How Fraud Can Be a Great Customer Experience

How Fraud Can Be a Great Customer Experience Martin Warwick Biography Martin Warwick is Principal Consultant at FICO with specific responsibilities in Fraud Consulting a position he has held since 2007. Previously Martin headed up the Fraud Operations at Barclaycard with responsibility for over 20 million plastic cards, leading a team of over 400 people. He has over 28 years of plastic card experience with Barclaycard in various roles and responsibilities from fraud through to work study, operations and projects. Martin Warwick Principal Consultant FICO Martin was also heavily involved in major industry fraud prevention initiatives such as the roll out of Chip & PIN. Being heavily involved in the fight against fraud in the UK, meant that Martin was invited to sit on many industry bodies such as the UK, European and International Risk Advisors groups for Visa as well as being a member of the Plastic Fraud Prevention Forum at APACS for many years. Keywords Fraud protection, Customer experience, Customer loyalty, Security and analytics Paper type Research Abstract Consumers are increasingly putting fraud protection amongst their top two criteria when selecting a financial service provider, sometimes even above pricing. But for financial providers, with the proliferation of mobile devices and digital services and the new fraud vulnerabilities they bring, protecting transactions and accounts is more challenging than ever. Providers who successfully defend against these growing vulnerabilities have better customer service and therefore a competitive advantage. As the battle for market dominance shifts from product-based advantages to superior branded customer experiences, security management is now at the forefront of customer loyalty, and vice versa. While it s hard to foresee the precise deciding factors in customer loyalty, providers that offer exceptional fraud management capabilities will have a market-changing advantage. Organisations that successfully find ways to both protect and please will become the strongest contenders in the new battlefield of customer experience. Introduction With all the news about troublesome data breaches, particularly at major US retailers like Target 1 and Sally Beauty 2 you might think that a huge percentage of the population deal with fraud on their credit and debit cards regularly. While that isn t necessarily the case, fraud is high on the press agenda and at the front of people s minds globally, consumers ranked identity theft and bankcard fraud as the most worrisome threats in the 2014 Unisys Security Index, even ahead of national security which means it should be at the forefront of business leaders minds as well, particularly CIOs. 1

Financial service providers should especially take note; recently, CEB TowerGroup analysts reported that security ranked in the top three most valued attributes of financial services providers for over 40% of customers 3. Indeed, one leading bank we have worked with for a while recently revealed that 67% of its customers said security and protection were their primary concern in choosing financial service providers, while only 26% said competitive pricing, and 22% said rewards. Just this time last year, FICO s European map of card fraud 4 showed that card fraud losses in 2013 for 19 European countries reached 1.55 billion more than the previous peak in 2008. While the UK had the highest losses, mainly fuelled by card not present fraud, France and Greece both had higher ratios of fraud losses to card sales, and fraud grew fastest in Russia, jumping nearly 28%. So, it is not really surprising that consumers increasingly put fraud protection and security in their top two criteria for choosing financial services providers. The question is, what strategies are best to follow to fight financial crime without ruining the customer experience? While no-one wants their funds to be accessed by a fraudster across the seas, most customers get quite grumpy if their card is declined just because they are away on holiday. Fraud as a customer service deal-breaker Fraud and security protection has always been something consumers want from financial service providers. However, until recently it has been more of an assumption or afterthought, generally not deemed a big enough factor to make a consumer switch providers, not a customer experience maker or breaker. Today it is. We recently did a survey 5, which found that 68% of banking customers who experienced fraud said the incident was handled so well that their opinion of the provider rose. Among those positively impressed by the experience, one in five later recommended the provider to a friend, family member or colleague, and one in ten opened additional accounts with the provider. On the flip side, we found that 36% of banking customers who experience fraud on an account subsequently closed it, and 15% close all accounts with that provider. Customer experience is key While fraud and security protection is rising to top-of-mind for consumers, customer experience is top-of-mind for businesses. According to a 2014 Gartner survey, Growing competition and consumer power have eroded traditional product-based advantages, forcing organizations to shift to a new battlefield: the customer experience. The study found that 89% of companies surveyed plan to compete primarily on the basis of the customer experience by 2016 6. Tech researchers Altimeter reveal similar findings; in the top eight digital priorities for executives in 2015 7, the top three were all about customer understanding and satisfaction. FICO caught onto this quite early with solutions such as the FICO Proximity Location Service 8, part of our Fraud Resolution Manager 9, which compares the physical location of a cardholder s registered mobile phone against the location of 2

