Fraud crackdown cuts into card convenience

Not long after stating "your table is ready," restaurant host David Seymour has lately been forced to address a number of customers with a far less welcoming message: "Your credit card has been declined."

Each month, Mr. Seymour personally turns down an average of six credit cards. His colleagues report similar statistics.

The reasons may vary, says Seymour, but the change is clear. "The past six months there's been a big jump in declined cards," he says.

This shift is also playing out in retail stores across the country, experts say.

Increasingly, credit-card issuers are blocking purchases, leaving some consumers without a method of payment and causing others to rely on cash or another card to complete a purchase.

At the root of the trend: a growing effort by creditors to crack down on fraud. Last year, the credit-card industry lost $750 million to fraudulent purchases – a $160 million increase over 1997. But the percentage of all credit-card purchases lost to fraud has fallen significantly. (See chart, right.)

Many observers credit the downturn to issuers use of relatively new tools, including computer software called neural networks that block purchases that do not fit a cardholder's buying profile.

"Your individual spending patterns are learned by the network so that when you make a purchase outside of your spending pattern, a red flag goes up," says David Robertson, publisher of The Nilson Report, an Oxnard, Calif.-based credit-card research firm.

Attempted purchases are given a score of zero to 100 in less than a second. The higher the score, the more likely the purchase is fraudulent. Each credit-card company sets a number that, if exceeded, will cause a purchase to be blocked.

The software debuted about a decade ago, but has since become more refined, accumulating years of data on consumer buying habits and on incidents of fraud. More than half of credit cards on the MasterCard and Visa networks are under the umbrella of the technology.

"The level of sophistication of our systems has improved dramatically the past few years," says Skeet Rolling, director of Fraud Control Services, an information-security firm in Columbus, Ga., that sells neural-network software.

Combined with a new commitment to reduce fraud, the technology has likely led some top card companies to block more purchases, says Mike Cunningham, fraud executive for Chase card member services. "They're adding to their staff, making a larger investment, and referring more transactions at the point of sale," says Mr. Cunningham.

The efforts have yielded significant savings for the industry. "Over the last few years, losses to fraud are lower than a snake's belly," says Robertson. Now, for every $100 charged, card issuers lose only about 7 cents to fraud compared to 18 cents a decade ago.

But the security improvements have come at a cost. The system often blocks cards that belong to people who have done nothing wrong. And merchants say a small but growing number of consumers are bristling at the extra layer of bureaucracy now being imposed in the checkout line.

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