The Cooperation Imperative

By Thomas P. Johnson Jr.

Across the industry and across the institution, collaboration is the best defense against fraud.

Competition in banking today is arguably as intense as it's ever been. Now that the restrictions that once separated financial institutions by geography and product lines have been largely dismantled, banks compete against one another across the board.

However, there are many areas in banking that demand cooperation and collaboration with competitors, and one that has dominated the headlines lately is fraud prevention and control. Fraud perpetrated against one financial institution risks damaging others in the system — and the very system itself. There are two parties to every financial transaction, one institution's credit is the other's debit. Fraud is the monkey wrench tossed between the two.

Over the last 20 years, the industry has seen fraud develop from penny ante thefts to full-scale assaults by organized crime rings with political agendas. The industry's organized response, including large banks and technology providers, succeeded in stemming check fraud by implementing screening tools and sharing loss data. The fraud forays into electronic payments systems make cooperation and collaboration an imperative across banking and other affected industries. Indeed, several workgroups from BITS; the Financial Services Technology Consortium; NACHA; the Financial Services Sector Coordinating Council; and the Financial Services Information Sharing and Analysis Center, have come together for that purpose.

Within each institution, too, sharing across business units will be required. It's been demonstrated that today's fraudsters use existing silos to exploit the system. Ease in opening an account under a false identity and funding it, for example, makes it possible for a criminal to establish an identity and then proceed to apply for credit cards and even loans.

Those who organize internally to fight fraud can anticipate some tension: The controls recommended to protect the bank and its customers often come up against initiatives designed to speed a product to market, save expenses or address a customer's desire for fast-tracking. Overly strict controls have the potential to alienate customers.

Given the speed at which fraudsters are able to take advantage, the industry's best hope in effectively confronting fraud is to build on what has already been learned. Most existing security and safeguarding procedures — even those today considered cumbersome or obstructionist — had a valid reason for being. While there may be impassioned sales-, product development- or marketing-based reasons for bypassing them, the price to relearn prudent practices may be higher than the industry together will want to pay. It's critical, then, that security, product development and marketing staff be brought together early in the discussion to agree on objectives, priorities and risks and devise a plan that balances all considerations. Collaboration works well between institutions, and it can also be important within.

Mr. Johnson is publisher of Banking Strategies and president and chief executive officer of BAI.

Copyright © 2004 by Banking Strategies, published by BAI.

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