Why card companies wont care about a Rs. 2000 or $20 fraud transaction and will just refund me instead? It’s illegal, so why wont they help me find out who did it?*

Great question.

This is one of those things that brings out the stark difference in behavior between an Individual and a Company.

For an Individual, Fraud is Illegal, should be nipped in the bud, should not be allowed to propagate, fraudster should be punished to the full extent of the law, blah blah blah.

Whereas virtually every action in a Company is subject to Cost-Benefit analysis. The Cost of investigating a $20 Fraud would far exceed the Benefit of doing so. So the fiduciarily responsible course of action for a Credit Card Company would be to reverse the transaction and refund you.

But it would be a mistake to believe that a Credit Card Company does not care about the fraud.

Many Credit Card Companies use Predictive Analytics to detect and prevent fraud. When I published my article entitled Controlling Credit Card Fraud Through Predictive Analytics, at least 20 midsized and large banks in USA and a couple in Asia Pacific were using such systems. I’m sure those numbers have grown manifold by now.

To you it might seem that the Credit Card Company has totally ignored the $20 fraud. But, behind the scenes, there’s a good chance that the incident has been added to the fraud training database, which will significantly improve the cost-benefit of detecting and preventing such frauds in future.

This might be a good time to mention that the credit card fraud referenced above includes both

  • Third Party Fraud where a Credit Card is used in an unauthorized manner by a Bad Actor; and
  • First Party Fraud where the real Cardholder uses his or her Credit Card but files a fraud complaint, claiming that somebody else used it.

Credit Card Companies tend to come down quite harshly on both varieties of fraud.

Can’t say I blame them.

On an expanded note, some people believe that companies comprise individuals, so companies will behave in the same manner as individuals when faced with the same situation.

That’s not true. As we saw above, Companies have fiduciary responsibility to their shareholders and other stakeholders whereas Individuals don’t.

But it’s not the only reason.

I can think of many more factors that drive a difference in behavior between individuals and companies:

  • Companies have market cap / valuation. So, as long as they can attract investments from outside investors to fund their losses, companies can – and do – run at a loss for a long, long time. This is one of the guiding principles of Venture Capital Investment Model that I highlighted in Teardown Of The VC Investment Model. Individuals don’t have market cap / valuation, so they will go bankrupt if they consistently spend more than they earn.
  • Employees certainly have emotions and do tend to show them at their workplaces but their emotions tend to be nuanced in a work setting compared to raw emotions displayed in their private lives. So, to the extent that it’s shaped by its employees’ emotions, a Company’s behavior is still different from the emotion-driven behavior of its Employees. More at Role Of Emotion In B2B Sales.

That said, the behavior of individuals and companies could be converging in some areas.

For example, many people don’t bother to follow up for their security deposits when they cancel a mobile phone service. Similar to the Credit Card Company in the above answer, these individuals find the cost of following up with the TELCO / MNO for the deposit far exceeds the value of the deposit.

Does this create a moral hazard?

You bet it does, but it’s not the only modern day behavior to create moral hazard. Federal bailouts to banks during the Great Financial Crisis comes readily to mind.