Tag: fraud

With the most recent guidance newly issued by the Federal Financial Institutions Examination Council (FFIEC) there is renewed conversation about knowledge based authentication. I think this is a good thing.  It brings back into the forefront some of the things we have discussed for a while, like the difference between secret questions and dynamic knowledge based authentication, or the importance of risk based authentication. What does the new FFIEC guidance say about KBA?  Acknowledging that many institutions use challenge questions, the FFIEC guidance highlights that the implementation of challenge questions can greatly impact efficacy of its usefulness. Chances are you already know this.  Of greater importance, though, is the fact that the FFIEC guidelines caution on the use of less sophisticated systems and information that can be easily guessed or obtained from an Internet search, given the amount of information available.    As mentioned above, the FFIEC guidelines call for questions that “do not rely on information that is often publicly available,” recommending instead a broad range of data assets on which to base questions.  This is an area knowledge based authentication users should review carefully.  At this point in time it is perfectly appropriate to ask, “Does my KBA provider rely on data that is publicly sourced”  If you aren’t sure, ask for and review data sources.  At a minimum, you want to look for the following in your KBA provider:     ·         Questions!  Diverse questions from broad data categories, including credit and noncredit assets ·         Consumer question performance as one of the elements within an overall risk-based decisioning policy ·         Robust performance monitoring.  Monitor against established key performance indicators and do it often ·         Create a process to rotate questions and adjust access parameters and velocity limits.  Keep fraudsters guessing! ·         Use the resources that are available to you.  Experian has compiled information that you might find helpful: www.experian.com/ffiec Finally, I think the release of the new FFIEC guidelines may have made some people wonder if this is the end of KBA.  I think the answer is a resounding “No.”  Not only do the FFIEC guidelines support the continued use of knowledge based authentication, recent research suggests that KBA is the authentication tool identified as most effective by consumers.  Where I would draw caution is when research doesn’t distinguish between “secret questions” and dynamic knowledge based authentication, which we all know is very different.   

Lately there has been a lot of press about breaches and hacking of user credentials.  I thought it might be a good time to pause and distinguish between authentication credentials and identity elements. Identity elements are generally those bits of meta data related to an individual.  Things like: name, address, date of birth, Social Security Number, height, eye color, etc.  Identity elements are typically used as one part of the authentication process to verify an individual’s identity.  Credentials are typically the keys to a system that are granted after someone’s identity elements have been authenticated.  Credentials then stand in place of the identity elements and are used to access systems. When credentials are compromised, there is risk of account takeover by fraudsters with mal intent.  That’s why it’s a good idea to layer-in risk based authentication techniques along with credential access for all businesses.  But for financial institutions, the case is clear: a multi-layered approach is a necessity.  You only need to review the FFIEC Guidance of Authentication in an Internet Banking Environment to confirm this fact.  Boiled down to its essence, the latest guidance issued by the FFIEC is rather simple. Essentially it’s asking U.S. financial institutions to mitigate risk using a variety of processes and technologies, employed in a layered approach. More specifically, it asks those businesses to move beyond simple device identification — such as IP address checks, static cookies and challenge questions derived from customer enrollment information — to more complex device intelligence and more complex out-of-wallet identity verification procedures. In the world of online security, experience is critical.  Layered together, Experian’s authentication capabilities (including device intelligence from 41st Parameter, out-of-wallet questions and analytics) offers a more comprehensive approach to meeting and exceeding the FFIEC’s most recent guidance. More importantly, they offer the most effective and efficient means to mitigating risk in online environments, ensuring a positive customer experience and have been market-tested in the most challenging financial services applications.

