Winning the Battle Against Financial Crime in the Era of Real-Time Payments

Jenna Danko
Product Marketing

In 1839, Colonel Jacob Baker, a hero of the American War of Independence, wrote a will leaving an estate to his heirs comprising most of the city of Philadelphia. Years later, William Cameron Morrow Smith formed an association to pool the resources of anyone surnamed “Baker” who wanted to fight the legal battle to claim their share of the inheritance.

The only problem was that Colonel Baker never existed. Smith was a scam artist and the will was an elaborate hoax. After a 12 year investigation, Smith was arrested in 1936. The Baker Estate Fraud had netted an estimated $25 million from more than 50,000 Bakers, Barkers and even Beckers across North America over a period of decades, making it one of the largest and most elaborate frauds of the early 20th century.

The principles of fraud haven’t changed much since the Baker Estate Fraud, but today banks are generally quick to detect a scam like that, and it doesn’t take them 12 years to investigate it. Imagine having thousands of payments deposited into the same payee’s bank account from payers all with the same surname in the same geographic area. Fraud detection systems would put up a red flag in no time, right?

Not quite.

Fraud is reportedly one of the fastest growing crimes in Australia.

  • 2014 research by McAfee indicates financial fraud around the world, especially cybercrime, is growing exponentially and costs more than 700 companies more than US$400 billion a year.
  • OR 2014 research cited by Deloitte indicates financial fraud around the world, especially cybercrime, is growing exponentially and costs more than 700 companies more than US$400 billion a year.
  • KPMG estimates that A$345.4 million was lost to fraud in 2010, compared to A$301.1 million in 2008, and only about one-third of the total losses are being detected. Most fraud is still committed by individuals, and around A$1 billion of crime costs is attributed to identity fraud annually.
  • Statistics from the Australian Payments Clearing Association show that in 2013, 947 cheque transactions and 1,543,197 Australian-issued card transactions were fraudulent, representing 0.0169% of the total value of transactions.

Fraud detection will become even more of a challenge in 2016 once Australian businesses and consumers can make real-time payments.

Oracle & Deloitte hosted executive luncheons in Sydney and Melbourne over the last 6 weeks where the topic of real time fraud detection and management in the context of the New Payments Platform (NPP), which promises to deliver a fast, flexible and data-rich payments infrastructure to industry and consumers. At the luncheon, we explored:

  • The challenges of balancing the demand for real-time payments with mitigating risk of financial crime and anti-money laundering,
  • How to overcome siloed financial crime infrastructure to integrate risk management controls and protocols for real-time payments, &
  • Best practices and emerging technologies to rapidly detect and prevent complex financial crime and cybercrime. 

The discussion was wide-ranging, and covered some of the new challenges to be addressed in the area of real time payments, including:

  • Management in a tokenized world, where accounts holders are transferring value via email and mobile number based identification protocols,
  • The value of industry collaboration in putting in place a comprehensive fraud management framework,
  • The business and technology challenges associated in validating transactions for complex fraud events in sub-second timeframes, whereas previously overnight batch processing windows were available,
  • The sheer volume of data points to be considered in this new world of big data – internal & external, structured & unstructured, etc.
  • The real challenges of getting to a true 360 degree view of the customer, &
  • The practicality of model calibration in near real time.

The benefits of real-time payments are clear. Consumers like it because payments are received and guaranteed instantly, whether it’s for making routine purchases or sending emergency funds to family or friends. Having to obtain bank cheques for large purchases will be a thing of the past. Businesses like it because they can manage their cash flow better. Banks like it too, because they have an opportunity to migrate customers to cost-effective online payment channels, increase retention and build their brand.

To make a successful transition to a real-time environment, banks have to upgrade their payments and core systems and educate their customers. In addition, they have to re-evaluate their payments monitoring operating model. Specifically, standards need to be developed, network operating rules need to be established, and guidelines need to be created to determine liability.

But they also have to look at the risk management implications because real-time payments shorten the window to detect fraudsters. Banks won’t have time to validate transactions, and customers will expect almost instant confirmation that their funds have been sent or received.

Risk management controls and protocols for real-time payments need to be integrated with the rest of the bank’s fraud infrastructure. The most straightforward way to do that is by implementing a single, integrated fraud management platform. That way, banks have:

  • Pre-built fraud scenarios
  • Event identification, correlation and surveillance across the enterprise
  • Intelligent alert correlation from point fraud solutions
  • Real-time monitoring and interdiction capabilities
  • Comprehensive case management

Banks can rapidly detect and prevent complex fraud schemes, minimize losses, maximize customer trust and reduce reputational risk. Moreover, investigators can focus on the most urgent and actionable fraud alerts.

Scammers beware.

Stuart Houston is a Global Solution Manager for the Financial Services Global Business Unit at Oracle.  He can be reached at stuart.houston AT oracle.com.

Be the first to comment

Comments ( 0 )
Please enter your name.Please provide a valid email address.Please enter a comment.CAPTCHA challenge response provided was incorrect. Please try again.