Financial institutions are fighting the wrong war when it comes to credit card fraud, said Scott Edington, CEO of San Francisco-based Deep Labs.
Fraudulent transactions are expected to total $32 billion worldwide in 2019, according to Nilson. But banks should be paying more attention to false positive declines, Edington said.
False declines — payment-card transactions that are incorrectly flagged and canceled — led to losses of $331 billion globally in 2018, said Edington, citing a study by research and advisory firm Aite Group.
"Let's say I take a couple of my clients out to a very nice dinner, and I spend $500. Typically, if you're looking at my history, I would normally never spend $500 on a dinner. What ends up happening is oftentimes, that sort of transaction would be declined by a payment processor," Edington told Banking Dive. "The reason it’s been declined is because it doesn't fit the mold or the pattern that it's used to seeing as relates to my purchase history."
Edington said his company's context-aware platform can use persona-based intelligence to better differentiate between a fraudulent transaction and a legitimate one. The key, he said, is open banking, which allows financial institutions to share customer financial data with fintechs and other third-party providers.
"Until now, computers and specifically neural nets couldn't distinguish between the different contexts," he said. "What we're able to do is provide a solution that allows the banks, the payment networks and the various merchants to really understand the context surrounding that transaction or that event to make heads or tails of it."
Three of the U.S.'s top five banks are using the platform to minimize fraudulent transactions and false declines, said Edington, who co-founded Deep Labs in 2016. He added that his company is also servicing three top payment networks.
The financial services sector is closely eyeing the opportunities that open banking provides since it was mandated in Europe last year with the European Union's passage of the Payment Services Directive 2 (PSD2).
The law requires banks to open up their application programming interfaces (APIs) and customer data, with customer consent, to third-party vendors.
"The idea is to enable payment service providers, financial institutions and payment networks to better serve the consumer," said Edington, adding that open banking has allowed third-party vendors to develop myriad platforms focused on identity verification, credit scoring and wealth management, among others. "What it does is it opens up new digital channels for these historic banks."
Although he U.S. has not followed the EU's lead with mandated open banking, the vast majority of U.S. banks are implementing it in some form, Edington said.
"The top 10 banks have a huge budget behind it, so they have the ability to take some of their legacy services and provide APIs to them," he said.
A 2018 report by the U.S. Treasury concluded that the private sector would be best positioned to pursue open banking, acknowledging "significant differences between the United States and the United Kingdom" in regulation.
"I don't think there's going to be any sort of regulatory push in the short time frame," Edington said, "but what I've seen from a market survey perspective is that the large banks and certainly the large payment networks have been bending over backwards to become far more open in terms of providing open frameworks that are allowing the fintechs that are popping up in New York and San Francisco to introduce some very cool and compelling services."
