Try the new FT.com

September 10, 2008 3:15 am

New method may reduce credit card fraud

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments

New detection methods may reduce the levels of fraud involving credit and debit cards while reducing the number of false alarms.

David Hand, president of the Royal Statistical Society, discussed the new approach at the BA Festival of Science in Liverpool on Tuesday.

Some estimates of the amount of credit card fraud in the UK are as high as £70bn ($123bn) per year. To reduce this figure, retail banks rely on computer models to identify and block transactions that may be fraudulent.

To date, those models have used data on individual cardholders to identify their particular pattern of spending. Historic data about a person’s spending is used to generate models that describe their usual behaviour.

When spending on a card fails to match that behaviour, the transactions are flagged for further investigation. These models cannot predict when cardholders might suddenly change their pattern of spending, as a result of seasonal or other events.

Professor Hand’s new model, developed at Imperial College London with support from four banks, addresses this problem.

Instead of generating rules based on the spending pattern of one individual customer, the new method uses historical data to classify individuals into one of several peer-groups. New transactions are compared with current behaviour of the rest of that group, rather than the past behaviour of the individual.

“Someone may make transactions that are much of a muchness, then suddenly, just before Christmas, start spending at a much higher rate. That by itself is suspicious,” said Prof Hand. “What we do is compare the spending against the peer group, and we can actually show whether the spending in this group is very similar.”

Of over 7bn plastic card transactions in the previous year, fewer than one in a thousand will be fraudulent. Minimising the risk of false alarms is a high priority in developing new fraud detection methods. The new method reduces the number of false alarms triggered by sudden changes in spending.

Prof Hand said that there is a balance to be struck between the cost to the bank of false alarms and the cost of failure to identify fraud. He also explained that there will be a direct benefit to the customer.

“The aim is to find a balance between the irritation of being rung up by the credit card company and asked ‘did you make that transaction?’ and the warm glow of reassurance when they do,” he said.

Related Topics

Copyright The Financial Times Limited 2017. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments

The FT’s one-stop overview of key British economic data, including GDP, inflation, unemployment, business surveys, the public finances and house prices

NEWS BY EMAIL

Sign up for email briefings to stay up to date on topics you are interested in

SHARE THIS QUOTE