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CHARACTERISTICS OF A SUCCESSFUL PAYMENT METHOD: SECURITY
1.1 Micro Characteristics Security It is clear that a payment system needs to be as secure as possible from fraudulent activity to be trusted by users and to drive volume. However, the security of a payment method cannot simply be measured by looking at fraudulent activity. There are several nuances that determine the worthiness of a payment method’s security, including: 1. Approvals Considerations The easiest way to create a payments system completely devoid of fraud is to ensure all transactions are declined and there is no money flowing through the system to steal. This, however, is clearly ludicrous because payments exist to facilitate commerce. There is a trade-off between preventing fraud and maximizing sales and customer experience. Clearly, merchants who have the right tools at their disposal to analyze transaction characteristics can minimize the pain of this trade-off. However, data can be limited and there are still important strategic decisions for merchants to make, both in back-end operations and the front-end customer side. Whether or not to employ EMV 3D Secure – and if so, where in the transaction flow - is an example of this trade-off. To this end, it is just as important to analyze authorization (or approval) rates as it is to analyze fraud patterns. Merchants can work with their industry partners, including fraud management firms, merchant acquirers and issuing banks, to ensure authorization rates are maximized while fraud is minimized. 2. Error Resolution Framework System Any payment method needs to ensure there are error resolution frameworks for merchants, consumers and other industry stakeholders to engage with to investigate the source of fraudulent activity, mediate fraud liability disputes between stakeholders, and set/apply liability rules fairly. These systems can require significant resource to develop and maintain for several stakeholder groups, including merchants, issuing and receiving banks, processors and networks. This may in large part explain why nascent payment methods struggle to manage fraud, and convince participants they have the necessary infrastructure (i.e., there is the chicken-or-egg dilemma whereby participants fund the infrastructure, but the infrastructure is required to attract participants). 3. Liability Rules (i.e., Network Rules) A good payment system needs effective governance, which allocates the liability for fraudulent behavior on the party responsible. In a card environment, this is typically the merchant, issuing bank or the consumer. A merchant will likely be considered responsible if they fail to authenticate a consumer, for example. An issuing bank will likely be considered responsible if they issue payment products lacking security features such as a chip. A consumer will likely be considered responsible if they directly handed payment credentials to a fraudster. In order to efficiently allocate liability, effective fraud liability rules need to be established. Fraud
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