This article previously ran on CUInsight.com.
When many credit union executives hear the term “fallback,” they automatically think fraud. However, more often than not, fallback transactions are legitimate. And they should be processed as such.
Our team of fraud analysts is currently receiving many inquiries on this topic. In response, we are teaming up with industry expert Deborah Spidle from Paragon Application Systems to develop a webinar and white paper on how to successfully navigate the complexities of fallbacks.
According to CO-OP Fraud Expert John Buzzard, “Most fallbacks are simply failed EMV transactions, in which the member inserts a legitimate EMV chip card into the POS terminal, and something goes awry. Either the terminal is faulty, or there is a programming issue somewhere, prompting the member to swipe the card instead.”
Buzzard emphasizes that, despite all the press coverage surrounding fallbacks lately, they are actually fairly uncommon, accounting for less than 5 percent of all transactions. “There is a perception that fallbacks are more prevalent and threatening than they really are,” he said.
Which is why, Buzzard notes, credit unions are blocking them left and right.
“Because credit unions see fallbacks as potentially fraudulent, they believe it is best to eradicate them,” he said. “That is a bad idea, though, considering that most fallbacks are legitimate. Blocking a legitimate transaction not only costs your credit union the associated interchange revenue, but it also shakes the member’s confidence in your card.”
Buzzard advises credit unions instead to authorize fallbacks, with a caveat. “As a precautionary measure, credit unions should always follow up on fallbacks with the member just to make sure the transaction is theirs,” he said.
And to identify those fallbacks that are, in fact, fraudulent, Buzzard recommends leveraging advanced fraud detection systems and strategies.
“Card issuers should at least be aware of how their business looks related to fallbacks,” he said. “Which means they first need to identify which merchants and merchant categories are experiencing the most fallbacks. And if any activity looks suspicious, they should contact our risk department immediately.”
He continued, “Fallbacks are always going to exist because the technologies facilitating EMV transactions can malfunction or get damaged for any number of reasons. However, as the industry becomes more experienced with EMV technology – and more proficient in how to deploy it – the incidence of fallbacks should decline. In the interim, credit unions need to ask themselves an important question: Why are we denying a transaction that makes us more money on interchange than we would spend on the fraud?”
To learn more about fallbacks, download our white paper below.