Calculating the Total Cost of Fraud on Cardholder Portfolios

I recently had the opportunity to speak at Card Forum 2018 where I addressed a number of card and payment executives representing the industry’s leading issuers, networks, retailers and innovators. With my co-presenter, Brian Fisher, Group Product Manager at U.S. Bank, I led a lively discussion on the topic of card-not-present (CNP) fraud.


Following the advent of EMV chip cards, fraudsters have followed the path of least resistance by attacking CNP channels (online, through mobile devices and over-the-phone). CNP fraud has led to billions of dollars in losses and expenses for financial institutions, and the problem is only expected to worsen.  As CNP fraud rises to 64 percent of total fraud losses, understanding how fraud impacts portfolio growth, cardholder behavior, and profitability is an urgent requirement for card portfolio and marketing managers.


Not only does fraud cost card-issuing banks a fortune, it impacts cardholder usage behavior. Converging market dynamics such as escalating fraud, increasing consumer worry and ecommerce shopping are requiring banks to reshape how they think about and manage fraud. Fraud negatively changes consumer credit and debit card behavior which is a silent revenue killer for banks’ portfolios and a wake-up call for action.


In the past, credit and debit card issuers focused on fraud loss ratios and charge-off dollar volumes. However, that is not nearly enough today. Most card-issuing organizational structures keep the risk management teams isolated from operating departments, customer service channels, and even product portfolio managers. And because bank card organizational structures tend to be siloed, there is little to no cross-functional analysis conducted that accounts for all the fraud related expenses together to paint a cohesive total cost of fraud picture.


Payment card fraud has an impact that reaches well beyond just the charged off dollars, and despite financial institutions’ best intentions, most do not know how fraud affects card portfolios on a multitude of levels. Understanding fraud’s impact is the new imperative for cardholder retention and acquisition marketing efforts. It is essential that portfolio managers recognize that fraud could be a trigger event for detrimental changes in cardholder behavior and attrition. Fraud has become a silent revenue killer that needs to be considered when marketing to new and existing cardholders in an already competitive arena. Fraud prevention techniques have become a marketing opportunity and portfolio benefit above and beyond what the most advanced AI detection methods can deliver.  


The CVV+ solution, from Tender Armor, addresses the growing threat of CNP fraud and the consumer worries it creates. CVV+ works to prevent fraud from occurring before it happens, unlike other solutions that don’t detect fraud until the transaction is being processed. The easy-to-use solution works by anonymously authenticating the cardholder everywhere payment cards are accepted including through mobile devices, online, and over-the-phone by generating a security code that only the cardholder can obtain. The cardholder can choose to receive the code daily or use the solution as a one-time passcode. Cardholders can securely receive their CVV+ code via a mobile app, text-on-demand, a daily SMS message, email, or through their card issuer’s banking site. To complete the transaction, the dynamic CVV+ code is used by the cardholder in place of the static security code printed on the payment card.


Forthcoming research from Tender Armor, conducted by a third-party independent researcher, will provide a clear view of why credit and debit card fraud prevention, as well as understanding the total cost of fraud, is the new imperative going forward. More specifically, the research will reveal the implications of fraud on portfolios and underscore the value behind evaluating the total cost of fraud in order to enhance future cardholder acquisition and retention marketing initiatives.


Looking ahead, bank card issuers are urged to consider the total cost of fraud on their entire organization. Based on the significant operational expenses and market share losses associated with CNP fraud, it’s imperative for card portfolio and marketing managers to take a keen interest in trying not simply to mitigate fraud, but rather prevent it from occurring in the first place.