Fraud & Identity Management

By: Ken Pruett The great thing about being in front of customers is that you learn something from every meeting.  Over the years I have figured out that there is typically no “right” or “wrong” way to do something.  Even in the world of fraud and compliance I find that each client's approach varies greatly.  It typically comes down to what the business need is in combination with meeting some sort of compliance obligation like the Red Flag Rules or the Patriot Act.  For example, the trend we see in the prepaid space is that basic verification of common identity elements is really the only need.   The one exception might be the use of a few key fraud indicators like a deceased SSN.  The thought process here is that the fraud risk is relatively low vs. someone opening up a credit card account.  So in this space, pass rates drive the business objective of getting customers through the application process as quickly and easily as possible….while meeting basic compliance obligations. In the world of credit, fraud prevention is front and center and plays a key role in the application process.  Our most conservative customers often use the traditional bureau alerts to drive fraud prevention.  This typically creates high manual review rates but they feel that they want to be very customer focused. Therefore, they are willing to take on the costs of these reviews to maintain that focus.  The feedback we often get is that these alerts often lead to a high number of false positives. Examples of messages they may key off of are things like the SSN not being issued or the On-File Inquiry address not matching.  The trend is this space is typically focused on fraud scoring. Review rates are what drive score cut-offs leading to review rates that are typically 5% or less.  Compliance issues are often resolved by using some combination of the score and data matching. For example, if there is a name and address mismatch that does not necessarily mean the application will kick out for review.  If the Name, SSN, and DOB match…and the score shows very little chance of fraud, the application can be passed through in an automated fashion.  This risk based approach is typically what we feel is a best practice.  This moves them away from looking at the binary results from individual messages like the SSN alerts mentioned above. The bottom line is that everyone seems to do things differently, but the key is that each company takes compliance and fraud prevention seriously.  That is why meeting with our customers is such an enjoyable part of my job.

Last week, a group of us came together for a formal internal forum where we had the opportunity to compare notes with colleagues, hear updates on the challenges clients are facing and brainstorm solutions to client business problems across the discipline areas of analytics, fraud and software.   As usual, fraud prevention and fraud analytics were key areas of discussion but what was also notable was how big a role compliance is playing as a business driver.  First party fraud and identity theft detection are important components, sure, but as the Consumer Financial Protection Bureau (CFPB) gains momentum and more teeth, the demand for compliance accommodation and consistency grows critical as well.  The role of good fraud management is to help accomplish regulatory compliance by providing more than just fraud risk scores, it can help to: Know Your Customer (KYC) or Customer Information Program (CIP) details such as the match results and level of matching across name, address, SSN, date of birth, phone, and Driver’s License. Understand the results of checks for high risk identity conditions such as deceased SSN, SSN more frequently used by another, address mismatches, and more. Perform a check against the Office of Foreign Asset Control’s SDN list and the details of any matches. And while some fraud solutions out there make use of these types of comparisons when generating a score or decision, they may not pass these along to their customers.  And just think how valuable these details can be for both consistent compliance decisions and creating an audit trail for any possible audits.  

Consumers want to hear about data breaches - Eighty five percent of respondents in a recent study say learning about the loss of their data is pertinent to them. However, when they do, 72 percent indicated that they are dissatisfied with the notification letters they receive. Companies need to take note of these findings because more than one-third of consumers who receive a notification letter contemplate ending their relationship with the company. Providing affected individuals with a membership in an identity protection product is extremely important since 58 percent of consumers consider identity protection to be favorable compensation after a breach. Learn five pitfalls to avoid in your notification letters and how Experian Data Breach Resolution can help. Source: Download the complete 2012 consumer study on data breach notification.

2011 was the 12th consecutive year that identity theft topped the list of FTC consumer complaints. Florida had the highest rate of complaints, followed by Georgia and California. Rank State Complaints per 100,000 population 1 Florida 179 2 Georgia 120 3 California 104 Learn how to detect and manage fraud activity while meeting regulatory requirements. Source: Consumer info.com infographic and FTC's Consumer Sentinel Network Data Book for January-December 2011.

The Consumer Financial Protection Bureau (CFPB) now has the ability to write and enforce 18 consumer protection laws that guide financial products and services. The new regulator has signaled the following issues as priorities: Clarity on how credit scores affect lender decisions: Beginning July 21, 2011, lenders were required to disclose the credit score that they used in all risk-based pricing notices and adverse action notices Shorter and simpler consumer disclosure forms: One of the first priorities is to make the terms and conditions associated with purchasing a mortgage or applying for a credit card shorter and clearer Enforcing the Fair Debt Collection Practices Act: The CFPB will enforce the Fair Debt Collection Practices Act and review current debt collector practices Learn more about the CFPB  

This is last question in our five-part series on the FFIEC guidance on what it means to Internet banking, what you need to know and how to prepare for the January 2012 deadline.   Q: How are organizations responding? Experian estimates that less than half of the institutions impacted by this guidance are prepared for the examinations.   Many of the fraud tools in the marketplace, particularly those that are used to authenticate individuals were deployed as point-solutions.  Few support the need for a feedback loop to identify vulnerabilities, or the ability to employ a risk-based, “layered” approach that the guidance is seeking. _____________ This is the last of our five-part series but we're happy to answer more questions as we know you need to know how to prepare for the January 2012 deadline.    

