Academic journal article Economic Perspectives

Divided We Fall: Fighting Payments Fraud Together

Academic journal article Economic Perspectives

Divided We Fall: Fighting Payments Fraud Together

Article excerpt

It is a great pleasure to be addressing this august group. As some of you know, I began my career at the Federal Reserve back in 1982. So speaking to you is like a homecoming for me. I have been fortunate in my career to participate in the U.S. banking economy from three perspectives: at the Fed, obviously a policymaking central bank; at Citibank, a lender; and at two financial technology providers, including 12 years at IBM (International Business Machines) and the last year at Fair Isaac, a leader in decision management technology.

From these three perspectives, I have seen the tremendous collaboration that exists in the banking industry on the issue of fraud. However, from my current vantage point, I am also able to see a disturbing trend: More companies are declining to participate in some of these collaborative, consortium-based best practices. The reason is simple: They see a competitive advantage to keeping their information and experience to themselves. This raises some key issues for the financial services industry.

Do we want to fight fraud or move it around? That is, do we want to reduce the amount of fraudulent activity overall, or are we content to just have the most advanced banks move it to the less advanced banks, and to shift it from well-protected channels to less protected channels? Does a failure to maximize our effectiveness at fraud prevention have even deeper consequences? Which people, which groups, and which activities might we be funding if we allow fraud to persist? And are private industry initiatives enough, or is there a role in fraud prevention for public sector initiatives, mandates, or intervention?

I won't leave you guessing as to where I'm going with this. My experience has taught me the following.

* Fraud is too important to the economic and social well-being of our country to let it persist and grow.

* Individual gains must be balanced by the collective good.

* It is better to stop a fraudster than send him to the bank next door.

Now, my company is in the business of giving banks a competitive advantage. We have used consortium approaches to defeat fraud. We believe these collaborative approaches, along with ubiquity in protection, are essential ingredients in the fraud-fighting formula. They are necessary to reduce the "balloon effect" in fraud prevention, where progress in fighting a segment of fraud succeeds primarily in moving fraud from one place to another. We win when fraud loses--and fraud loses when we fight it together.

Types of payments fraud

Let me start by simply defining the key areas of payments fraud I'm discussing here. Fundamentally, we can divide fraud into two categories. There is first-party fraud, which is the abuse of account privileges by the account holders themselves, or the acquisition or expansion of those privileges by deceitful means. There is also third-party fraud, which is often identity fraud, or the abuse of one person's account by another. For the purposes of this talk, I am not discussing insider fraud, which is the misuse of a customer account by bank employees or others involved in the provision and distribution of financial services products.

First-party fraud typically involves your customer opening an account with you, with the intention of violating the terms of the account agreement. It can also involve a borrower selling his information to criminals or constructing a fraudulent identity or deceitful credentials for gaining credit. This type of fraud very often shows up in the collections queue as bad debt. But it is not traditional bad debt--when it is intentional, it is fraud.


Third-party fraud is what we usually think of when we consider fraud. This is stolen identities, the use of lost or stolen cards, and the counterfeiting of cards or other means of account access. It encompasses a wide range of techniques. …

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