Winds of Change?
A recent S1 Enterprise consumer survey found that consumers now value financial stability (65%) and trust (54%) ahead of convenience (50%) in terms of attributes they value most in a financial institution. I agree with Mr. Adams, the Bank Technology News writer who covered the findings, when he (sarcastically) wrote, “Well, here’s a shocker.” But I’m shocked for different reasons.
For all of the time I’ve been in the world of financial fraud prevention, it’s been drilled into me that fraud and risk policies take a back seat to sales and marketing initiatives focused on acquiring new customers and accounts. The conventional wisdom was that as long as new products and new channels (i.e. convenience) were profitable, associated fraud losses were a cost of doing business.
Is it possible that this survey provides some evidence that the conventional wisdom is now wrong? Banking customers now place trust ahead of convenience… interesting. I realize that “trust” has several potential meanings in this context, but one of those meanings must relate to how banks protect customer information and assets. Will this help bolster the business case for investing in fraud prevention and security resources and projects? It’s hard to say, but let’s hope so.
A Fraud Tsunami and the Road Ahead
The Heartland breach is a revealing example of a fraud tsunami. As most of us know by now, hackers penetrated one financial intermediary – a relatively small ripple – which eventually grew into a tidal wave that affected hundreds of institutions and hundreds of thousands of consumers. To date, over 650 institutions have been impacted, from Alaska to Florida. Thousands of customer accounts have been closed and new cards issued. Millions of dollars have been spent and the cleanup continues.
The structure of the financial industry, with its many interconnected intermediaries, is one of the underlying factors of the scope of the Heartland breach. In financial services, economies of scale matter. Processors make big upfront investments in infrastructure, and then rely on generating huge volumes of low margin transactions over which they can spread the fixed costs. . In Heartland’s case, this means over 100 million transactions per month. The highly competitive financial services industry has come to rely on these super efficient, low-cost-per -transaction intermediaries. And, customers have come to expect more convenience and more options when accessing, transferring or depositing their funds. To stay competitive banks will likely become more interconnected, not less.
From a fraud management perspective, this presents a difficult dilemma. An isolationist strategy is impossible, yet utilization of necessary third parties opens the door to risks banks can’t possibly control. Data breaches at intermediaries and other 3rd-parties aside, even customers themselves are unknowingly handing their information to bad guys by responding to phishing, 419 and other scams.
So what if we just assume that all customer data is compromised? That every interaction should be questioned for authenticity? What would fraud prevention systems look like then? Is this paranoid view of the world too pessimistic, or is this the road ahead?
Fraudsters get stimulus too
The government’s plan to spend $750 billion on economic stimulus is well publicized, and has been widely discussed. What is less discussed (in the traditional media, anyway), is that experts are now warning that as much as $50 billion, yes that’s right $50 billion, could be lost to fraud. Robert Mueller, the director of the FBI recently said, “These funds are inherently vulnerable to bribery, fraud, conflicts of interest and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey.”
Tell me something I don’t know. Fraudsters are indeed committing fraud at unprecedented levels, and the stimulus package is just another opportunity in an already target rich environment. David Williams, who runs the Deloitte Financial Advisory Services, believes that the fraud concern is warranted due to the fact that almost all movement of money is now done electronically. For this reason, Williams is recommending clients improve the monitoring of their transaction systems. This concern is real. Here’s a link to a recent example of fraudsters exploiting the ACH network used to pay state contractors.
High profile public cases such as Madoff, Satyam and the whole mortgage mess have already turned the dial on the attention being paid to fraud. The FBI currently has 65 taskforces working on mortgage fraud with 965 cases opened in the first four months of 2009 compared to 136 in all of 2004. In addition, the DOJ and other industry watchdogs are on high alert for fraud. U.S. companies should take a cue from the low tolerance policy toward fraud right now and take the initiative to improve their own systems before their hand is forced by government/regulatory pressure.
Know What You Don’t Know
No one would ever confuse Donald Rumsfeld with Shakespeare but I think he’s onto something here. In fact, I think most fraud managers are very familiar with both types of unknowns and the dangers that both present. Fraud is a complex subject. No one can truly be an expert in all areas, but in my opinion some fraud managers don’t take the necessary steps to know as much as they could.
The Rapid Rise of ACH Risk
ACH is undergoing rapid change. While losses remain low, the risk of loss continues to increase. Are we prepared? Join me for a discussion on the evolving payments landscape.
Check Kiting Remains an Unsolved Problem
Yes Virginia, kiting really is a problem, and a down economy makes it worse. I’m disconcerted by the attitude that it’s not a big deal, there is little risk. Many feel like the customer is basically a good guy with some bad habits. “They’ll make it good, they always do.” Is a comment I hear all too often. Let’s try and look at kiting from a different perspective, and see how it changes the picture.
The Value of Fraud Prevention
Fraud prevention is vitally important to the well being of financial institutions of all sizes. If you don’t believe that you haven’t been paying attention.
The Business of Organized Fraud
Much is written about the threat posed by organized crime. If you are involved in fraud detection and investigation for any length of time, you will investigate organized crime, whether you know it or not.
Is more consolidation coming?
A recent article, For small banks it’s eat or get eaten, on CNN.com is adding credence to the concept of a banking bulge that we explored in the beginning of April. Our previous post titled Battle of the Bulge cited the conclusions of Merideth Whitney to help illustrate the emergence of a trend that smaller banks will be forced to merge and that the once popular mega bank model would fade.
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