Technology vs. Fraud vs. Technology

RMA Journal, The, March, 2001 by Beverly Foster

Although fraud has been around since humankind's first opportunity to commit it, many banks are just now getting their feet wet in employing technology to fight it. This, of course, is because developments from the laser printer to the Internet have created a tidal wave of opportunity to commit fraud and to commit it worldwide. Transactional fraud is the area in which most banks have made their earliest and strongest efforts. Fraud prevention specialists at Citizens Bank of Rhode Island, J.P. Morgan Chase & Co., and Wachovia Bank share with readers their efforts at stanching the flow of fraud.

There's little choice. Bankers must continue to charge ahead in their quest to engage customers in new products and services that will generate fees and help replace lost deposits. There's excitement in introducing them to something a little more sophisticated, a little friendlier, and a little quicker than their competitor has and that technology has made possible.

But each new tech-based sweetheart brings along a mean little sidekick. Accompanying each new service and product is a little powder keg of new risks from fraud. Technology, unfortunately, is an equal-opportunity tool; as the good guys get better at catching fraudsters, the fraudsters get better at their craft.

Meantime, a recent entrant on the risk hit list has captured the attention of banker and regulator alike--operational risk. And a growing component of operational risk is fraud. It's no surprise, then, that banks are beginning to devote more time and resources to fighting fraud.

Methods of dealing with fraud are, by necessity, increasingly high-tech. What are banks up to in their mouse-to-mouse battle with fraudsters?

No Shortcuts, Be Tough, Stay Connected

Rich Nelson is SVP and director of Risk for the Consumer Finance Division of Citizens Bank, a subsidiary of $30.2 billion Citizens Financial Group, Inc., headquartered in Providence, Rhode Island. Five risk managers report to him, from product lines that include the small business group, the merchant acquiring group, the VISA business group, the indirect auto lending group, and a direct lending group that handles business from branches. The risk managers' responsibilities include fraud management and upgrading technologies. The bank has a centralized fraud manager as well a centralized proprietry database of known frauds within its operational processing systems.

At this point, the bank relies primarily on the fraud detection tools employed by credit bureaus, which raise a red flag when an address or other information supplied by a credit applicant doesn't jibe with database information. In such an instance, the bank follows an established procedure:

1. Contact the customer. Even if everything appears to be all right, the bank may use a reverse directory and also check the customer's place of employment.

2. Additional verifications. "Under normal circumstances, we may waive 'employment' or 'income' verification," says Nelson. Upon an alert, these additional verifications kick in. They bottom line, says Nelson, is "don't take shortcuts"--attention to detail is very important. "Stay connected with local and international fraud organizations," he advises. "When we have a problem, we contact that group; in one instance, within a week we were able to stop and arrest someone who was doing fraudulent loans at our branches." He also encourages cooperation. Citizens Bank works with three or four other institutions.

Charles J. Bock Jr., SVP and director of the Fraud Prevention and Investigation Group at J.P. Morgan Chase & Co., knows that an extremely tough stance on punishing internal fraudsters is essential. The bank is also partnering with colleagues in law enforcement, and Bock meets regularly with all federal and state law enforcement agencies. J.P. Morgan Chase invites them to participate in fraud-prevention conferences. The bank has also offered a training class to 75 FBI agents involved in violent crimes who needed assistance in knowing what records exist and what is available to subpoena.

Check, Credit Card Cautions

Special risk mitigation is required for the merchant acquiring group. Citizens Bank insures this group's ability to take MasterCard and Visa. So in the event of any alerts, contact may be made with any issuing banks involved, and the merchant may then be contacted directly, up to and including a site visit. The bank may also research the merchant's credit record as well as that of the primary owners.

Further, "You cannot work in a vaccum," says Nelson. "When a banker sees a merchant who took a loss, he or she should share that information with a merchant in a similar business. It really has opened the eyes of some of our merchants."

Bock says J.P. Morgan Chase is a pioneer in developing early warning fraud monitoring and detection in lines of business that experience a great amount of data generation and transactions going through. "The credit card world and check fraud, in particular, lend themselves to scrutiny in an automated environment," he says.