3-D Secure Use Drives Down CNP Fraud Rates, Report Finds

Merchants and financial institutions that use 3-D Secure to help vet online transactions in markets that require its use see fraud rates that are three to six times lower than for all card-not-present transactions. That’s one finding from a Outseer-sponsored report completed by the research and consulting firm Datos Insights.

Released Monday, the report also found that while U.S. CNP fraud losses, estimated to hit $9.2 billion in 2023, are projected to increase to $12.87 billion by 2026, use of the advanced online fraud-prevention service is weak. 3-D Secure transaction volume was up 20.5% from the first half of 2022 to the first half of 2023 in the Americas, compared with 29.8% growth in Asia-Pacific and 27.1% in the Europe, Middle East, and Africa region, according to Outseer data.

3-D Secure is a standard developed by EMVCo to counter online fraud. A recent update to it provides a software-development kit to make it easier to apply 3-D Secure to traditional and nontraditional channels and devices.

The Outseer report interviewed fraud executives at 20 financial institutions, including those in Australia, Canada, Germany, the United Kingdom, and the United States. 3-D Secure is not required by regulators or card networks in Canada or the United States.

As might be expected, then, 3-D Secure use in North America is low, averaging 2.7% of all CNP transactions, “yet fraud rates on 3DS-protected transactions are nearly six times higher than for all CNP transactions,” the report says. “This is largely because the majority of merchants in unregulated markets send only high-risk transactions across the 3DS rails, which in turn prompts issuers to employ more draconian authorization strategies, which also adversely impact authorization rates.”

The inverse is true in regulated markets, Datos says, “in which 25% to 50% of CNP transactions are protected by 3DS, and fraud rates are three times to six times lower than for all CNP transactions.”

“The data is clear: invoking 3DS has a significant impact on CNP performance. In the UK, when 3DS is used to protect CNP transactions, card authorization rises to an impressive 90-96% versus a mere 70-75% authorization rate without 3DS,” Julie Conroy, Datos chief insights officer, says in a statement.

Among North American financial institutions canvassed for the report, 70% believe 3DS to be as effective or more effective at fraud detection than their other CNP tools. Though many North American issuers would welcome greater use of 3-D Secure, with some saying they’d welcome a government or card-brand mandate, others are less open to that method. As one Canadian bank executive told Datos, “The card brands need to work with merchants to get them to adopt and use 3DS more. While mandates have worked in other markets, I don’t think it’s going to happen in North America.”