By: Kennis Wong On the surface, it’s not difficult to define existing account fraud. Obviously, it is fraud perpetrated against an existing account. But the way I see it, existing account fraud can be broken down into four types. The first type is account takeover fraud, which is what most organizations think as the de facto existing account fraud. This is when a real consumer using his or her own identity to open a legitimate account, but the account later on get taken over by an identity fraudster. The idea is that when the account was first established, it was created by the rightful person. But somewhere along the way, the account and identity information were compromised.  The fraudster uses the compromised information to engineer their way into the account. The second type is impersonation. Impersonation is somewhat similar to account takeover in the sense that it is also misusing the victim’s account. But the difference is that impersonation is more of a one or few times misuses of the account. Examples are a fraudulent use of a credit card or wire transfer. These are the obvious categories. But I think we should also think about these other categories. My definition of existing account fraud also includes this third type – identity fraud that was undetected during application. In other words, an account is established based on stolen identity.  Many organizations call this “new account fraud”, which I don’t have a problem with. But I think it’s really also existing account fraud, because –  is this existing account? The answer is yes. Is this fraud? Absolutely. It’s not that difficult, is it? Similarly, I am including first-party fraud in existing account fraud as well. A consumer can use his or her own identity to open an account, with an intention to default after the account is established. Example is bust out fraud. You see that this is an expanded definition of existing account fraud, because my focus is on detection. No matter at what point and how identity fraud comes in, it becomes an account in your organization, and that is where we need to discover the fraud. But at the end of the day, it’s not too important how to categorize or name the fraud - whether it's application fraud, existing account fraud, first party fraud or third party fraud, as long as organizations understand them enough and have a good way to detect them. Read more blog posts on existing account fraud.

The Communications Fraud Control Association’s annual meeting and educational event was held last week (June 14 – 16) at the Allerton hotel in Chicago, IL.   The Communications Fraud Control Association is made up of communications and security professionals, fraud investigators, analysts, and managers, law enforcement, those in risk management, and many others.   As an organization, they started out as a small group of communications professionals from the major long distance carriers who were looking for a better and more collaborative way to address communications fraud. Now, almost 30 years later, they’ve got over 60 members – a great representation of the industry yet still a nimble size. From what I hear, this makes for a specialized but quite effective “working” conference. Unfortunately I was not able to attend the conference but my colleague, Kennis Wong, attended and presented on the topic of Account Takeover and existing account fraud. It’s an area of fraud and compliance that Experian has spent some R&D on recently, with some interesting findings. In the past, we’ve been more focused on helping clients prevent new account and application fraud. It might seem like an interesting time to expand into this area, with some studies citing large drops in existing account fraud (2011 Identity Fraud Survey Report by Javelin).  BUT...consumer costs in this area are way UP, not to mention the headline-grabbing news stories about small business account takeover.  Which means it’s still a large pain point for financial institutions.   Experian’s research and development in existing account fraud, combined with our expertise in fraud scores and identity theft detection, has resulted in a new product which is launching at the end of this month: Precise ID for Customer Management. Stay tuned for more exciting details.

Whether you call it small business, commercial, or corporate account takeover, this form of existing account fraud has been in the headlines lately and seems to be on the rise. While account takeover happens to individual consumers quite frequently, it’s the sensational loss amounts and the legal battles between companies and their banks that are causing this form of commercial fraud to make the news. A recent BankInfoSecurity.com article, Fraud Verdict: Opinions Vary, is about a court opinion on a high profile ACH fraud case - Experi-Metal Inc. vs. Comerica Bank – that cites a number of examples of corporate account takeover cases with substantial losses: ·         Village View Escrow of Redondo Beach, Calif.:  lost $465,000 to an online hack ·         Hillary Machinery: settled with its bank for undisclosed terms in 2010. ·         The Catholic Diocese of Des Moines, Iowa:  lost $600,000 in fraudulent ACH transactions. I was curious what information was out there and publicly available to help businesses protect themselves and minimize fraud losses / risk. NACHA, the electronics payment association, had some of the best resources on their website.  Labeled the  “Corporate Account Takeover Resource Center”, it has a wide variety of briefs, papers, and recommendations documents including prevention practices for companies, financial institutions, and third-party service providers. There’s even a podcast on how to fight ACH fraud!  One thing was interesting to note, though. NACHA makes a point to distinguish between ACH fraud and corporate account takeover in this statement at the top of the web page: Corporate Account Takeover is a form of corporate identity theft where a business’ online credentials are stolen by malware. Criminal entities can then initiate fraudulent banking activity. Corporate Account Takeover involves compromised identity credentials and is not about compromises to the wire system or ACH Network. ACH fraud and wire fraud, terms mistakenly used to describe this type of criminal activity, are a misnomer. The ACH Network is safe and secure. Mostly I agree –the ACH Network is safe and secure. But from an F.I.'s or company’s perspective, corporate account takeover and ACH Fraud often go hand in hand.

