Why Europe's Bankers Are Making Enterprise Fraud a Priority

In FICO and Efma’s sixth European Credit Risk summary, more than 40% of risk managers said that strengthening fraud protection across the enterprise is a priority for 2013, and almost no one said it was not a focus.

Source: FICO™ Banking Analytics Blog. © 2012 Fair Isaac Corporation.

Given everything else risk managers need to worry about in Europe, why is fraud still so important? Well, fraud is an emotional issue that affects customer loyalty, advocacy and behavior. It also attracts acute regulatory attention. Customer and regulator expectations have increased, and many banks are now promoting a customer security message, or setting out their fraud management stall in the likes of Customer Charters, as the basis of competitive differentiation.

What’s more, many financial institutions have embraced the fact that they are susceptible to first-party fraud or intentional credit abuse, which has historically been allowed to slide, mainly unchallenged, into the bad debt books. Some estimates say one-third of bad debt is really first-party fraud. These are not people who are unable to pay, these are people who set out to drain the maximum possible available credit from a bank and then disappear. Early, effective identification and intervention could and should drive significantly lower exposure and significantly higher recovery opportunities.

But that’s not all. As the recession squeezes harder, banks are seeing more cases of internal or insider fraud — from harvesting data in one channel for use in another, to manipulation and collusion, to straight theft. This damages trust and reputation in a media-beleaguered industry, and presents a reputational risk.

Bankers also know that fraud, especially that perpetrated by organized crime rings, is being used to fund the most unsavoury aspects of society, including terrorism, gun-running, kidnapping, extortion, etc.

So the fraud mitigation banner flies high with European risk professionals. The most effective way of dealing with the various risks is to approach them on a holistic or enterprise-wide basis using complimentary components, multi-channel feeds and customer-level profiles to best understand customer behaviour and leverage and target fraud systematically and prescriptively.

Just this week, CEB TowerGroup recognised FICO as being “best in class” in its report Enterprise Fraud Management: Technology Analysis. Enterprise fraud management is definitely a discipline which can help bankers reduce the number of sleepless nights!

For more discussion of European bankers’ 2013 priorities, see my colleague Daniel Melo’s recent post.