Credit card fraud detection strategies with consumer incentives

Abstract

Credit card fraud increases as ecommerce becomes more prevalent. Current fraud detection techniques, however, are far from accurate, and can result in significant financial losses to merchants and card issuers. Furthermore, the associated high false positive declines can cause inconvenience and dissatisfaction for consumers. We introduce a consumer incentive strategy for merchants to adopt more accurate fraud detection (prevention) techniques, such as secondary verification. We further optimize the strategy by applying secondary verification only to transactions with values higher than certain thresholds. We identify the conditions under which the strategy is attractive to merchants, and show that it may lead to a ‘win-win-win’ for consumers, merchants, and the card issuer, when the consumer’s tolerance of false declines is low or/and the incentive amount is within a certain range. In addition, we show that coordinated decisions by the merchant and the card issuer may generate further benefits. Finally, the effectiveness of various proposed strategies is demonstrated using actual credit card transaction data.