At Experian’s recent client conference, Vision 2011, there was a refreshing amount of positive discussion and outlook on origination rates and acquisition strategies for growth. This was coming not only from industry analysts participating in the conference but from clients as well. As a consumer, I’d sensed the ‘cautious optimism’ that we keep hearing about because my mailbox(the ‘original’ one, not email) has slowly been getting more and more credit card offer letters over the last 6 months.   Does this mean a return to prospecting and ultimately growth for financial institutions and lenders? It’s a glimmer of hope, for sure, although most agree that we’re a long way from being out of the woods, particularly with unemployment rates still high and the housing market in dire shape. Soooo…..you may be wondering where I’m going with this…. Since my job is to support banks, lenders, utilities and numerous other businesses’ in their fraud prevention and compliance efforts, where my mind goes is: how does a return to growth – even slight – impact fraud trends and our clients’ risk management policies? While many factors remain to be seen, here are a few early observations: ·         Account takeover, bust out fraud, and other types of existing account fraud had been on the rise while application fraud had declined or stayed the same (relative to the decrease in new originations); with prospecting and acquisition activity starting to increase, we will likely see a resurgence in new account fraud attempts and methods. ·         Financial institutions and consumers are under increasing risk of malware attacks; with more sophisticated malware technology popping up every day, this will likely be a prime means for fraudsters to commit identity theft and exploit potentially easier new account opening policies. ·         With fraud loss numbers flat or down, the contracted fraud budgets and delayed technology investments by companies over the last few years are a point of vulnerability, especially if the acquisition growth rate jumps substantially.  

It’s that time of year again – when people all over the U.S. take time away from life’s daily chores and embark upon that much-needed refresh: vacation! But just as fraud activity spikes during the holidays, there are also fraud trends suggesting spikes in fraudster activity during the summer. With consumers on vacation, identity theft becomes easier. Consumers are most likely to break their normal spending trends and break patterns established by fraud analytics; and consumers are less likely to be as attentive to elements that can help minimize fraud while out of town. There has been plenty of research to demonstrate that fraudsters perpetrate account takeover by changing the pin, address, or email address of an account. Now, fraudsters are more likely to add themselves as an authorized user to the account, which may not be considered a high-risk flag in transactional decisioning strategies. By identifying risky behaviors or patterns outside of a consumer’s normal behavior and an engaging in a knowledge based authentication session with the consumer, it is possible to help minimize the risk of fraud. Knowledge based authentication provides strong authentication and can be part of a risk-based approach to on-going account management, protecting both businesses and consumers from being burned, at least by fraudsters, while on vacation.

