Posts Tagged ‘credit risk’

The true story of a bank card holder.

Friday, January 8th, 2010

It is a true story. I met David at Predictive Analytics World in Washington DC last October (of course, he later became one of my linkedin connections). He told me emotionally that in the past a few months his bank card transactions were blocked twice by the bank’s fraud prevention. He said he had stopped using the card and would cancel it in a few months.

I realize how serious the situation is for the bank.

Firstly, the bank will lose the future income from David if he was not bothered by the bank’s fraud prevention and might stay with the bank for, say, 5 more years. Supposing the bank makes $300 every year from David, that would be equivalent of $1,400 loss in present value.

Secondly, we can say that a lot of the time the fraud prevention is making mistakes. If the fraud prevention places holds on 100,000 cards a year, how many of them are mistakes and thus inconvenience good customers like David? 10,000? or 50,000? or 80,000? or 99,000?

Fraud prevention is a double-edged sword. On the one hand, it saves fraud losses. On the other hand, it reduces good revenue which could be significant. Do you want to share your insights on this?

If you are a C level executive or manager who owns the whole card or account operation, it is the bottom line that matters. I developed a methodology that uses the notion of the total cost to measure the impact of a fraud prevention to the bottom line. The total cost includes fraud loss, operation cost and opportunity loss due to false positive. The approach is not perfect but still useful. We can not afford not to measure the cost of inconveniencing good customers by fraud prevention. Please send me an email ( if you want the document.