In the early 1990’s financial institutions began creating centralized liability risk management groups dedicated to the reduction of new account, check and deposit fraud losses. For example, an informal group known as the Orlando 13 met at a BAI check fraud conference in 1996 to establish a forum for bankers to discuss industry issues, fraud trends and how they could work together to mitigate the growing problem. Early on, this group came to the conclusion that in order to be successful, fraud prevention need not and should not be regarded as a competitive issue. While their counterparts within commercial, credit card, or retail banking were competing directly with each other to win market share, fraud and risk managers were simultaneously hosting regional and national events to exchange best practices and find ways to reduce losses for the industry as a whole.
Several years ago, the following analogy came to me from a fraud manager, “Fraud is much like a balloon, when you squeeze one end, fraud (or air) simply migrates or moves to other areas’. In other words, rather than just pushing fraud elsewhere in the bank, or to other financial institutions and industries, it became clear that sharing data to mitigate fraud would help to instead ‘pop’ the balloon and eliminate fraud all together. In the following paragraphs we will further discuss the benefits of sharing information and ways in which it can help your institution reduce fraud losses.
You Can’t Manage What You Don’t Measure
Before you can avoid losses, it is important to know where they are coming from. Frequently we hear from smaller financial institutions that they don’t incur fraud losses. In reality they actually do; they are simply hidden elsewhere. Among surveyed institutions, either individual branches or an operations group will often times write off losses to ‘NSF general ledger accounts’. We have found this to be the primary cause for the common misperception, “we don’t have losses”.
If this scenario is occurring at your institution, take a moment to review your general ledgers to determine if some of these write-offs should be reclassified. Additionally, a closer look at your current investigation queues and collections departments can also uncover losses. Finally, if you don’t already participate, we encourage you to join the ABA Check Fraud Data Reporting Group. They have already standardized a number of loss categories while allowing for reporting of loss results by bank. They in turn share key metrics with participants allowing for peer industry benchmarking. For more information visit: www.aba.com.
Creating a Model for Industry Collaboration
An output of the Orlando 13 initial meeting was the creation of a Fraud Working Group within BITS*, the Banking Industry Technology Secretariat. Founded in April 1998, the focus of this group is to create a nationwide program to reduce check fraud, primarily through the following:
- Information sharing through shared databases;
- The exchange of best practices; and
- Implementing standard industry fraud definitions and benchmarks.
At its core, BITS defined three legs to a proverbial stool that would include the sharing of information on accounts, transactions, and people. In conjunction with Primary Payment Systems (PPS), this industry vision has become a reality. This business model, proven successful over the past 10 years, is built on the following guiding principles:
- Fraud is not a competitive issue;
- Sharing information intra-industry as well as across industries to help mitigate fraud losses;
- Strict operating rules to govern data provision, ownership, and use;
- Revenue sharing for contributors whose data results in value to others; and
- To offer incremental value over existing negative databases by providing data that is updated daily and contains a full positive look at all transactions and checking accounts
Squeezing the Fraud Balloon
Today, many of the largest financial institutions are averting losses by actively sharing information on over 205 million accounts, 17 million stop payments, and nearly half of all U.S. checks returned on an annual basis. In total, over 1.5 Billion transactions were reviewed this past year.
However, while these institutions are detecting and preventing losses, fraudsters have begun shifting their attention to others such as community banks and credit unions. For many, exposure to return item losses and counterfeits is on the rise --- and will likely persist with the pending enactment of Check 21. With an anticipated reduction in float, fraudsters will accelerate their efforts with cash-back and less-cash transactions at the teller line and new account desk.
What Can I Do?
If you are not yet participating in one or more of the aforementioned fraud reduction initiatives take time to learn more on how you too can benefit. While there is no silver bullet to mitigate all the risk, there are a number of solutions available that leverage shared databases to reduce losses and help protect you from becoming the next victim. Let’s continue to work together to ‘pop’ that fraud balloon.
• BITS is a nonprofit industry consortium whose members are 100 of the largest financial institutions in the United States. Serving as the strategic “brain trust” for the industry, BITS focuses on issues related to e-commerce, payments and emerging technologies. More information can be found on BITS by visiting: www.bitsinfo.org.