Fraud has been a hot topic since the 1780’s when the U.S. banking system came into being. Back then, the pioneers of financial fraud often swindled investors with false business proposals or used insider information to manipulate the fledgling stock market. As the banking industry and the stock market became more regulated, these old-school tactics became harder to pull off – but fraudsters have never stopped innovating and inventing new ways to make off with illicit profits.
It’s an age-old problem that continues to pose significant challenges for all banks and credit unions.
Effectively fighting financial fraud today requires a community approach – one that includes leveraging technology as well as collaboration between financial institutions, the government, law enforcement, regulatory agencies, and the public.
Fraud impacts society on all levels ranging from individuals and businesses to financial institutions and government entities and manifests itself in many different ways.
Some of the current trends we’re seeing include account takeover, use of malware, identity theft, and check fraud or check washing schemes. We’re also seeing criminals automate attacks using bots, generative AI, and impersonation of financial institutions, government entities, businesses and individuals, as well as a proliferation of large, organized fraud rings and social engineering scams leveraging social media. According to the FTC, about 5% of all fraud and scams occur through P2P networks, while the other 95% occur through cash, checks, ACH, wire, credit and debit cards, crypto, and gift cards.
Fraud prevention has also come a long way – 20 years ago we used to do it on paper, using a name, Social Security number and address to verify a customer’s identity. Then we moved to email verification, and now behavioral biometrics capabilities. We’ve been good at stopping fraud using modern technology, but that has pushed fraudsters both backward to completely unsophisticated fraud schemes like check fraud, as well as forward with very sophisticated tactics like using AI to execute attacks at scale.
When it comes to tackling the issue from a financial services standpoint, you generally have two types of players – the largest banks who have the data needed to identify fraud, but not the flexibility to move quickly, and the fintechs who are more flexible, but lack the data and expertise to identify bad actors. To effectively combat fraud, we need a convergence of the fintechs and the big banks so that we can combine the data and expertise to identify fraud with the flexibility to move quickly to address it.
A data consortium is one powerful lever the fraud prevention community uses that benefits not only the big banks, but the U.S. financial system as a whole including banks and credit unions of all sizes and consumers.
What is the consortium model and how does it work to prevent fraud?
In the simplest terms, a consortium is a group of organizations, in this case financial institutions, that work together to share information that helps them better understand and prevent fraud. At Early Warning®, we’ve been doing this for over 30 years.
To participate in our consortium, banks and credit unions contribute account and payments information from their institutions. In return, they receive insights on potentially fraudulent activity from the collective pool of information, contributed by all other participating institutions.
Early Warning is able to provide responses for, on average, 94% of payment and deposit inquiries. Based on our data reporting from 2023, we had around 3 billion inquiries to the consortium and screened $11 trillion in payments, enabling participating banks to prevent $3 billion in fraudulent transactions.
If you’re a local credit union, participating in a consortium means you don’t have to rely just on your own internal data to evaluate the risk of taking on a new customer – you can inquire into a shared database with fraud data contributed by over 2,500 institutions to find out about a potential member’s history.
For example, let’s say you have a new member who applies to open an account – by inquiring within a consortium database, you’re able to see that they’ve had multiple checking accounts and never had a derogatory event. In that case they’re probably a safe customer to do business with. On the other hand, if their history comes back with multiple derogatory disclosures like overdrafts or remote deposit capture fraud attempts, you know they’re a risky customer. Either way, you as a smaller financial institution, don’t have to rely solely on internal data or create your own custom predictive model to evaluate customer risk.
With the consortium model, you’re able to tap into data contributed by thousands of FIs from the big banks to smaller institutions to see the bigger picture and decide if you want to open a new account or not.
On the other hand, if you’re a bigger bank, you may have the internal data and ability to create your own in-house models to assess customer risk, but you still lack visibility into the behavior of potential customers that you’ve never done business with. Without the insights of shared data from other institutions, small or large, your institution is at greater risk of letting bad actors into your system.
The goal is ultimately to eliminate bad actors from the system, but sometimes it’s not that black and white. Financial institutions, no matter the size, run into potential customers who aren’t attempting to commit financial fraud, but who may have mismanaged their accounts in the past. In that case they don’t fit squarely into a “yes” or “no” decision when it comes to providing them with financial services. An additional benefit of consortium data is that it allows for more nuanced risk evaluations – banks and credit unions can offer these customers tailored services based on their acceptable risk threshold without excluding them from the banking system.
Taking a multi-pronged community approach to fraud prevention
While consortia provide a formidable first layer of defense against fraud, it’s important that we don’t rely on just one single consortium, technology, or technique as the end all, be all. There is no single solution today that is the answer to it all so it’s important to take a multifaceted approach to attacking fraud.
Additional layers of defense like partnerships with government agencies, law enforcement, and consumer protection agencies as well as educating consumers can further enhance the effectiveness of our fraud detection and prevention efforts.
Government and consumer protection agencies like the Financial Crimes Enforcement Network (FinCEN) and the Consumer Financial Protection Bureau (CFPB) play a pivotal role in fraud prevention by providing regulatory frameworks and enforcing compliance standards. Law enforcement is also a key partner for investigating and prosecuting criminal financial activity in accordance with government policies and regulations.
Finally, consumer education is critical – preparing consumers so they have the knowledge and resources to avoid and report fraud and scam attempts and letting them know that we’re here to help them protect their life savings and accounts. This helps banks and credit unions protect their trusted relationships with consumers and brings a risk prevention mindset into the fold.
Public-private partnerships and task forces, like the Task Force for Fraud & Scam Prevention, recently launched by the Aspen Institute that Early Warning participates in, are helping to unite a range of community partners across sectors on this critical mission.
Ultimately, we all have a vested interest in ensuring the safety and security of our financial system, and the more we work together as a community, the stronger we’ll be when it comes to protecting against fraud, strengthening financial security, and building public trust.