Credit Card Fraud Analytics: The “Obama Problem”

Credit Card Fraud Analytics: The “Obama Problem”

“Excuse me, sir….” You know the situation. It’s probably happened to you. You’re traveling. Or out to dinner with clients. Or buying a special gift. And suddenly, you’re stuck with that shopkeeper or waitress staring at you saying the words you dread to hear: “Your card has been declined.” There’s nothing wrong with your card. You have available limit. Your payment wasn’t late. You’re the victim of poor credit card fraud analytics. Your transaction was flagged by the bank as being “suspicious” and your card was shut off. Now, it’s your responsibility to turn it back on. If you’re lucky, your bank may contact you in advance of shutting it off. Or maybe they’ll reach out to you in the moment. But no matter how it goes, it’s now your problem. Well, it was President Obama’s recently as well, as he admitted at a meeting of the Consumer Financial Protection Bureau (CFPB) recently. While dining out at a nice restaurant, his card was declined by his issuer (Chase Bank, as far as the news reports go). He was saved by his wife’s card, which did work. Which goes to show you how random and problematic these analytics can be. No One Wants Fraud Just so it’s clear: no one wants fraudsters to get away with anything. But the fraudsters seem to have moved from the random target to the “big prize” of hacking into an entire organization. That completely changes the dynamic of how we detect fraudulent activity on a card. Instead of looking for an “out of the blue” odd transaction, we’re invalidating thousands (or in the case...
Non-Bank Business Lines of Credit Change the Risk Formulas

Non-Bank Business Lines of Credit Change the Risk Formulas

Google just recently announced the launch of a small business credit card that only allows for purchases of AdWords campaigns. Along the same lines, Amazon just recently announced it will be offering credit for its online sellers to invest in inventory sold via Amazon. In Google’s case, they’ve opted to use an issuer, Barclaycard, to process through the MasterCardnetwork. In Amazon’s case, they’re going it alone. In both cases, the question is: will this be a threat to traditional card issuers or other commercial lenders. So far, the conventional wisdom is “no.” I disagree. I think the fact that these lines of credit are issued by companies that directly benefit due to the growth will in fact change the landscape. When you look at traditional risk metrics for a line of credit, you are mostly interested in the net interest margin: what you charge minus what you lose minus what it costs you to find the account. (Yes, I’m oversimplifying.) But in the case of Amazon and Google, there’s another component of the profit equation: what you earn from the additional business. This additional profitability component could make all the difference in the world for small business owners. It could tip the scale from “too much risk” to “let’s take the risk.” I know there’s a similarity between retail cards used at, say, Sears or JCPenney’s, and that those retailers finally opted to go with issuers instead of self-funding in most cases. These credit lines drive growth in businesses where retail cards simply fund expenses. That’s why an “HP line of credit”, though it exists, isn’t game changing. HP doesn’t earn...