The Fraud Antidote

By Ghiglieri, James | Independent Banker, January 2011 | Go to article overview

The Fraud Antidote

Ghiglieri, James, Independent Banker

Technology can inoculate your bank against rising debit fraud

Fraud has long been a dominant topic in the financial industry. From Russian counterfeiters to Georgian identity thieves, the banking industry has been in a grueling battle with fraudsters for decades. Ironically, the very thing that makes these fraudsters such a threat can be the savior for many community banks with regard to fraud prevention-technology.

Fraudsters have gained tremendous power by adopting or innovating technology at a faster pace than their banking industry counterparts. They have used this new technology to gain access to banks' information technology systems to steal cardholder information, perform fraudulent money transfers, create fraudulent accounts and more. Fraudsters then used technology to target accountholders themselves with phishing, vishing, SMiShing and other types of attacks.

In recent years, we have seen an explosion of new technology to help banks combat and prevent these new types of fraud. Law enforcement officials have stepped up the attention paid to this type of crime as well.

According to a February 2010 study by Javelin Strategy & Research, arrests related to fraud and financial crime have doubled, prosecutions have nearly tripled, and convictions have nearly doubled since 2008. Most of this action has come directly from financial institutions' use of the fraud identification and prevention technology and their increased fraud reporting.

There are two focal points in protecting and preventing debit card fraud: protecting your community bank and protecting your cardholders. While these often overlap, both are key to minimizing the potential for fraud.

Protecting cardholders

* Adopt early-detection technology: Neuralnetwork technology such as FICO Falcon Fraud Manager is the backbone of any effective fraud mitigation program. This technology provides the foothold to recognizing potential fraud early and often. It works by building a profile of legitimate transactions, instantly alerting financial institutions to purchases made outside those parameters. For example: If a cardholder has never made a purchase at a particular store for a particular item, such a transaction will receive a higher potential fraud score than one made at a usual shopping destination.

Many of these neural-network technologies offer the ability for customization so your community bank can set the rules and parameters for notification and scoring.

By recognizing a particular fraud trend or fraudulent transactions, community banks put the power of fraud prevention directly into their own hands. The next step is to take action.

* Monitor constantly and take quick action: When using neural-network technology, it is incredibly important to develop processes to monitor and take quick action in the event of suspicious activity. It is one thing to know about the potential for fraud and another to take action against it. Ultimately, this responsibility falls squarely on financial institutions.

When you see a fraud trend developing or see increased potential fraud occurring on a particular cardholder's account, take immediate action by notifying the cardholder about the suspected activity, up to and including validating a purchase. If a cardholder cannot be reached, place a block or prevent the card from being used for further transactions. This will help save the cardholder from being attacked and save your bank from losing money.

Many electronic funds transfer (EFT) networks provide fraud-monitoring services. Not only will they monitor and notify financial institutions about suspected fraudulent activity; they will also contact financial institutions about fraud trends in areas of the country that might be affected. If your community bank knows of potential fraudulent activity, it can take immediate action resulting in a significant decrease in losses.

* Educate cardholders: Marketing and advertising are fundamental in any successful business, but they can be a powerful way to encourage behavioral changes as well. …

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