the ATM or point-of-sale terminal where the card is being used. This innovative technology cuts unnecessary and potentially aggravating fraud protection activities like deactivating a card by as much as 70%. It adds a powerful new tool that can help financial service providers eliminate a great source of frustration for their customers who travel. A cardholder account can be blocked or cleared for further activity based on the proximity of the customer s phone to the site of the transaction, reducing the number of false positives (genuine transactions investigated because they appear to be fraudulent) on international transactions. Fraud protection know your customers There is an unprecedented opportunity for fraud management 10 to contribute to enterprise success by simultaneously improving customer protection and experience. However, seizing the moment requires more than a business-as-usual approach to fraud management. Working against fraud while not disrupting your customer s standard behaviour 11 is critical for strong customer service. Figure 1: Listening to the voice of customer Source: CEB Traditionally, knowing the customer in fraud management has centered on transactional analytics recognizing usual versus unusual behavior patterns. Today s best analytics provide deeper, more detailed behavioral insights than ever before but, in this era of changing payment methods, mobile devices and customer attitudes, there are other important things to know about your customers. For instance, do you know which devices and payment or communication methods your customers typically use or are interested in trying? Among its findings, a FICO banking consumer survey shows that financial services providers have an opportunity to increase communication via text messaging, for example using fraud 3

alerts 12. Figure 2 shows there is a gap between what providers are currently doing and what customers want, and it extends across all age groups. Figure 2: Survey shows opportunity for more fraud alerts via text Fortunately, today s flexible fraud management platforms 13 let you make such connections gradually, focusing on where they will have the biggest impact on improving customer experience. An initial step is usually exchanging a data variable or message between two payment channels. Your platform should have the flexibility to fold in new data sources as needed, and exchange information across traditional and alternative payment methods. Metrics for assessing progress are expanding beyond the traditional tracking of revenue, usage and attrition rates. Many financial service providers are paying careful attention to their Net Promoter Scores and analyzing fraud data against overlaid customer satisfaction surveys as they work to improve fraud strategies. However, industry innovators will go further, understanding not only what their customers say, but what they do when impacted by fraud or anti-fraud actions. The future is analysis of detailed customer behavioral data how did we treat that customer, and what happened afterward? Innovative companies use a variety of methods surveys, social media, quick questions via two-way messaging to take frequent readings of where customers are today, and where they re trending. For strong customer service, leading financial service providers will leverage this information to advance their fraud strategies across different channels. Align with enterprise goals To compete on the basis of superior customer experience, companies are beginning to establish explicit goals at the enterprise level. Fraud management should have a seat at the table for such strategic discussions, and senior 4

executives need to understand how fraud management contributes to the company s Net Promoter Score. So, fraud management teams need to align technical capabilities and performance metrics with wider enterprise goals. We are already seeing this trend among FICO clients. One executive at a UK bank described this new challenge: In the same way we determine our institutional appetite for fraud loss, we need to determine our appetite for number of customers impacted by fraud and anti-fraud measures. Meeting such objectives requires financial organizations to make better use of existing technology. A common enterprise goal is more holistic management of customer experiences, so individuals have a sense that the company knows who they are. If you have siloed fraud management operations, aligning with this goal means you need to start breaking down these silos and facilitate information sharing at a minimum enough to avoid the satisfaction-killer situation depicted in Figure 3. Figure 3: Toward holistic management of customer experience Figure 4: Analyzing fraud data against multiple overlays of customer data 5

Use your customer data The next step is to use what you know about your customers across the organization to create targeted fraud management strategies. In real-time decision flows, such as the one in Figure 5, these segmented strategies balance fraud risk against the probable impact on customer experience to determine what action to take. Additional business rules determine how to take action in a given situation based on customer preferences and communication history. Figure 5: Making the best fraud management decision in realtime Initially, most financial service providers will perform segmentation at an account level, but that will change as industry leaders make progress with the data sharing required for managing customer experience across the organization at a holistic level. We expect to see customer-level segmentation, enabling providers to apply fraud management strategies consistently across all accounts. Companies advancing to that point will have a significant competitive advantage as they ll be able deliver the quality of experience that makes customers feel my provider understands me. Mobilize every analytic advantage The most powerful way to simultaneously improve customer protection and customer experience is with better fraud detection and prevention. Today s best detection systems pack an increasing analytic punch into the 40 to 60 milliseconds 14 much faster than the blink of an eye it takes to determine fraud risk in an incoming transaction. Various analytic innovations combat fraud in different ways. Working together, they provide multiple layers of defense for catching more fraud while interceding in fewer legitimate transactions: Increased sensitivity to detail and context of individual behavior. Advanced user behavioral analytics capture the granularity of customer habitual patterns. A customer, Julio for example, may have an amount he typically withdraws from an ATM at a particular location at certain intervals. Such insights continuously updated as behavior evolves sharpen distinctions between normal and suspicious activity. Other analytics confirm that a device Julio is using for an online or mobile transaction has been used by him before and can be trusted. 6

