaknesses aggressively.

Many merchants have hurried to solve this problem by investing in fraud solutions, only to discover an even bigger challenge – falsely declined transactions. False declines can cost you much more than fraud and they leave many shoppers frustrated enough to abandon their shopping journey altogether. 

In 2022, you can be in the forefront of a new approach to preventing fraud – one that occurs earlier in the process, closer to the user, and uses high-quality data to detect and block fraud attacks more precisely.

Typical fraud detection solutions sit at the back end of transactions, usually at the authorization host. They rely on data fed to them via API from some – but not all – points in the transaction journey and the data itself has been stripped of valuable information by the systems from which it is gathered. The better approach to fraud detection is to capture data from the entire end-to-end transaction at the network level, and leveraging the raw, unfiltered network traffic for anomaly detection. When suspicious and fraudulent transactions are detected, individual transactions can be blocked at the field level based on a variety of different criteria, allowing good traffic through while keeping out the fraudsters. This level of precision means you can approve more legitimate transactions (meaning more revenue) and block more fraudulent ones.

Things to consider:

  1. What is your cost of false declines compared to your cost of payment fraud loses?
  2. Can you block transactions per user, per PAN?
  3. Can you block anomalies on the fly, in real-time, while still approving legitimate payments?
  4. Is your level of customer experience at the threshold you want?

III) Is your payment fraud detection happening in real-time throughout the payment journey?

The development of global real-time payment services will have an impressive impact on the financial industry: faster transactions mean faster availability of funds, lower payment costs, and increased efficiency. Payment modernization holds great promise for financial institutions, fintech companies, and merchants, while raising concerns with payment security.

Real-time transactions happen in seconds and are irrevocable. Cybercriminals and fraudsters use sophisticated techniques. They will jump on any perceived weakness quickly, leaving little or no time for banks, payment providers, and merchants to defend against attacks. If you are still relying on stagnant data and manual fraud case reviews, you will not be able to keep up. Living in the era of real-time payments requires instant reaction and access to real-time data, so you can detect and block fraud in milliseconds.

As more and more third-party instant payments apps enter the market, the risk for financial institutions and merchants increases. A New York Times report reveals that payment apps typically have fraud rates that can be three to four times higher than those of credit and debit cards.

Finding that balance between convenience, frictionless customer service, innovation, and security is key for success and growth, as more fintechs compete with traditional financial service providers.

Things to consider:

  1. Do you have access to real-time data across all payments channels?
  2. Can you block fraudulent transactions in real-time?
  3. Can you spot anomalies on the fly, as they appear, before the transaction is completed?

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