This is fourth question in our five-part series on the FFIEC guidance and what it means Internet banking. Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline.  If you missed parts 1-3, there's no time to waste, check them out here: Go to question one: What does “multi-factor” authentication actually mean? Go to question two: Who does this guidance affect?  And does it affect each type  of credit grantor/ lender differently? Go to question three: What does “layered security” actually mean? Today's Q&A: What will the regulation do to help mitigate fraud risk in the near-term, and long-term? The FFIEC’s guidance will encourage financial institutions to re-examine their processes. The guidance is an important reinforcement of several critical ideas: Fraud losses undermine faith in our financial system by exposing vulnerabilities in the way we exchange goods, services and currencies. It is important that members of the financial services community understand their role in protecting our economy from fraud. Fraud is not the result of a static set of tactics employed by criminals. Fraud tactics evolve constantly and the tools that combat them have to evolve as well.   Considering the impact that technology is having on commerce, it is more important than ever to review the processes that we once thought made our businesses “safe.” The architecture and flexibility of fraud prevention “capabilities” is a weapon unto itself. The guidance provides a perspective on why it is important to be able to understand the risk and to respond accordingly. At the end of the day, the guidance is less about a need to take a specific action---and more about the “capability” to recognize when those actions are needed, and how they should be structured so that high-risk actions are met with strong and sophisticated defenses. _____________ Look for part five, the final in our series tomorrow. 

  This is third question in our five-part series on the FFIEC guidance and what it means Internet banking.  If you missed the firstand second question, you can still view - our answer isn't going anywhere.  Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline. Question: Who does this guidance affect? And does it affect each type of credit grantor/ lender differently? The guidance pertains to all financial institutions in the US that fall under the FFIEC’s influence. While the guidance specifically mentions authenticating in an on-line environment, it’s clear that the overall approach advocated by the FFIEC applies to authentication in any environment. As fraud professionals know, strengthening the defenses in the on-line environment will drive the same fraud tactics to other channels. The best way to apply this guidance is to understand its intent and apply it across call centers and in-person interactions as well. _____________ Look for part four of our five-part series tomorrow.  If you have a related question that needs an answer, submit in the comments field below and we'll answer those questions too.  Chances are if you are questioning something, others are too - so let's cover it here!  Or, if you would prefer to speak with one of our Fraud Business Consultants directly, complete a contact form and we'll follow up promptly.  

This is second question in our five-part series on the FFIEC guidance and what it means Internet banking.  If you missed the first question, don't worry, you can still go back.  Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline. Question: What does “multi-factor” authentication actually mean?    “Multi- Factor” authentication refers to the combination of different security requirements that would be unlikely to be compromised at the same time. A simple example of multi-factor authentication is the use of a debit card at an ATM machine.   The plastic debit card is an item that you must physically possess to withdraw cash, but the transaction also requires the PIN number to complete the transaction. The card is one factor, the PIN is a second. The two combine to deliver a multi-factor authentication. Even if the customer loses their card, it (theoretically) can’t be used to withdraw cash from the ATM machine without the PIN. _____________ Look for part three of our five-part series tomorrow.

This first question in our five-part series on the FFIEC guidance and what it means Internet banking.  Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline. Question: What does “layered security” actually mean?   “Layered” security refers to the arrangement of fraud tools in a sequential fashion. A layered approach starts with the most simple, benign and unobtrusive methods of authentication and progresses toward more stringent controls as the activity unfolds and the risk increases. Consider a customer who logs onto an on-line banking session to execute a wire transfer of funds to another account. The layers of security applied to this activity might resemble: 1.       Layer One- Account log-in. Security = valid ID and Password must be provided 2.       Layer Two- Wire transfer request. Security= IP verification/confirmation that this PC has been used to access this account previously. 3.       Layer Three- Destination Account provided that has not been used to receive wire transfer funds in the past. Security= Knowledge Based Authentication Layered security provides an organization with the ability to handle simple customer requests with minimal security, and to strengthen security as risks dictate.  A layered approach enables the vast majority of low risk transactions to be completed without unnecessary interference while the high-risk transactions are sufficiently verified. _____________ Look for part two of our five-part series tomorrow. 

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.   

As I’m sure you are aware, the Federal Financial Institutions Examination Council (FFIEC) recently released its, "Supplement to Authentication in an Internet Banking Environment" guiding financial institutions to mitigate risk using a variety of processes and technologies as part of a multi-layered approach. In light of this updated mandate, businesses need to move beyond simple challenge and response questions to more complex out-of-wallet authentication.  Additionally, those incorporating device identification should look to more sophisticated technologies well beyond traditional IP address verification alone. Recently, I contribute to an article on how these new guidelines might affect your institution.  Check it out here, in full:  http://ffiec.bankinfosecurity.com/articles.php?art_id=3932 For more on what the FFIEC guidelines mean to you, check out these resources - which also gives you access to a recent Webinar.

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.