Blog

Whats your FIs fraud prevention philosophy?

November 4, 2013 by Kevin Christensen — Vice President, Audit, SHAZAM

As with any great debate, you'll find advocates on both sides of the mobile banking fraud question.

Some believe smartphones and tablets, in combination with emerging authentication strategies, are the magic bullet that will bring a meaningful decrease in fraud losses.

Others will argue that for every step forward taken by the good guys, it'll soon be two steps back the minute fraudsters get their crafty brains wrapped around the solution.

But from my perspective — and that of my colleagues at SHAZAM – the solutions lie less in the method of transaction and more in the financial institution's detection and prevention strategies.

Community FIs' fraud philosophies and goals are as wide-ranging as the size and location of today's banks and credit unions.

Whereas some want to find and stop as much fraud as possible, others accept some losses as a cost of doing business.

Whereas some expect cardholders to "deal with" the pains that come from stopping fraud; others do not want their cardholders to experience any inconvenience at all.

If an FI has not nailed down its internal philosophy of fraud prevention, risk managers should push for these conversations to happen. What is the FI's stance on balancing fraud prevention with a positive, reliable customer experience?

To have this conversation intelligently, however, FI leaders must first understand their current and potential interchange income, as well as their overall fraud losses (in terms of both actual dollars and basis points).

A quick way to perform a rough calculation is use some industry averages: The average cardholder performs 20 debit transactions per month at an average of $38 per transaction, for a total monthly average of $760 in transaction volume.

Multiply $760 by the number of active debit cardholders in your portfolio. To figure out if your fraud losses are equal to those of your colleagues (based on industry averages), perform two separate calculations and then total them:

multiply the total transaction volume by .0007; this will give you the expected fraud loss for signature-based transactions; and
multiply the total transaction volume by .0001; this will give you the expected fraud loss for PIN-based transactions.

Add these two numbers to get your total expected fraud loss.

Example: An FI with 2,000 active debit cardholders can expect approximately $1,064 in signature fraud losses and $152 in PIN fraud losses (or $1,264 in total fraud losses) each month. If an FI is seeing much larger numbers, its risk and cards teams may want to regroup on fraud prevention philosophy.

Many debit portfolio partners have account executives who can drill down into the data and provide real numbers. Ask your partner if they can help you and your teams develop a formal fraud-prevention policy based on your portfolio's averages.

Read more about security.