By: Staci Baker It seems like every time I turn on the TV there is another natural disaster. Tsunami in Japan, tornadoes and flooding in the Mid-West United States, earthquakes and forest fires – everywhere; and these disasters are happening worldwide. They are not confined to one location. If a disaster were to happen near any of your offices, would you be prepared? Living in Southern California, this is something I think of often. Especially, since we are supposed to have had “the big one” for the past several years now. When developing a preparedness plan for a company, there are several things to take into consideration. Some are obvious, such as how to keep employees safe, developing steps for IT  to take to ensure data is protected , including an identity theft prevention program, and establishing contingency business plans in case a disaster directly hits your business and doors need to remain closed for several days, weeks, or …. But, what about the non-obvious items that should be included in a disaster preparedness plan? When a natural disaster hits, there is an increase in fraud. So much so, that after Hurricane Katrina battered the Gulf, the Hurricane Katrina Fraud Task Force, now known as the National Center for Disaster Fraud, was created. In addition to the items listed above, I recommend including the following. Create a plan that will put fraud alerts in place to minimize fraud.  Fraud alerts are not just to notify your clients when there is fraudulent activity on their accounts. Alerts should also be put in place to let you know when there is fraudulent activity within your own business as well. Depending on the type of disaster, delinquency rates may increase, since borrower funds may be diverted to other needs. Implement a disaster collections strategy, which may include modifying credit terms, managing credit risk, and loan loss provisioning. Although these are only a few things to be considered when developing a disaster preparedness plan, I hope it gets you thinking about what your company needs to do to be prepared. What are some things you have already done, or that are on your to do list to prepare your company for the next big event that may affect you?

By: Kristan Frend I was recently pleased to see that the state I reside in, Minnesota finished in the bottom third of a state ranking.  Luckily the rankings weren’t about overall health (#6), high school graduation (#3), or SAT scores (#2); instead it was the Federal Trade Commission’s state identity theft complaint ranks.  Minnesota has just 49.2 complaints per 100,000 population, whereas the highest ranked state, Florida, as 114.8 complaints per 100,000 population.   The top three states leading identity theft consumer complaints (per 100,000 population) included Florida, Arizona, and California.   Besides warm sunshine and top-tier golf courses, what do these three states have in common?  According to the February 2011 RealtyTrac U.S. Foreclosure Market Report™, all three rank in the top 5 states for foreclosure, and two of the three (Florida and California) rank #49 and #50 in unemployment rates, according to a March 2011 report released by the Bureau of Labor Statistics.    On a national level unemployment rates and identity fraud incidence rates both improved from 2009 to 2010.  From 2009 to 2010, unemployment rates went from 10.0% to 9.4% while according to Javelin’s 2010 Annual Identity Fraud Survey Report, identity fraud incidence rates fell from 4.8% to 3.5%.    While it may be inaccurate to state that economic distress causes higher rates of identity fraud, there does seem to be a natural correlation between economic downswings and fraudulent activity.   As we move further into 2011, it will be interesting to see if identity fraud incidence rates will continue to decrease as unemployment and economic outlook is on the upward swing. 

By: Kristan Frend Imagine you’re on the #1 ranked relay swim team at the World Championships and you’re leading off. You finish your leg of the race with the team in first place. As your third teammate approaches the wall, your team is in first by a full body length. You’re on pace to set a new world record. Yet the anchor of your team is nowhere to be found, ultimately resulting in your team being disqualified.   If only your fourth teammate would have made it to the blocks in time…. When you take a step back and look at your fraud risk management solutions, do you ever feel like you have all of the tools and processes available yet feel like the anchor is missing? Perhaps it’s time to reexamine your internal resources. You may have an assembly of sophisticated and robust online fraud detection tools from vendors, but you may be missing a critical piece if you’re not also effectively leveraging internal data. Through our work with clients, we’re found that it is not uncommon for organizations to manage the customer relationship through different departments or silos within the organization.   All too often there is less than optimal coordination between these functional areas in taking advantage of their own internal negative data to combat application fraud. Additionally some organizations may have negative internal data but do not incorporate the check within their verification or risk based authentication tool, creating multiple steps and operational inefficiencies. One of the ways to overcome some of these issues is by incorporating internal negative data within an automated front-end check.  Once loss data is loaded into a historical database, the next time that name, phone, address, driver’s license or SSN reappears on a new application, the data element is immediately identified as one associated with a previous loss. The negative data is securely stored for only your organization’s use and is not shared with users outside of your organization.

