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Compliance

How to Prevent New Account Fraud Online

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Many banks fear that online services will lead to unmanageable and costly rates of fraud. But when done right, digital tools can help banks mitigate risks while also improving customer experience.

For community banks and credit unions, digital channels are the most cost-effective way to deliver financial products and services. But as customers embrace cashless payments and online banking, banks also face greater risks that come with online transactions. In fact, respondents to KPMG's 2019 Global Banking Fraud Survey cited “evolving digital channels” as a top 3 challenge for risk mitigation. Many bank leaders fear — not without reason — that digital channels are easier for fraudsters and cyber criminals to exploit.

Yet even though online banking and digital account opening can expose institutions to fraud, increased digital activity also provides a rich reservoir of behavioral data that helps banks better manage risk. Most cases of fraud are preventable with the right data analytics, monitoring tools, and a rigorous risk management strategy.

Fraud in Physical vs. Digital Channels

Digital fraud often follows similar patterns to in-person fraud, and many cybercriminals use the same strategies as in-person scammers. For instance, “check kiting” is a common way of accessing unauthorized credit by writing physical checks. It involves writing a check from an account with insufficient funds to a second checking account. This second account can then withdraw the transferred funds before the check bounces, enabling vast sums to be stolen if the transfer is not flagged as suspicious activity.

Kiting can also occur in digital channels such as ACH services. Individuals or fraudulent companies can bill businesses for vast sums, extending their line of credit as the bills wait to be processed. As with in-person check kiting, ACH kiting can be prevented by putting a hold on the money. However, this often results in poor user experience — and there are more sophisticated ways to differentiate authentic transactions from fraudulent ones.

While acknowledging the risks, it’s important to note that digital channels offer a new set of options and tools for fraud prevention. For instance, banks offering digital services have the option of setting up real-time transaction monitoring. By adopting the right software, they can also apply enhanced fraud analytics to any suspicious transaction. This allows banks to automatically assess if the transaction in place follows a legitimate pattern or whether the account has committed fraud in the past. By using a more sophisticated suite of tools, banks can reduce the risk of fraud without an extensive manual review process or putting legitimate transactions on hold.

The Key to Effective Fraud Prevention

As community banks and credit unions implement fraud prevention solutions, a common misconception is that they can minimize risk by choosing an “all-in-one” fraud prevention system. Fraud prevention and identity management solutions such as Equifax, LexisNexis, and Qualifile each offer data analytics and predictive insights for fraud prevention – but none are sufficient as a one-stop shop for banks looking to verify digital identities. One service may be excellent at checking for financial fraud in a person’s history, but it may not be able to uncover other forms of fraudulent activity. To unlock the full potential of fraud prevention solutions, a bank needs to rely on multiple services, with each providing protection in the areas where they are strongest.

For its clients, MANTL simplifies fraud prevention by enabling banks to verify applications against various data providers. Running a person’s information through a service like LexisNexis may produce a baseline score, but checking that same information successively, through additional services, can provide an increasingly accurate portrait. For instance, to protect against address fraud, MANTL runs a user’s address through four separate data sources, which are all additive to achieving a high-efficacy match rate. By running provided information through the databases that are best suited to validating that piece of the puzzle, banks can significantly reduce fraud across their digital channels.

Fraud Prevention and Customer Experience: A Tradeoff?

Relying on different security solutions can be time-consuming and expensive, and risk management will always involve certain tradeoffs — especially with regards to customer experience. Digital banking customers are willing to part with personal information — but only to a degree. The key is to ensure that banks are consciously balancing customer experience with risk mitigation.

To get the most from their digital offerings, banks need the right tools. For instance, most banks require that new users disclose their driver’s license number or a photo of their driver’s license as a form of identification. Yet MANTL’s research has found that with each additional inquiry in the account opening process, application drop-off will increase. The data shows that asking customers for a driver’s license number will lower conversion rates by about 15 percent and decrease fraud loss by only about 1 percent. Collecting a driver’s license picture causes a 29 percent drop in conversions, with just a 1.5 percent decrease in fraud loss. MANTL looks at this data to help banks determine where to draw the line in order to balance fraud prevention and customer experience.

Cyber risks present an ongoing challenge for banks that deliver their products and services through digital channels. Yet by applying the right digital solutions, institutions can gain critical insights into digital activity and minimize the need for manual review or the use of onerous controls that hamper customer conversions. MANTL not only offers banks and credit unions the data they need, we also provide the analytical context to improve outcomes and reduce risks. This way, bank leaders can know they are optimizing both customer experience and risk management.