How banks can (and should) solve the transaction data depletion problem

Let’s do a little mental exercise here. Banks are addicted to data, but they still suffer from data scarcity. Financial institutions have access to vast amounts of customer data, including account information, transaction history, and credit scores. But much of that data is siled across different payment platforms and networks, making it inaccessible to fraud teams when they need it most: at the point of transaction approval. As a result, financial institutions make risk decisions (approve or deny) without proper insight, often resulting in trusted customers being rejected.

We all know that fraud costs a lot of money, and false declines can literally cost merchants millions of dollars. In fact, our own data shows that for every $1 a retailer loses to fraud, an estimated $30 is forfeited due to attrition from legitimate shoppers. The 2023 Consumer Trust Premium report found that 56% of U.S. consumers were incorrectly rejected in a three-month period.

Reliability evaluation

So how can data sharing address these issues? Rather than making risk decisions based on limited and often static transaction data, issuers and sellers can You can evaluate the reliability of identity Behind each transaction. For example, Internet Protocol addresses and geolocation data can give banks reassurance that a cardholder in good standing is traveling.

The lack of proper data also impedes banks’ actions in other ways. Without access to the right types of data, it can be difficult to offer customized products, such as personalized loans or credit card offers, which can result in customers paying higher interest rates and fees. You may have to pay. For financial institutions, not having access to this data means increased costs and reduced efficiency. Banks may have to spend more money on manual processes and customer service if they don’t have access to data about transactions.

The banking industry has some unique characteristics that make the situation even more difficult. For example, the financial industry is highly regulated and banks have been slow to modernize. Banks are also subject to data privacy and data governance rules that can hinder efforts to share data with external partners, even for fraud prevention purposes. Another issue is that banks rely on legacy technology, such as mainframe technology solutions hosted on-premises, rather than modern API-based technology built in the cloud.

The situation is slowly changing. Technology has evolved over time to reduce the risk of fraud. For example, validation technology has moved from always requiring customer interaction (3DS 1) to frictionless behind-the-scenes authentication (3DS 2). European regulations have led to large-scale implementation in the European industry. VISA research shows that 3D Secure 2 can reduce credit card fraud by up to 35%.

Prevent fraud and reduce business risk

So what can banks do now to address this transaction data exhaustion problem? Here’s how to prevent fraud and reduce other business risks when you don’t have complete data access. Here are four recommendations to help you.

1. Modernize your technology stack. Financial institutions need to embrace the cloud. By doing so, publishers can be more flexible from a system perspective. Banks should also prioritize modernizing their authorization and authentication engines. E-commerce is only going to accelerate, and these institutions cannot continue to leverage systems that were built 40 years ago just to process card-present transactions.
2. Get creative by installing rails now: Banks should ask merchants to look at unused data fields and submit insights that can inform more accurate risk decisions. You need to adjust the data you want to receive from merchants that will best help you approve legitimate transactions and reject fraudulent ones.
3. Rely on providers to scale. Building a bespoke solution for every merchant is not scalable. Therefore, banks must work with technology providers to create an ecosystem where a trusted customer for one customer becomes a trusted customer for all merchants. The ultimate goal is for the bank to know that it is dealing with a trusted merchant based on her identity and trust data from the technology provider. When this happens, banks will be able to relax their risk mitigation logic and approve more transactions.
4. Drive innovation: There is power in numbers. The more card networks, banks, and merchants that are part of the trust ecosystem, the more insights they have to inform risk decisions.

Note that the financial industry has made some progress in addressing the lack of transaction data. For example, many banks are now investing in new technology to collect and analyze transaction data. Additionally, the open banking movement has made it easier for banks to share transaction data with each other and other financial institutions in a secure and privacy-preserving manner. Still, much work remains to be done.

Rich transactional context will be a big bet five years from now. Without data to build models, publishers cannot hire quality fraud teams. Sellers who don’t participate in this space will have significantly lower approval rates than sellers who do. And cardholders will come to expect a certain level of precision and accuracy from their banks. If not, they will move to a bank that can offer it. In today’s competitive environment, this is a risk that no financial institution can afford.