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Retail Banking Fraud Management: Challenges and Emerging Alternatives

 

Managing and minimizing fraud is an intrinsic part of any bank’s operations, as banks face frauds across a wide range of products like loans, credit cards and debit cards. Banks have evolved unique strategies to manage frauds in line with organizational norms, but there is still a need for them to continually scan industry best practices for new types of attacks and ensure preparedness for the same, much like putting in place antivirus software that is updated with each new virus released.

Fraud is rising across the banking product range and surfacing in different forms across the globe. While the prevention of loan fraud needs to be effected at the time of sourcing and is a onetime effort, prevention of credit and debit card fraud is an ongoing process due to the transactional nature of the product.

Current Approach to Fraud Management
Most banks employ real-time monitoring of transactions, with rule-based engines that help them pick transactions that are risky on the basis of the rules defined by them. The banks then review the transactions to determine whether they are fraudulent or genuine. However, fraud is dynamic. Hence, the rules also have to be dynamic to ensure that the changing fraud patterns can be quickly identified. Fraudulent transaction rules are generally based on the following:

  • Bank’s own fraud trends
  • Bank’s customer transaction patterns
  • Information shared about fraud trends by associations

Fraudsters innovate faster than banks do. It is only when a trend is identified that the rule engine gets updated to ensure that similar frauds are prevented. Today, there is a long lead time between the start of a trend and its identification by the banks and a mitigation strategy being put in place. This is the time when fraudsters stand to gain, which can be significantly restricted if a trend once identified by one bank can be made immediately available to the others.

Right Sourcing: A Proactive Model to Combat Fraud
Right Sourcing Fraud Operations involves setting up and operating fraud management activities for global banks from centers around the world. These centers are staffed with fraud experts equipped with the skills, tools and technologies to identify trends and proactively build protective strategies. Ideally, the fraud management operations of multiple banks would be with one partner who would provide this specialized service using a shared operations model.

The Right Sourcing Model works as follows:

  • When a fraud trend hits one particular bank, the trend is immediately shared with all the banks having the same service provider. The banks can now be proactively prepared for the same trend to hit their bank and ensure that their rules are ready to take care of the situation.
  • Taking this a step further, even before a full trend is observed by one bank’s operations, if they find a new modus operandi or a new merchant / Merchant Category Code (MCC) featuring in their monitoring, the information is immediately shared with the Operations of the other banks having the same service provider. Hence, reviewers of the other banks can also be alerted. A trend can sometimes be formed by transactions across multiple banks and in this model, all the banks can identify it and benefit faster.
  • Points of compromises and activation of skimmed cards can be better determined when transactions across banks are compared to help quicker identification of patterns and common purchase points.

Fraudsters do not restrict themselves to one or few banks; they typically try the same modus operandi with multiple banks and change their approach once their own strategy fails. They target a large number of banks to make the most of their strategy. Traditionally, by the time the banks realize that there is a trend and they build the preventive strategies around it, it is too late as the fraudsters have moved on to a new strategy. Hence, time is a crucial factor. The sooner the banks are able to modify their rules and strategies in line with a trend, more the money they can save.

Conclusion
Right Sourcing is emerging as an effective alternative to achieve faster response times to new frauds. We, at TCS, believe that its best shoring model can effectively enable banks track and fight fraud better by sharing best practices. Banks are able to react faster and thus prevent fraudulent transactions and resulting losses. We currently offer a Right Sourcing Model for global banks, where a central fraud management team services fraud operations and analytics for loans, cards and other fraud-prone banking products. We manage fraud operations across 30 countries, with coverage across business lines such as credit, debit, deposits, payments and loans.

We are seeing several large banks increasingly moving toward a central fraud management organization. This model can help banks manage risk effectively by reducing fraud losses, improving productivity through process improvements, automation and standardization, and proactive risk prevention using advanced analytics.

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