Is Higher Fraud Risk an Unintended Consequence of Fed’s New Debit Routing Rule?

Last month, the Fed said it was officially ending debit network exclusivity across all channels. Beginning in 2023, all debit card issuers must enable merchants to choose at least two unaffiliated payment card networks to process transactions.

The exclusivity ban has been in place for over a decade and initially applied only to in-person debit card transactions but will now apply to all other debit transactions, including online payments.

It’s a rule expansion that some industry watchers say will lead to unintended consequences.

“Fraud is going to be an ever-present challenge,” Yinglian Xie, CEO of DataVisor, told Karen Webster in a recent conversation.

Smaller networks will, of course, jockey for processing volume against Visa and Mastercard, mainly competing on price to win favor from merchants.

Initially, “there will be a lot of incentives, from the perspective of competition, for these [debit] networks to reduce costs,” said Xie. Merchants, understandably, might be enticed by the prospect of boosting margins.

Although debit acceptance costs are one aspect that merchants should consider, there’s another aspect to consider, too, according to Xie: The newer, smaller networks onboarded by merchants are relatively vulnerable.

“If merchants start to see huge fraud losses, that defeats the purpose of lower costs per transaction,” she remarked.

Not as Battle-Tested

Smaller debit networks, said Xie, are less mature than Visa and Mastercard and may not be ready for volume surges.

They’re also less “battle-tested” than the payment network giants, which she said is more important today given the rise of fraud in a digital world, particularly as scams and social engineering continue to plague online commerce.

Issuers will also no longer be able to rely on receiving just one set of fraud assessments and signals from the card networks, to whom they have, Xie said, effectively “outsourced their debit risk.” They’ll receive risk signals from several debit networks, and sometimes those signals can conflict.

Conflicting signals lead to a more friction-filled customer experience where a cardholder’s activity at a particular merchant is deemed suspicious and declined simply because the smaller debit networks may be more risk averse.

The negative ripple effects would create more false declines and a greater number of exception reviews.

The friction becomes especially pronounced as payment ecosystems evolve and new payment methods — pay by bank, real-time payments and BNPL — gain traction. As consumers and banks move to real-time payments, she said, “manual reviews are not going to work. We have to be able to make decisions in real time.”

She added that “starting next year, the issuers are going to have to take these signals in hand and will be responsible for making final decisions,” which she contended that issuers may not be prepared to do.

Xie explained that data orchestration layers could help issuers manage the payments and the fraud signals that come from the different networks processing payments on their behalf. The platform approach, which brings DataVisor’s unsupervised machine learning into the mix, she said, can leverage innovations and data points further “upstream” in a transaction. That data can include device-level information or how consumers enter their details online to spot anomalies and stop fraud and financial scams.

Along the way, she said, data is shared consistently and at scale across issuers, no matter the payment type or stakeholders interacting across closed or open loop systems.

Orchestration, she said, enables issuers and banks to view transactions holistically and bolster their defenses against fraud. “A strong orchestration platform can very effectively leverage the different input and different signals and at different checkpoints in time to make effective decisions,” she said (which, of course, impacts the final customer experience).

“We’re sharing user intelligence in a centralized way, and in context, to be able to make informed decisions on transactions,” she told Webster, adding that “having the consumer’s general history, and spotting the outliers, is hugely beneficial in protecting all of us.”