Be Faster than the Fraudsters

By Colin Reid

The word “sophisticated” may bring up images of men in tuxes and women in long gown, eating canapés and drinking champagne while a piano tinkles in the background and city lights twinkle through skyscraper windows.

Unfortunately, “sophisticated” can also apply to criminals, including those who attack your computer systems.

“Fraud trends change on a weekly basis or faster,” said Scott Boding, development manager risk engineering for CyberSource, a leading provider of electronic payment, risk and security management solutions for online merchants.

“We regularly see merchants detect a new approach to payment fraud and put rules and methods in place to fight that fraud, only to find that in just a week’s time, the culprits have developed a workaround that the merchant must address. There’s no question that fraud is becoming much more sophisticated.”

As if increased sophistication weren’t enough, the prevalence of fraud continues to grow at an astonishing pace. The United States Department of Justice’s 2009 Internet Crime Report showed a 22 percent increase in complaints from 2008 to 2009 and a nearly 2,000 percent increase over the 10-year period presented. The associated dollar losses expanded at an even faster pace, up 112 percent in 2009.

Fraud in AFS

Alternative financial services providers know the perils and challenges of fraud extremely well but, unlike the e-commerce industry, don’t have the luxury of the numerous credit card oriented safeguards at their disposal.

However, there are solutions created by specific providers that deliver the results and protections needed in such a fast moving environment.

Since AFS providers regularly encounter fraud sophistication similar or exceeding that found in e-commerce, many already put these aggressive fraud prevention tools to work. As fraudsters continue to adapt their tactics at an astonishing pace, however, it’s increasingly important that AFS providers continue to refine their efforts and work with partners that are proven in reacting to this ever changing challenge.

Although technology can help their cause, it also helps the perpetrators, and with the nature, types and scope of fraud growing fast and changing at an ever increasing rate, AFS providers should dedicate ample energy and resources to their existing decisioning processes to keep these as refined as possible.

By adopting faster, more accurate tools and data and continuing to analyze their own transactions to further refine their scoring models, AFS providers can catch up with more proactive industry peers, reduce incidents of fraud and significantly boost profitability.

This need for constant refinement touches all sectors of AFS. Whether cashing checks or running a retail or online lending business, every provider must effectively address the risks of fraud.

While some aspects of fraud remain consistent, others change at a sometimes overwhelming rate. In check cashing, for example, AFS providers know that fraud can be related to the check maker or the check presenter. The ways in which fraudsters can misrepresent this information to outsmart a lender change often, but the scope of this fraud is mostly contained in these two forms.

In other forms of short-term lending, the places to look for fraud range far and wide. In fact, AFS providers can analyze more than 100 data attributes about an applicant to confirm that the consumer information provided truly belongs together and is accurate/up-to-date or detect fraudulent attempts to secure funds. While a few of the most common flags or indicators include a social security number/name match, a name/address match and a deceased indicator, many AFS providers find that it pays to look at even more granular and predictive indicators.

To add to the complexity, new forms of fraud affect AFS providers just as they do e-commerce merchants, and fraudsters are always looking for new ways to win.

Still, regardless of the increased sophistication of fraud AFS providers face, they can protect themselves and stay as profitable as possible by ensuring they employ the most complete, accurate and up-to-date coverage with their identity verification tools, particularly when dealing with consumer not present (Internet) transactions.

The best approach to IDV will vary from one AFS provider to the next, but the key is to remain diligent. Diligence can enable AFS providers to build extremely predictive models to help them make solid and profitable fraud forecasts and better inform their overall decisioning processes.

Beyond this, AFS providers also need speed and flexibility to excel in fraud prevention and effective decisioning as a whole. Systems and rules in place should enable rapid approvals or denials. From the perspective of flexibility, AFS providers should be willing and able to adjust scoring models on the fly based on the past performance, because an important attribute in both fraud prevention and lending decisions today may not matter tomorrow.

The goal for any provider should be to ensure that its scoring models evolve faster than, or at least in step with, the most advanced of the fraudsters.

What To Do?

AFS providers that want to increase their effectiveness in detecting and combating fraud to boost profitability should check with data providers to ensure they’re using the most effective and optimized technology platforms available to them, and those who want still faster performance should shop around to investigate other options offered by leading credit bureaus.

They should also take a critical look at their fraud scoring models and consider how they may be able to improve performance by incorporating more yes/no or match/mismatch consumer attributes.

Colin Reid is VP strategy, marketing & business development for CL Verify Credit Solutions. Contact him at

Posted in Convention 2010.