With Volumes Rising, Pulse Joins Trend to Upgrade Fraud Detection

As fear of fraud climbs at electronic-funds transfer networks along with PIN debit traffic counts, the networks are adopting a variety of technologies to detect fishy transactions. The latest is Pulse EFT Association LP, a Houston-based unit of Discover Financial Services Inc. Pulse on Tuesday announced it is rolling out a system that spots out-of-pattern usage and sends e-mail alerts to issuers in the network. The system, which tracks PIN and signature-debit transactions as well as PINless debit activity both within the network and through gateways to other networks, is coming on stream after a three-month test phase involving 14 representative member financial institutions, says David Schneider, president of Pulse. Its arrival comes after a decision the network made last year to address debit card fraud more aggressively. “We believe fraud is an increasing concern?it's clearly top of mind [with our issuers],” says Schneider. The move by Pulse also follows by a month a decision by NYCE Payments Network LLC, a rival EFT network, to install technology from Fair Isaac Corp. that detects fraudulent PIN debit activity at point-of sale terminals and at ATMs (Digital Transactions News, Aug. 29). Networks are reacting to a growing problem. Overall, issuers' net losses from PIN and signature debit fraud jumped 21% in 2005 over 2004, reaching $662 million, according to the latest data from Dove Consulting, which surveyed issuers in research sponsored by Pulse and released early this year (Digital Transactions News, March 5). While Schneider says Pulse's 4,400 members do not ordinarily report fraud statistics to the network, he notes the growing concern about the problem stems mainly from double-digit rates of growth in debit card transactions. Pulse's transaction volume grew 22%, to 1.67 billion, in the first nine months this year compared to the same period in 2006. Third-quarter volume was up 26%, to 593.9 million transactions. At the same time, recent cases of data breaches and PIN pad tampering at stores have raised questions with some people about the security of PINs, once seen as rock-solid. “We've been aware for many years that the security of the PIN is a significant aspect of what consumers value about PIN debit,” says Schneider. The new system, which Pulse is calling DebitProtect, uses underlying neural-network technology from Retail Decisions, a U.K.-based vendor of fraud-detection products, to analyze transaction flows. As with other neural nets, DebitProtect is programmed to “learn” normal patterns for transactions and to score them accordingly, with transactions not fitting the pattern receiving a score that may indicate cause for suspicion. The Pulse model focuses exclusively on debit card activity and includes experience it picked up from the pilot. For the system's first phase, which is now rolling out, DebitProtect will send an e-mail message to the issuer whenever a transaction's score crosses over a pre-determined threshold. The issuer then may act according to its own risk policies, which may include contacting the cardholder and de-activating his card. That first transaction might have been fraudulent, but the idea, says Schneider, is to prevent repeat activity. “The average fraud incident involves six transactions,” he says. “The bulk of the losses happen after the first transaction. If we can stop it after the first transaction, it will help the institution avoid the bulk of the losses.” The scoring thresholds for the first phase are set by Pulse, but in the second phase, slated to begin later this year, issuers will set their own limits and will be able to automatically block transactions according to rules they set up. An example Schneider gives is that an issuer may set one threshold for the first transaction, then a lower one for subsequent ones exhibiting the same score. Issuers will have to take care weighing the rules behind blocking transactions, Schneider cautions, as they could run the risk of denying legitimate activity. “That's a complex balance issuers have to think carefully about,” he says. DebitProtect is a free service at least through next March, Schneider says, at which time the network will consider whether to charge a fee for it.