the system is using the "Full Name" if it is populated.
When the "Full Name" is empty Firstname and Lastname are concatenated and used (even if one of those two fields is empty).
If this is not sufficient you can set the Origin to "Identification-Relevant" and implement the merge-BadI.
Could you share the link to the documentation from which you took this screenshot?
The match and merge process in import documentation for the latest cloud release is Contact Match and Merge on Import | SAP Help Portal and the diagram is different.