An increasing number of payment options, the demand for faster payments and the rapidly changing nature of fraud all present new challenges for fraud management within retail banks. But what are the solutions? It comes down to technology, data and expertise. Jay Floyd of ACI Worldwide writes
Today, retail banks offer their customers an increasing number of electronic payment methods. From EMV cards to contactless cards, internet banking and telephone banking and more recently Apple Pay, customers in the UK have come to expect a wide range of choice when it comes to payment options.
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At the same time, we have seen the nature of fraud rapidly changing in recent years. As new payment options have become more diverse and fraud management programmes have become more sophisticated, fraudsters have also come up with new, innovative methods for stealing and selling data on the black markets hidden within the darkest corners of the web known as the DarkNet. But there has also been a shift of back-to-basics and crude methods among fraudsters such as social engineering specifically preying on the naïve and vulnerable.
The increasing number of payment options, the demand for faster payments and the rapidly changing nature of fraud all present significant challenges to retail banks’ fraud management policy.
Retail banks must ensure they have robust technology, strategy and expertise in place to monitor all payment channels. Get this wrong and the bank suffers from increased fraud losses, potential fines from the schemes or regulators on top of the reputational damage which easily can result in the exodus of customers.
Worrying developments
A look at the fraud statistics published by Financial Fraud Action UK reveals that fraud remains a major concern for retail banks in the UK. In recent years for example we have seen a significant rise in online banking fraud; in 2014 alone fraud incidents in this category, commonly known as ‘account takeover’ fraud, increased by 48% and resulted in £60m ($88m) of fraud loss in the UK alone. Card fraud in the same year rose by 6% resulting in a staggering £479m gross loss on UK issued cards.
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By GlobalDataHaving worked with many banks and building societies across Europe and other parts of the globe, I have come to see how many financial crime departments get their approach to fraud prevention right, whilst many others are faced by challenges such as inadequate collection and procedures around fraud metrics, silo mentality, inefficient communication between IT and Fraud Departments and lack of resource to name but a few.
In my view, there are three core areas that banks must address to effectively manage fraud in today’s age.
Technology
Having the right technology and a robust infrastructure in place to monitor payments ‘real time’ is crucial, along with technology that can support non-financial transactions such as IP intelligence systems.
Many banks today still rely on archaic technology which is effectively crumbling and failing to meet today’s infrastructure requirements. Some of the monitoring systems used by banks today were implemented years, and in some cases, decades ago and many banks have failed to upgrade or move to better fraud detection systems. Payments and the systems to monitor payments has moved on and banks must invest wisely to implement the right back office technology.
Data
Collecting and passing transaction information into a monitoring system is paramount. Most banks monitor payments well but many today do not include all ‘non-financial’ transactions, which can include anything from recording when a consumer logs into their internet bank account from mobile phones and computers, setting up a new beneficiary (payee), changing an address and so on.
Essentially everything a consumer does though their bank should be collected and passed into the monitoring system in order to look for anomalies. The collection and monitoring of ‘big data’ is key in order to reveal irregular and abnormal patterns, especially relating to customer behaviour. In the fraud prevention world, we typically call this profiling and while a lot of banks implement this type of strategy today, many others do not.
Expertise
To cut costs, banks sometimes move parts of their monitoring teams offshore but this usually turns out to be a false economy as the teams in overseas territories lack the experience and social understanding of the UK and European markets, especially in specific niche areas such as fraud. Furthermore, some banks look to streamline their costs by centralising office locations and reducing headcount. Fraudsters are more likely to target banks that are in this position as they are seen as more vulnerable.
Today, many banks are under pressure to save costs on multiple fronts, however, being too cost sensitive in the realms of financial crime prevention has its perils. It’s important that banks build a robust enough business case that justifies the cost to invest in better technology and retaining or building the right expertise for their fraud management programmes.
There are many parts to such a business case and, for some banks, there are more important areas than others but typically, it should include fraud projection models, comparisons of old versus new and improved system features and functionality, current hardware platforms, any analysis of where the bank is in industry standings and where they should be in comparison to their peers and others.
Finally, I often find banks implement multiple monitoring systems to cater for different fraud channels such anti money laundering and sanctions checking, merchant acquiring, card issuing, employee, cheque and online banking fraud, but a multiple system approach can be costly and inefficient.
Few banks have fully embraced Enterprise Fraud Management by using a single system that can cater for the many different fraud channels but it’s certainly the future. If banks can build a strong enough business case to justify these costs and succeed in implementing a strategic platform for Enterprise Fraud Management, they will be in a much better place to keep themselves and their customers protected and keeping running costs down.
Jay Floyd is Principal Fraud Consultant at ACI Worldwide
