Financial institutions have reported a spike in attempted credit card fraud since the pandemic shut down the global economy.
The Federal Trade Commission registered 2.2 million fraud cases involving U.S. consumers in 2020. They lost more than $3.3 billion due to fraud in this period.
However, it's not only consumers who are falling victim to fraud. According to a recent PWC survey, almost 50% of companies around the world have experienced fraud in the past two years. The estimated cost amounted to $42 billion!
Fraud rates are still at an all-time high. Ignoring fraud prevention is a risk that companies can't afford. So, what options are available?
Rules-Based Fraud Management Solution
Rules are a proven method of providing protection from fraud and mitigating risk. A rule can consist of conditions that, when satisfied, flag a transaction as fraudulent.
Fraud detection systems that use rules to prevent fraud analyze a set of unusual factors— including timestamps, account numbers, IP addresses transaction amounts, and locations —to identify fraudulent behavior.
When these elements are identified, the anti-fraud platform labels them as possibly fraudulent.
Rules-based fraud detection solutions are easy to understand because they're just a set of conditions, which significantly speeds up the development cycle.
They are also much faster to implement, which is especially important when overseeing a large number of transactions in real-time.
The Benefits of a Rules-Based Fraud Prevention Solution
There are three key reasons why businesses choose to protect themselves using a rules-based anti-fraud technology.
Rules-based fraud detection solutions are both easy to set up and extremely fast. Solutions like Hyperon can scan through all the transactions in real-time and flag potential fraud.
Rules-based fraud detection tools are easy to interpret. The transparency of these systems is perfect for diagnosing and identifying issues. For example, uncovering why a particular rule produced false positives.
In this case, a team member can quickly fix the issue with no business disruption.
Instant Response to Threats
Rules-based fraud detection solutions quickly insert rules once new fraud trends emerge.
For instance, if a company traces an attack to an exact location, then they can immediately blacklist the location to prevent fraudulent transactions from that area.
Rules-Based Fraud Protection in Action
Let's go over some potentially fraudulent behavior that a rules-based fraud management solution can flag with ease.
Physical and Online Location
When transactions take place far from a customer's residence. For example, a charge from a convenience store in another state from the card’s billing address at midnight.
Or if a user with the same IP address opens several accounts and makes large payments using newly issued credit cards. Online fraud detection software based on business rules can be configured to automatically detect fraud and block these types of transactions.
If a typically inactive account all of a sudden starts buzzing with transactions. Another case might be if a customer receives large payments from several newly created accounts.
When a customer seems to be using a card to make payments within an extremely brief period of time. It's apparent that these fast transactions are impossible for a customer who's physically shopping around with their credit card and are therefore probably not legitimate transactions. In this case, a rules engine can run a rule requiring identity verification.
Building Chargeback Management Systems with Rules Engines
Fraud-related chargebacks are a constant threat to banks and other financial institutions. Chargeback fraud (sometimes called friendly fraud) is when consumers request a refund via the chargeback process. Fraudsters make purchases using their own credit/debit cards, and then request a chargeback from the issuing bank once they receive products or services.
If successful, the fraudsters receive a full refund on the products.
Chargeback Prevention with Rules
The best fraud detection software against this type of threat is based on business rules.
Companies use rules engines to apply rules to transactions and spot fraudulent activity or transactions that may indicate fraud. When a rules engine automatically identifies a potentially fraudulent transaction, the business can then either block the transaction, flag it for review by a fraud analyst or request more information from the customers.
Many global online payment companies prevent payment fraud using business rules engines in this manner.
Preventing Account Takeover Fraud with Rules Engines
A business rules engine can prevent account takeover fraud by implementing a set of rules and policies to identify and flag suspicious account activity. For example, a rules-powered fraud management tool can track the IP address of the device used to access the account. If there are multiple login attempts from different IP addresses, the tool can flag the activity as suspicious and block access to the account.
The Issue with Rules-Based Fraud Detection Systems
There is one important thing to keep in mind when using rules-based systems to prevent.
A rules-based fraud protection system is only as good as its rules. Poorly defined rules result in weaker fraud detection and false positives.
Therefore, organizations need to keep track of emerging risks and make updates accordingly.
Rules-Based Fraud Prevention: Common Misconception
One of the critiques leveled against rules-based prevention platforms is that they get too complicated the more rules you add. However, Hyperon's domain configuration feature is designed to help users easily navigate countless rules to find the ones they need to modify. Fraud analysts can drill down and target the right fraudulent behavior.
So, you can make your anti-fraud platform as complex as you need it to be.
Fraud Protection with Machine Learning
Machine learning solutions are more advanced than their rules-based counterparts.
The ability of machine learning to identify hidden links between variables is unrivaled. It's able to detect sophisticated correlations that would be virtually impossible for a person to notice.
However, a great deal of data is required to spot these intricate patterns. This is especially true for fraud detection because on average only 1 in 1,000 transactions is fraudulent. Without going over a large number of fraud cases and fraud data, an algorithm can't learn to spot fraudulent activity.
Therefore, this means lengthy development cycles, slower deployment, and costly maintenance.
The Black Box Problem
Organizations need to know why a particular transaction was flagged. However, complex AI systems don't provide clarity or transparency. In other words, it's difficult for humans to understand why AI labeled an event as fraudulent.
Why Choose a Rules-Based Fraud Prevention Solution
The main problem with most fraud detection software based on machine learning systems is that they rely on data that's around 90 days old. Obviously, this makes it difficult to spot the latest threats. An organization might be aware of a new kind of fraud, but artificial intelligence hasn't yet come across this behavior.
Therefore, machine learning isn't well suited for situations that demand immediate reactions.
On the other hand, when fraud managers learn about new fraudulent incidents, a rules-based management platform allows businesses to easily add the necessary protections. In these cases, rules can block a new type of fraud before it hurts the business.
Why Our Customers Use Hyperon
A single poorly constructed rule has the ability to allow all transactions, including all the fraudulent ones. Similarly, a rule that blocks all transactions is equally detrimental to a business.
That's why every anti-fraud management solution should allow fraud analysts to safely experiment without having to risk affecting the organization.
Hyperon has a built-in tester that allows fraud analysts to see the exact effects of rules before they go live. This way businesses can test out different rules and find out which combination is best for what they need to accomplish.
The Right Fraud Detection Software Runs on Hyperon
Hyperon is an advanced fraud detection solution that empowers organizations to respond to immediate threats. As soon as a new threat has been discovered, your fraud managers have the necessary tools to react.
Ready to see how Hyperon can optimize your fraud prevention efforts and protect your business? Get in touch with one of our experts today.