A wider view, from individual outward, of risky patterns or connections. Analytics can examine transactions based on the behavior patterns not only of the customer, but other participants such as merchants, ATMs, POS terminals, etc. A customer s online purchase of expensive sneakers, for instance, might not look suspicious if viewed in isolation. But this merchant has experienced 20 times its normal volume of such sales in the past hour, indicating a fraud scheme may be underway. Additional analytics glide across a wide range of external data sources to ensure customer information and activity is in no way linked to that of suspicious individuals or known criminal networks. Such connections could indicate an account takeover has occurred as part of an organized fraud scheme involving many actors. Grasp changing behavior amid new payment methods and digital services. Adaptive analytics dynamically adjust to changing behavior patterns, enabling faster recognition of both new fraud schemes and legitimate purchasing trends. Self-calibrating outlier models compare the transactional characteristics of similar peer groups (for example, customers with two credit cards and less than 20% credit utilization) to estimate normal ranges of behavior and discover outliers that may indicate fraud risk. Since these models learn normal ranges from the transaction stream (rather than from training on historical data), they improve fraud detection in newly launched products and channels. By continuously recalculating normal ranges, they also quickly pick up how legitimate behavior changes as customers become more familiar with new ways of making purchases and payments. Figure 6: Fraud analytics know more about your customers The customer is king An important trend in fraud management is to give customers opportunities for some degree of control and participation in protecting their accounts. While fraud protection is clearly a key consideration for consumers choosing a financial services provider, it is also their responsibility to be vigilant and monitor their accounts to make sure that there is no suspicious activity. For instance, customers who elect to receive two-way fraud alerts on suspicious transactions can help stop fraud sooner. These quick communications also increase the effectiveness of adaptive analytics by providing more abundant and frequent fraud/no-fraud data. 7

A FICO survey 15 found that while in the US, 63% of consumers said they would like to receive such alerts, only 51% of Canadians and 46% of British consumers were interested. Nevertheless, some customers will want to go further. In the same FICO study, 50% of consumers surveyed in the US, Canada and UK said they wanted to use a mobile app to control the types of transactions for which their cards could be used (for example, no online purchases ) and the maximum purchase amount for allowable transactions along the lines of what s illustrated in Figure 7. Figure 7: Many consumers want more control over fraud protection Conclusion While it is hard to foresee every new digital trend, especially as more connected devices keep financial service providers on their toes, it is clear that customers will opt for providers that combine security and convenience in stand-out ways. The motivation of maintaining happy customers should be more than enough to move fraud management up the priority list, but it is worth keeping in mind the financial ramifications as well. After all, insufficient security has cost Target $19 million 16 and counting. Reference 1 2 3 4 5 6 http://www.cnet.com/uk/news/target-settles-with-mastercard-for-19m-over-databreach/ http://www.inforisktoday.co.uk/new-sally-beauty-breach-old-intrusion-a-8198 CEB TowerGroup, Alternative Payments: FICO World 2014, CEB, 2014 http://www.fico.com/landing/fraudeurope2013/ http://www.fico.com/en/blogs/marketing-customer-engagement/customer-impactfraud-make-break-banks/ Sorofman, J. and McLellan, L. (September 29, 2014) Gartner Research Note: Gartner Study Finds Importance of Customer Experience on the Rise Marketing is On the Hook. 8

7 8 9 10 11 12 13 14 15 16 http://www.intelligenthq.com/business-education-2/the-top-8-digital-businesspriorities-for-executives-in-2015/ http://www.fico.com/en/newsroom/new-fico-technology-correlates-locations-ofmobile-phone-and-card-transaction-to-crack-down-on-fraud http://www.fico.com/en/latest-thinking/product-sheet/fico-fraud-resolution-manager http://www.fico.com/enterprisefraud/ http://www.slideshare.net/fico/fico-fraud-minute-analytics http://www.fico.com/en/products/fico-card-alert-service http://www.fico.com/en/fraud-security/enterprise-fraud-and-security-solutions http://www.fico.com/en/blogs/analytics-optimization/infographic-how-fast-is-cardfraud-detected-5x-faster-than-the-eye-blinks/ http://www.fico.com/en/newsroom/fico-survey-finds-consumers-want-to-play-abigger-part-in-protecting-their-payment-cards-from-fraud http://www.cnet.com/uk/news/target-settles-with-mastercard-for-19m-over-databreach/ 9