How Fiserv's purchase of First Data could help it tackle false declines

An acquisition as large as Fiserv's deal to buy First Data has lots of moving parts, but one big piece may be a new First Data product that's designed to improve the vexing problem of payment approvals.

First Data's digital commerce team developed the Authorization Optimization tool, which could add to existing Fiserv efforts to cut into false declines once the Fiserv/First Data acquisition closes.

Fiserv addresses fraud and false declines through Mastercard Decision Intelligence. Marketwide, First Data says its conservative estimate based on digital commerce is that as much as $15 billion in revenue alone is lost annually because merchants are not using a reliable method to authorize transactions. Industry estimates for all false-decline lost revenue from all payment methods in the U.S. runs in the hundreds of billions.

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Neither Fiserv nor First Data would speculate at this time on how the merger will affect fraud prevention products, saying the companies continue to operate separately at this time.

But First Data contends it can resolve the false positive issue because of its track record of having partners, data flows and solutions stemming from the issuer/processor, acquirer and merchant sides of the payments equation.

Nandan Sheth, head of global digital commerce at First Data, hopes Authorization Optimization's early momentum will boost clients and partnerships and address the growing number of merchants turning to multichannel payment options.

In its early phases, the authorization system is delivering anywhere between 250 and 300 basis points in increased approved digital commerce transactions, Sheth said, adding at the top end First Data is seeing almost a 700 basis points increase, but the company is pleased with an average between 200 and 400.

It's important for First Data to expand upon its past multichannel solutions that have helped the petroleum, quick-service and grocery industries convert to multichannel operations in which payments are coming through traditional POS, e-commerce sites or in-app through smartphones, according to Sheth.

"If you suddenly move from POS to include card-not-present transactions at your business, all of the fraud systems are not expecting that," Sheth said. "All of a sudden, they start seeing declines and more fraud. It is absolutely something we are focusing on with the Authorization Optimization suite."

First Data has always been "everything to everybody, even from way back," and has substantial issuance plays and many joint ventures on the acquiring side of the fence, said Brian Riley, director of card services for Mercator Advisory Group. "It's more than a lot of the other processors have," he added.

The various mergers across the industry will result in many new fraud programs for merchants, Riley said. "But in a lot of ways, First Data is the grandfather of all of this," he said.

The artificial intelligence, machine learning framework and rules engine that make the system possible are important, as is the data First Data gets from merchants and issuers.

To gather data from different parties, First Data has "tried to play Switzerland" in being neutral and bringing all three sides — the networks, merchants and issuers — together under the objective of creating a better approach that benefits the entire ecosystem, Sheth said.

Through that process, Sheth's team hopes to address the Do Not Honor 05 code predicament in which generic declines come back to a merchant because they don't fit any other categories.

"It is really a hard code to understand, but we have an entire machine learning sequence that understands the meaning behind these Do Not Honor declines, based on the BIN and the issuer," Sheth said. "It came about from our direct relationship with issuers and our ability to create a win around these declines."

A far easier fix occurs when First Data is able to apply an account updater in real time so that merchants taking recurring payments won't experience declines because they don't have the freshest personal data for the cardholder. This will be particularly effective in the ride-sharing platforms and customer-initiated digital transactions and subscriptions.

Any effort to increase approval rates is likely to be welcomed by merchants of all sizes.

"Most of the larger merchants that I speak with are more concerned about the false declines they experience in e-commerce than the fraud," said Julie Conroy, research director and fraud expert with Boston-based Aite Group. "We estimate that there were over $330 billion worth of false declines in the U.S. last year, which includes card present as well."

Still, card-present transactions average a 97% approval rate at the POS, but CNP approval rates are around 85%, Conroy added. "This means that CNP transactions are disproportionately impacted, and anything an acquirer can do to move the needle on this problem for their merchant client is a big competitive differentiator."

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