by Santiago Patiño
The old back office operations guy sat at his desk and marveled at the evolution he had witnessed during his long career. He remembered the countless hours spent analyzing the sort patterns programmed into the IBM 3890 that drove his check collection system. He had built quite a reputation among his peers, back in the day when float was king. His colleagues respectfully called him The Float Meister.
Like a mantra, he repeated the phrase over and over: “It’s not about the float anymore.”
He lamented the days when they began to assign float to deposited items. He fondly recalled the committees he was on where they analyzed and reported that some customers were using funds before the bank had a chance to collect them. Obviously, this had to stop! But worse than that, the studies showed that legal float assignments could not protect the bank from dishonored items (i.e. charge back items, bounced checks, incoming returns, etc.). Reg. CC had taken care of that!
So, the old banker stayed focused on managing the bank’s availability of funds. He felt certain that in the very near future, checks would post in an online, real time environment – from the payee to the teller to the paying bank and back – all electronically and instantly and with fraud issues immediately detected.
IT’S ABOUT FRAUD NOW
Initially, banks focused their efforts to combat fraud with resolution, not prevention and detection. But as the years passed, fraud detection techniques improved and prevention took center stage. Still, fraud losses continue to increase and the fraudsters, ever more organized and sophisticated, utilize the latest available technologies to their benefit. Early on, the bad guys “washed” entire checks and altered all of the information. When Positive Pay use became widespread, they just modified the payee information. Banks responded to that and developed Payee Positive Pay.
Now, fraudsters are depositing fraudulent checks into accounts and using another channel, like a debit card at a point of sale terminal, to extract the funds. The stakes keep rising because multiple channels are being used to commit fraud, introducing a higher level of complexity to detection.
The old back office operations guy thought of the young whippersnapper in branch ops that was getting a lot of attention. This pup was in charge of fraud detection and was really doing a good job. It’s not that the old banker didn’t pay attention to fraud. Lord knows he had participated in enough focus groups throughout the years, but the payment systems landscape has been dramatically altered. In addition to paper checks, the bank now has to worry about potential fraud exposures created through ATMs, POS, ACH, wire transfer, Internet banking and, most recently, imaged check presentment channels.
He watches with appreciation as the youngster takes advantage of available fraud detection software. These tools utilize a series of “filters” aimed at disclosing the potential of fraud being perpetrated against the bank. Some of the more traditional filters at his disposal produce “suspect reports,” such as:
- Accounts Drawing Against Today’s Deposits (if the deposit wasn’t made, the account would have NSF)
- Significant Balance Changes (a percentage or dollar amount variance)
- Large Dollar Items (outside of norm)
- Insufficient and Unavailable Funds Usage
He also benefits from analytical data used to profile the account’s behavior:
- Debit to Credit Ratio (number of debits per credit)
- Deposit Velocity (how long a deposit “sticks” in the account before it’s depleted)
- Duplicate Check Numbers (should never happen)
- Out of Range Serial Numbers (outside of norm)
- Out of Range Dollar Amounts (outside of norm)
And, with the increase in ACH, ATM and debit cards, his arsenal includes the following:
- ACH filters and blocks
- Neural Networks (they “learn” customer behavior patterns and highlight exceptions)
- Positive Pay (check issue data to be compared against paid item data)
No one tool by itself assures fraud prevention, but together they provide clues that talented investigators pursue to determine if there truly is a positive hit (attempt) against the bank.
Due to the various and disparate systems being utilized (e.g. check processing, deposit, ACH, ATM), this bank – like many others – is not able to gather account data in one place. While the idea of pooling data throughout the bank to gain a single enterprise-wide view of the customer is where many in the industry believe fraud prevention needs to go, this concept won’t likely be realized for years to come.
In the meantime, the youngster feels in his gut that there are some steps banks can take to help minimize fraud:
- Watch the patterns and learn to recognize variables. The typical consumer deposits his pay and pays bills on a pretty regular basis. There’s generally not much variety. When the deposit amount is higher than expected, or when payments exceed norms, the activity should be examined closer to determine the propriety of the variance. Be careful not to get too focused on single transactions – it’s the collection of account activity where the clues lie.
- Institute internal educational sessions teaching the importance of understanding and monitoring depositors’ behavior.
- Examine all data sources. Go beyond MICR document analysis and recognize that ACH, POS and ATM activity are just as critical.
- Minimize the paper. Not issuing paper statements is a simple but effective first step to cutting back on the potential for sensitive customer information to fall into the wrong hands.
- Get customers involved. Recruit customers into the fraud-prevention battle by having them set parameters and thresholds for suspicious account activity alerts (maybe on their mobile devices).
- Sign on with other institutions. Join a fraud prevention effort collaboratively owned by a number of banks, designed to pool best practices in fraud prevention on a cross-institution basis.
The old back office operations guy turns off the desk lamp in his office and leaves for home. As he passes the youngster’s office he thinks, “It’s truly not about the float any more, and I’m really glad he’s here.” In his mind, he passes the torch to The Fraud Meister and smiles, knowing his bragging days are over.
-sp
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