The tension between established banks and fintech companies has been ongoing for years. Occasionally, however, they choose to collaborate rather than compete. In a notable partnership, Capital One has joined forces with payment leaders Stripe and Adyen, also its competitors, to introduce a no-cost product focused on fraud prevention, as announced last week.
Together, they have developed an open-source tool called Direct Data Share (DDS). This API enables merchants and others involved in the payment process to exchange real-time transaction data for each purchase.
As eCommerce fraud losses are projected to exceed $300 billion by 2027, the companies believe working together can effectively address this issue.
Key Takeaways
- Strategic Partnership for Enhanced Fraud Prevention: Capital One has partnered with Stripe and Adyen to introduce Direct Data Share (DDS), an open-source tool designed to prevent fraud in online transactions. This collaboration marks a significant move in the financial industry, where traditional banks and fintech companies work together to enhance security measures.
- Real-Time Data Sharing to Reduce Fraud and False Declines: DDS allows merchants and other payment processors to exchange real-time transaction data through an API, improving fraud detection accuracy and reducing false declines. This initiative helps merchants protect against fraud without incurring additional costs, aiming to mitigate the projected rise in e-commerce fraud losses.
- Collaborative Benefits and Improved Authorization Rates: The partnership leverages each company’s strengths: Stripe’s Radar product provides fraud scores to enhance transaction authorizations. In contrast, Adyen benefits from higher authorization rates and fewer chargebacks. This synergy helps Capital One’s cardholders experience fewer false positive declines and reduces fraud, benefiting all parties involved.
- Potential for Industry-Wide Adoption: While the DDS initiative represents a significant advancement in fraud prevention, its long-term success depends on widespread adoption across the financial industry. If other banks and networks implement similar open-source APIs, the security and efficiency of e-commerce transactions could improve dramatically. Conversely, limited adoption may restrict the initiative’s potential impact.
Capital One Introduces DDS to Combat Fraud in Partnership With Stripe and Adyen
Capital One, Adyen, and Stripe have introduced DDS, a free, open-source tool designed to combat fraud. This initiative aims to improve real-time authorization decisions, thus reducing fraud-related losses and false declines for merchants. Capital One seeks to improve its market standing and create a safer banking environment for its customers.
The timing of this strategic partnership is important. Global fraud losses are expected to increase to $343 billion by 2027. Fraudulent activities and declines lead to substantial financial losses and damage the reputation and customer trust of affected merchants.
Jon Borman, head of fraud strategy at Capital One, explained that while the company has developed models to protect customers against fraud, they were limited by insufficient data. To address this, Capital One created an open-source initiative, DDS. Borman described this as an API that enables merchants or others involved in the payment process to transmit real-time transaction data, which is particularly valuable for e-commerce transactions. He noted that these are less secure than in-store purchases where the user verifies the credit card chip.
DDS works by funneling transaction data through Capital One’s API every time an online purchase occurs, enhancing the bank’s ability to thwart fraud for a broader range of merchants and customers. By collaborating with payment platforms like Stripe and Adyen, Capital One utilizes DDS to function as a data clearinghouse, spotting fraud trends across different networks.
Borman added that if a fraudulent IP address is identified via Stripe, that information can be used to prevent fraud in transactions processed by Adyen and vice versa. This collaboration is anticipated to decrease false declines as well, where valid transactions are mistakenly identified as fraudulent, and provide merchants with better protection without additional charges. Capital One’s DDS solution has already shown its effectiveness, enabling over $1 billion in merchant transactions that could have been declined otherwise.
The partnership also prompts questions about Capital One’s plans for its Discover network.
Expansion of Collaboration and Shared Goals in Fraud Prevention
Capital One started working with Stripe on this initiative in early 2023 and expanded the collaboration to include Adyen more recently.
Borman noted that Stripe and Adyen are also focused on combating fraud for both financial benefits and to curb criminal activity. This realization sparked a moment of clarity at Capital One, leading to the recognition that they share similar business models with these firms, which could enhance their joint efforts against fraud.
In the case of Stripe, Capital One can now receive fraud scores from Stripe’s Radar product through its API, which they believe will enhance the accuracy of transaction authorization.
Trevor Nies, Adyen’s SVP and global head of digital, mentioned that when Capital One proposed a solution to boost authorization rates, Adyen quickly agreed to it.
Borman expressed enthusiasm for the partnership, highlighting that it brings mutual benefits: Adyen’s merchants enjoy higher authorization rates and fewer chargebacks, while Capital One’s cardholders experience reduced false positive declines and less fraud.
The DDS initiative represents a major advancement, but its long-term success will hinge on broader adoption. If other banks and networks implement similar open-source APIs, the results could dramatically improve security and efficiency in ecommerce. Conversely, if DDS remains confined to Capital One, its potential to prevent widespread fraud could be limited.
About Capital One
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Capital One Financial Corporation is a financial services holding company for Capital One, National Association. It offers a range of financial products and services across the US, the United Kingdom, and Canada. The company operates through three primary segments: Credit Card, Commercial Banking, and Consumer Banking. Capital One accepts various deposit types such as money market, checking, savings, negotiable order of withdrawal accounts, and time deposits. Its lending options cover credit card loans, as well as retail and auto banking loans. Additionally, the company provides commercial and multifamily real estate loans and industrial and commercial lending.
Capital One also issues credit and debit cards and offers capital markets services, advisory, depository services, treasury management, and direct online banking. It serves a diverse clientele, including small businesses, commercial customers, and individual consumers through digital platforms, branches, cafés, and additional distribution networks located in states such as Louisiana, New York, Maryland, Texas, New Jersey, California, and Virginia. Founded in 1988, Capital One’s headquarters are in McLean, Virginia.
About Stripe
Stripe, founded in 2009 by brothers John and Patrick Collison, handles online payment processing for various businesses. Over the last year, Stripe introduced a charge card program that assists fintechs in offering expense cards to their clients. Its customer base includes significant companies like Amazon, Uber, and OpenAI. Additionally, Stripe has enhanced its checkout system by providing access to over 100 different payment methods and enabling merchants to offer multiple one-click checkout options such as Google Pay and Apple Pay.
Companies ranging from emerging startups to established public firms like Salesforce and Facebook utilize Stripe’s software to process online payments and manage complex financial operations. Stripe supports new businesses in their initial growth and revenue generation while helping established companies expand into new markets and develop new business models.
About Adyen
Adyen N.V. runs a payments platform that serves regions including the Middle East, Europe, North America, Africa, Latin America, and the Asia Pacific. The company’s platform offers an integrated payments stack that encompasses gateway, processing, risk management, acquiring, settlement services, and issuing.
Additionally, it provides a back-end infrastructure for payment authorization. Adyen caters to various sectors such as mobility, digital, marketplaces, and platforms, food and beverages, retail, hospitality, and subscription services. Founded in 2006, Adyen is based in Amsterdam, the Netherlands.
Conclusion
The collaboration between Capital One, Stripe, and Adyen marks a significant step in tackling e-commerce fraud, potentially leading to a more secure payment environment. Introducing the Direct Data Share (DDS) tool showcases how industry leaders can join forces to combat a common threat. By sharing real-time transaction data, they aim to reduce fraud-related losses and improve authorization decisions, benefiting both merchants and consumers.
Such initiatives are crucial as global fraud losses are projected to soar. However, the broader adoption of similar open-source APIs will determine the long-term success of DDS in the fight against fraud. If widely embraced, this could set a new standard for security in the financial industry.