Let’s face it – not all knowledge based authentication (KBA) is created equal. I, too, have read horror stories of consumers forced to answer questions about a deceased relative or ex-spouse, or KBA sessions that went on far too long for anyone’s benefit. I have to attribute this to vendor inexperience and a lack of consulting with clients. An experienced vendor will use a fraud best practice such as a fraud analytics model to determine that some consumers do not even need questions and then a “Progressive Question” feature, which uses consumer performance on an initial question set to determine if it is necessary for the consumer to answer additional questions. This way, the true consumer completes the process quickly, improving the customer experience. The product of choice should also use a question mix that balances three factors: ·         how easily the true consumer can answer the question; ·         the fraud separation of the question (effectively the measured delta over time between how well true consumers answer the question vs. how well fraudsters do); ·         how many consumers overall the question can be generated.  A list of hundreds of possible questions doesn’t mean much if the questions can only be generated for one quarter of one percent of the population, as is the case for something like airplane ownership or pilot’s license. Ultimately, out of wallet questions should be generated for a large part of the population, easily answered by the true consumer but difficult for a fraudster; and not offensive or what a consumer would consider “creepy” (such as their child’s birthday or name). Well designed questions will be personal but not intrusive and mindful of personal relationships that may have changed.  The purpose of a knowledge based authentication session is risk management and/or consumer authentication for fraud prevention and compliance purposes – not to cause the loss of business because the fraud tool crossed the line in the mind of your customer.

Many compliance regulations such the Red Flags Rule, USA Patriot Act, and ESIGN require specific identity elements to be verified and specific high risk conditions to be detected. However, there is still much variance in how individual institutions reconcile referrals generated from the detection of high risk conditions and/or the absence of identity element verification. With this in mind, risk-based authentication, (defined in this context as the “holistic assessment of a consumer and transaction with the end goal of applying the right authentication and decisioning treatment at the right time") offers institutions a viable strategy for balancing the following competing forces and pressures: Compliance – the need to ensure each transaction is approved only when compliance requirements are met; Approval rates – the need to meet business goals in the booking of new accounts and the facilitation of existing account transactions; Risk mitigation – the need to minimize fraud exposure at the account and transaction level. A flexibly-designed risk-based authentication strategy incorporates a robust breadth of data assets, detailed results, granular information, targeted analytics and automated decisioning. This allows an institution to strike a harmonious balance (or at least something close to that) between the needs to remain compliant, while approving the vast majority of applications or customer transactions and, oh yeah, minimizing fraud and credit risk exposure and credit risk modeling. Sole reliance on binary assessment of the presence or absence of high risk conditions and identity element verifications will, more often than not, create an operational process that is overburdened by manual referral queues. There is also an unnecessary proportion of viable consumers unable to be serviced by your business. Use of analytically sound risk assessments and objective and consistent decisioning strategies will provide opportunities to calibrate your process to meet today’s pressures and adjust to tomorrow’s as well.

When we think about fraud prevention, naturally we think about mininizing fraud at application. We want to ensure that the identities used in the application truly belong to the person who applies for credit, and not from some stolen identities. But the reality is that some fraudsters do successfully get through the defense at application. In fact, according to Javelin’s 2011 Identity Fraud Survey Report, 2.5 million accounts were opened fraudulently using stolen identities in 2010, costing lenders and consumers $17 billion. And these numbers do not even include other existing account fraud like account takeover and impersonation (limited misusing of account like credit/debit card and balance transfer, etc.). This type of existing account fraud affected 5.5 million accounts in 2010, costing another $20 billion. So although it may seem like a no brainer, it’s worth emphasizing that we need to continue to detect fraud for new and established accounts. Existing account fraud is unlikely to go away any time soon.  Lending activities have changed significantly in the last couple of years. Origination rate in 2010 is still less than half of the volume in 2008, and booked accounts become riskier. In this type of environment, when regular consumers are having hard time getting new credits, fraudsters are also having hard time getting credit. So naturally they will switch their focus to something more profitable like account takeover. Does your organization have appropriate tools and decisioning strategy to fight against existing account fraud?

