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Shared Information: Your Best Bet to Mitigate Fraud

By: Paul Finch

According to the Federal Trade Commission, fraud costs financial institutions and retailers more than $31.3 billion each year, while customers lose an additional $5 billion annually. To date, nearly one million Americans have had their identities stolen and used for fraudulent purposes.

In an era where fraud is so prevalent, prevention should be at the top of every financial institution’s priority list. From pharming to phishing, criminals are becoming more technologically savvy and sophisticated, which will only serve to intensify the threat to your institution and its customers. While you may not be able to avert all losses associated with a new method or scheme, you can certainly adopt practices to help mitigate losses and prevent illegal activities that are often copied or repeated.
Do you know where the threat exists?
The first step in mitigating risk is to understand where the threat of loss resides at your institution. From what the data reveals each day about the amount of fraudulent activity in the marketplace, I believe that no financial institution is totally immune to fraud.

With certain kinds of losses that financial institutions experience, the source is quite evident; while in other instances, the cause of the loss is not so obvious. For example, some losses at your institution might be written off to “NSF general ledger accounts” or buried in the collections departments and investigation queues. Either way, it is extremely important to understand the level of loss your institution is experiencing.

Fraud not only has a negative impact on your bottom line, but it can also damage your institution’s reputation. How can financial institutions beat the fraudsters who, in many cases, are winning the game at your organization’s expense? The use of shared information can be one of your institution’s most effective lines of defense to combat fraud.
Your competitors can help
Every day, financial institutions compete directly with each other to win customers. However, many financial institutions understand that competitive differences are immaterial when it comes to fraud. As a result, these organizations are continuously hosting a variety of regional and national events to exchange best practices and help discover additional strategies for reducing losses for the industry as a whole.

The American Bankers Association recently reported the findings of its 2005 Deposit Account Fraud Survey Report, which highly ranked the use of shared databases as a means to fight fraud. Sharing information allows banks to learn from one another and establish better strategies to anticipate the threat of various types of fraud. Having access to more information helps financial institutions recognize fraudulent activity before it becomes a loss. 

The ABA report also revealed that regional and super-regional/money center banks (more than $5 billion in assets) ranked the use of both deposit account and item-level information from shared databases as one of the top external fraud filters.

For the past 10 years, financial institutions have been continually expanding a nationwide initiative to mitigate the threat of fraud resulting in loss. Primary Payment Systems’ Early Warning Databases, used exclusively for fraud prevention, represent the largest cooperative effort of its kind to mitigate deposit, payment and identity fraud.

Augmented by public data sources, the databases consist primarily of non-public secure information representing:

Maintained under the Trusted Custodian model, the Early Warning Databases are the result of a cooperative effort between U.S. financial institutions and other industries to prevent fraud and reduce losses. Usage and provision of contributed data is approved and governed by an advisory committee based on a strict set of operating rules. Committee members represent financial institutions and other financial service organizations and meet on a regular basis to oversee the operating rules and provide guidance on the development of enhancements and new services. This model also includes revenue sharing for contributors when their data helps others prevent a loss.

Data is updated on a daily basis with contributions from banks and other financial service organizations so that the most up-to-date and relevant information is available. For those financial institutions that participate, knowledge truly is power.
Sharing information works
As fraud continues to grow, one of the best ways to stay ahead of the fraudsters and their scams is to take advantage of the information that is available to defend your institution. Other industry leaders are willing to share. An example of this concept in practice is that last year alone, information generated from the Early Warning services resulted in more than 11 million account-level warnings on closed accounts and non-sufficient funds and also generated more than 4 million item-level warnings, including stop payments and return items.

Sharing information can work for all financial institutions regardless of size. The Early Warning Databases now cover approximately 90 percent of all open and active transaction accounts in the United States. Smaller banks that have typically utilized more process-based methods can benefit by leveraging the best practices that the larger financial institutions have adopted to take advantage of the information that is available to them.
What you can do
Participating in a risk management service that shares information might be the single best practice for your institution to implement. Not only does data contribution help protect the industry against fraudsters, but it also creates an additional revenue stream for the contributing financial institution.

PPS’s Early Warning suite of services helps protect financial institutions and their customers. These services provide advanced notification on deposits, payments, and identities that could result in financial losses to your institution due to fraud or mismanagement of funds.

For financial institutions unable to directly contribute account information to a shared database, they still have the ability to access the data through services like those offered by PPS to help protect their customers, institutions, and the industry as a whole.

Adopting advanced fraud mitigation practices like information sharing can allow financial institutions to successfully establish better ways to analyze new accounts immediately, using comprehensive databases so that losses can be stopped earlier in the account lifecycle. By deterring more fraud and risk on the front end, your organization will be able to spend more time focused on customer retention and enhanced service offerings.  All financial institutions can benefit from collaboration. By sharing information and working together, financial institutions can reduce losses and more effectively protect themselves and their customers from fraudulent activities.

Paul Finch is president and CEO of Primary Payment Systems, Inc., an affiliate of Denver-based First Data Corp.

© Copyright BankNews, July 2005