Decreasing the Risk of Fraud in the Decisioning Process

Financial institutions (FIs) are trying to cut costs to remain profitable in the ever-changing marketplace. Some FIs have even tried imposing new fees to recoup costs and increase revenue, but consumers didn't accept them. One way that FIs can cut costs is to reduce fraud-this will not only reduce the FI's losses, but protect their customers. Fraud prevention starts with the decisioning process. FIs should look at new and emerging alternative data sources, incorporating them into business logic, and test new logic to ensure that fraud prevention goals are being met.

FIs must use the vast amount of data available to them through data providers to make their processes more intelligent. Alternative credit data providers aggregate consumer information that can't be found in a traditional credit file. This information includes: rental history, utility and cell phone bill payments, payday lender information, and criminal history. 

Alternative data providers can be leveraged to create scores that represent how likely it is that the application is fraudulent. These data providers also offer device ID, which investigates and confirms the validity of the IP address and device being used to open new accounts. Sophisticated decisioning solutions also help FIs leverage their own internal data. FIs have a great deal of information in their databases about consumers which can be accessed for free. By using both alternative data providers and internal data, FIs can reduce the number of fraudulent applications processed and avoid pulling expensive credit data which reduces the FI's cost of data.

Fraud tactics evolve on a daily basis, so FIs must be able to react quickly to effectively protect themselves and their customers. There are many resources that can be used to combat fraud and these need to be incorporated into the decisioning process as new threats arise. FIs must be able to quickly update their business logic to reduce the FI's losses due to fraud. Innovative decisioning solutions offer tools that can give control over business processes to business users and represent each piece of logic graphically so processes can be created or modified using a "drag and drop" method. These tools allow changes to be automatically coded by the system, which drastically reduces the chances of human error which has been a problem associated with manual programming. Information that is coded by hand has a higher potential to have errors because of the human factor that is involved. With innovative decisioning tools, any fields that are modified by the user are translated into code by the tool which eliminates the human factor from the coding. The changes can then be thoroughly tested and put into production. Since the process does not require the use of IT resources, programmers can focus more on other important areas of business and the FI saves time and money.

Continual testing ensures that the fraud prevention tactics in place are effective and up-to-date. Best-in-class decisioning solutions include champion/challenger testing capabilities that allow FIs to compare the performance of their current decisioning logic with new business logic. Once the FI creates new business rules that incorporate new steps for fraud prevention, the champion (current business logic) can be compared to the challenger (new business logic). The testing process can be done in a live setting with a portion of live applications being sent through each set of logic. The accounts being approved can then be compared later down the road to see which approved accounts turned out to be fraudulent. Another type of testing uses historical applications that have already been approved by the champion. Those same applications can be run through the challenger in a non-production testing environment to see how many fraudulent accounts would have been prevented by the new logic. If the challenger outperforms the champion, it is implemented as the new champion. If not, the champion remains and the FI can begin formulating new fraud prevention strategies to be tested.

Article Source: Kristie K Heinemann

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