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Fighting Fraud While Expanding Access to Banking

Fraud can be a devastating blow to financial institutions. It’s not just the immediate financial losses that financial institutions need to be concerned about, however. The risk of damaged reputations is very real. Customers who get caught up in frauds are less likely to expand relationships with the involved financial institutions, which in turn can depress revenues. That’s why financial institutions cannot afford to let down their guard, even as new technologies and processes seemingly diminish opportunities for fraud.

Remote deposit capture, for example, compresses the check clearing cycle, reducing opportunities for check fraud. But it does not eliminate check fraud. “What we’ve noticed is that the severity of check frauds is actually increasing,” said David Barnhardt, Vice President of Product Management at Early Warning. “We’re still seeing a lot of counterfeit checks,” most are large-dollar items. Referencing data collected by the American Bankers Association, Barnhardt said losses from counterfeits exceeded losses from all other categories of check fraud in 2012 and 2013. Owned by five of the largest banks in the country, Early Warning develops risk management solutions, such as Deposit Chek, a service that helps FIs spot bad checks before the items can result in losses.

In August, Early Warning announced an enhancement to Deposit Chek that helps FIs to better identify potential counterfeits. The enhancement is fueled by the National Shared Database, an industry resource managed by Early Warning that takes daily feeds of customer account and related information from FIs located throughout the country. That information is used to make informed decisions on at least 95% of DDA transactions that clear between FIs each day, according to the company.

Deposit Chek with Counterfeit Notification, available now as a next-day batch offering, assesses the likelihood of a deposited check being fraudulent and generates a “score”. A real-time version is due out in February 2016. This should be especially helpful for identifying duplicate check deposits, Barnhardt noted.

New Account Fraud and Regulatory Concerns

Early Warning can also help FIs identify potential fraudsters at account opening. New account fraud is one of the most damaging types of fraud faced by FIs and their customers. Costs include direct losses (about $2 billion last year), the time and manpower needed to resolve frauds (about $25 per hour), and long-term reputational damage, Javelin Strategy & Research explained in a recent report. That report – Making Digital Account Opening Simpler – noted that fraudulent applications for checking and savings accounts, credit cards and mortgages are on the rise. It wasn’t unexpected, as “the number of fraudulent account applicants climbed markedly in the years after EMV was rolled out in Canada and the United Kingdom.”

Javelin points to two factors that are contributing to growth in new-account fraud – an increasing number of data breaches which lead to identity thefts, and the transition to EMV chip security for credit and debit cards. “This is likely to motivate crooks to rethink how they deploy their resources,” the paper stated. “Some crooks will turn to card-not-present fraud…Other crooks will take over existing accounts to dupe FIs” into issuing new credit and debit cards that then are used to commit frauds.

Identity Chek is a real-time service that has been upgraded to help FIs better assess the validity of customers at account opening. It can detect invalid, inconsistent or unusual details from applicants, such as driver’s license formatting or Social Security Numbers. Using collaborative intelligence, it allows FIs to determine right away whether applicants are who they claim to be, and if so the types of accounts and use privileges they should be offered.

Using predictive applicant screening scores will position FIs to serve more customers, including the so-called “under-banked,” explained Eric Woodward, Chief Corporate Development Officer for Authentication at Early Warning. According to the FDIC, about one in five households in the United States has little to no interaction with mainstream financial institutions. This has led the Consumer Financial Protection Bureau to voice concerns about the level of service and protections these consumers receive from FIs, prepaid card companies and mobile wallet providers.

“Unlike applicant screening tools that primarily rely on credit performance, thus excluding many from receiving basic financial services, our predictive scores reflect an applicant’s entire deposit history,” said Woodward. “In addition to giving financial institutions the opportunity to onboard more new checking account customers faster and with confidence, our New Account Scores strengthen CIP and KYC initiatives to better identify customers’ needs and the most appropriate services.”