By: Staci Baker According to Wikipedia, mobile banking is defined as, “a term used for performing balance checks, account transactions, payments, credit applications, etc. via a mobile device such as a mobile phone or Personal Digital Assistant (PDA).” However, as several large lenders and phone carriers test mobile banking and mobile payments, there is still much to be deciphered. Will it help businesses compete? Is it safe for a consumer? Should a bank offer a mobile solution; and if so, what precautions will they need to take to ensure their customer’s information, i.e. fraud, consumer identity? Peter Garuccio, spokesman for the American Bankers Association in Washington D.C., noted that “various experts predict that some 20 million people may be banking via cell phone this year, and that number is projected to skyrocket to 50 million by 2013.” And, according to a mobile payment study by Juniper Research ,“Combined market for all types of mobile payments is expected to reach more than $630B globally by 2014.” For the purpose of this blog, I will focus on the mobile banking solution, and questions to consider before entering into the mobile banking arena. Mobile banking today is akin to online banking a few years ago. It’s new, getting a lot of press, late adopters want more information, while the early adopters are already participating and it appears to be on the verge of taking over more conventional banking and payments. Before entering into the world of mobile solutions, there are a few things to consider: How will new regulations, such as the Durbin Amendment to the Frank-Dodd Act (a new Interchange fee proposal), affect implementation and usage? The current average interchange fee is between $1 and $1.30, the new cap at $.12 will reduce the charges by up to 90%.While the interchange fee proposal will not be finalized until after February, it is not known how the new “swipe fee” legislation will affect mobile solutions. If the new amendment directly affects debit cards only, mobile solutions can become a new revenue stream for many lenders. As more information becomes available regarding the Durbin Amendment, I will relay additional details and implications. What fraud prevention solutions do you have in place? Fraud is an issue in all industries; therefore utilizing fraud best practices specific to your market, or identifying fraud trends is essential in keeping retailers, consumers and your company safe. As consumers replace the need for a wallet with a phone, identity theft can become an issue. This is especially true of phones with minimal security, or if their phone gets into the hands of a hacker. Therefore companies can initiate an identity theft prevention program to raise awareness in consumers and retailers. As well as implement new internal processes and requirements. As we delve further into an IT-led economy, businesses will continually need to adjust how they do business in order to meet consumer demand, as well as finding new revenue streams. I am curious, how many businesses have already begun to implement a mobile solution, and what issues or results have you already seen? If you have not already implemented a mobile solution, is this in your planning for the upcoming year?

By: Ken Pruett The majority of the customers I meet with use some sort of Velocity Checks to assist with their Fraud and Compliance process. However, there are still quite a few that do not, especially when opening up New Business Accounts. Historical data checks have proven to be an effective form of identity theft prevention for both Consumer fraud and Commercial Fraud. We see scenarios where a perpetrator will have one successful penetration of a business and opens up a fraudulent account.  They then try and replicate this against the same business. All of the information may be different, with the exception of one element, often the phone number. Without velocity checks, this may not be identified at the time the account is being opened. More sophisticated rings try to be more creative in their fraudulent attempts. They may gain access to a consumers information and then go and apply at a variety of entities. They are more careful, so they never attempt to target the same business twice. They are aware that many companies have velocity checks, so they do not want to take a chance of having their information questioned. At a minimum, the use of in-house velocity checks should be a standard process for you fraud detection measures. Typical data elements to check against are; name (business or consumer), address, phone number, and Social Security Number. A fraud best practice would be to use a tool that provides velocity checks and incorporates the information into a fraud prevention tool. There are tools that provide checks across multiple businesses and this typically provides the best level of protection. By looking at inquiry information across multiple businesses, you are able to help prevent being a victim of some of the more sophisticated rings. Don’t find yourself being the easiest target. Once you get hit, it could snowball and you may be victimized multiple times. We all know there is no way to stop all of the fraud, but let’s not make it too easy on the perpetrators. Try and find a way to use some sort of velocity checks in your process to at least minimize your fraud risk.