Real-Time Fraud Detection Offers a Model for Banking Analytics

Mary E. Shacklett, President, Transworld Data | 11/23/2011 | 24 comments

Mary E. Shacklett
Right now, companies are striving to get their arms around real-time analytics and what it can mean for their businesses, but fraud detection software has been working in real-time for banks and payment processors for over 30 years.

Fraud detection software for credit cards is truly a business analytics success story, because, while it might be hard to calculate the money it's saved, the software is beyond doubt a true preemptor of losses for financial institutions and their customers.

Here’s how fraud analytics software operates:

A financial institution (your bank) has a card services department that is responsible for administering and monitoring debit and credit card activity for customers. Based on the past usage patterns you have established as a customer with your Visa or Mastercard, your bank knows that the majority of your purchases occur within 50 miles of your residence, and that the average purchase is less than $100.

Suddenly, the bank’s card services department sees charges on your card coming in from Asia -- say, $1,000 from Tokyo, $1,500 from Saigon, $2,000 from Bangkok. Card services places a hold on your credit card and immediately contacts you, saying that there is unusual activity that they are seeing on your card. You tell them that it’s alright. You’ve decided to take that big vacation in the Orient, and these are indeed your charges.

Of course, the card services department didn’t detect an unusual usage pattern from your card by researching and investigating it "by hand." Instead, card servicers receive online monitoring alerts from real-time business analytics software that tracks the usage patterns of all cardholders and immediately flags usage pattern aberrations for possible fraud investigation.

The ability to stop or even preempt losses for financial institutions and their customers with real-time analytics drops right to the bottom line. In one case, a credit union uncovered a suspicious usage pattern that involved the cards of a number of its members. Card activity was showing up in the Philippines, but the credit union’s conversations with the affected members revealed that none of them had been traveling or spending there. Losses were able to be stopped at $600,000.

In another case, a couple sent their daughter off to Europe on a graduation vacation with the family credit card. They were notified by their bank’s card services departments that thousands of dollars in purchases were showing up from various Paris dress shops. The “unusual card purchase pattern” undoubtably created an interesting family discussion -- but the important thing from the financial institution’s standpoint was that its analytics had been able to uncover an unusual credit card usage pattern that might have turned out to be fraudulent.

Just what is the lesson here for business analytics in financial services?

Simply put, analytics like credit card fraud detection systems work so well because everyone -- from the executives in mahogany offices to the services staff patroling the card-monitoring software to the customers they ultimately serve -- understand the benefits. These benefits begin with the peace of mind the analytics capability delivers to financial institutions and their customers, and it really hits home with the software’s real-time ability to intercept fraud, thereby saving millions and even billions of dollars in losses.

Operationally, the fraud analytics software also fits well into the card services operation. Line staff understand how and when to use it. Most importantly, they know why they are using it.

Going forward, banks, like other businesses, will look to incorporate even more real-time business analytics into their operations. When they shop for analytics solutions, they will be well served if they keep in mind the "best of breed" performance already being delivered by online fraud detection software with its ease of use, fit for purpose, hard dollar savings, and customer service.

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Mary E. Shacklett   Real-Time Fraud Detection Offers a Model for Banking Analytics   12/4/2011 10:58:10 AM
Re: Just a thought...
Short-term thinking is a big problem, Ashish--and a difficult one to egt past.
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Skr2011   Real-Time Fraud Detection Offers a Model for Banking Analytics   12/4/2011 4:48:58 AM
Re: Excellent but sometimes may be annoying
@ Mary

Yes he does. We still email each other. He checed in a guest and check out a friend.
eethtworkz   Real-Time Fraud Detection Offers a Model for Banking Analytics   12/1/2011 1:14:45 PM
Re: Just a thought...

My thinking exactly.

Its not enough just having the right and best and most superior Risk control systems in place if the Humans managing the whole thing set the parameters so lose that the commensurate Risk-Reward ratio gets skewed heavily on the Risk side.

Problem is it has a lot to do with(something you talked about in your other blog on the 15 year strategic plan) short-time thinking and Quarter to Quarter culture at most corporations.Nobody bothers looking at the Big picture anymore.Thats the whole problem.


Mary E. Shacklett   Real-Time Fraud Detection Offers a Model for Banking Analytics   12/1/2011 10:26:17 AM
Re: Excellent but sometimes may be annoying
Unfortunately, NO!--But he did get over it eventually.
User Ranking: Blogger
eethtworkz   Real-Time Fraud Detection Offers a Model for Banking Analytics   12/1/2011 9:34:51 AM
Re: Excellent but sometimes may be annoying

Ah well...

If the Board member reflected on this issue with a cool and collected state of mind,he would have realised he was to blame(atleast partially).

Only question was he humble enough to admit where he went wrong?


Mary E. Shacklett   Real-Time Fraud Detection Offers a Model for Banking Analytics   11/30/2011 5:37:11 PM
Re: Just a thought...
Remember one thing, Ashish--the analytics is only as good as the information and guidelines placed into it.

Back in the lending  "heydays," guidelines were very loose, and they were also programmed into the software.

Consequently, more people got more credit than they should have.
User Ranking: Blogger
Mary E. Shacklett   Real-Time Fraud Detection Offers a Model for Banking Analytics   11/30/2011 5:34:27 PM
Re: Excellent but sometimes may be annoying
This was actually a board member,  Ashish.

The software picked up some kind of unusual use pattern for his card; card services temporarily suspended his card when they couldn't get in touch with him--and then he tried to use the card in a checkout line  and was declined.
User Ranking: Blogger
eethtworkz   Real-Time Fraud Detection Offers a Model for Banking Analytics   11/30/2011 12:51:41 PM
Just a thought...

Don't most banks already have a level of these advanced analytics in their systems?? Especially when it comes to risk-taking ???And still all those banks failed???

I remember the case of SocGen and that trader Jerome Kerviel.SocGen had quite sophisticated analytics systems but they failed to flag Jerome even when he was clocking up those Gigantic losses.

Hopefully the Analytics systems have improved dramatically since then.


eethtworkz   Real-Time Fraud Detection Offers a Model for Banking Analytics   11/30/2011 12:45:25 PM
Re: Excellent but sometimes may be annoying

But you did'nt explain something else.

Was there actual fraud involved in the SVP's case? Was he a victim of identity theft or was it simply a case of over-zealous software?

That is very-very important to understand and appreciate.I know a lot of these VP types are extremely egoistical and don't like to see their various priviliges revoked(for whatever reason);if it happens they get beyond mad...

So what actually was the case?


eethtworkz   Real-Time Fraud Detection Offers a Model for Banking Analytics   11/30/2011 12:31:59 PM
Re: Excellent but sometimes may be annoying

I agree.The Fraud Protection software at most banks out there is really-really good and worth the trouble they sometimes cause us users.

Dealing with the mess after its caused is a much bigger pain-Especially since a lot of time a significant amount of the money may not be completely recovered.


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