Fraud-Fighting and Revenue-Sharing

BY GWENN BEZARD

Economic incentives are needed to help the industry better defend itself.

| SYNOPSIS | Faced with rising fraud and tight budgets, financial institutions' fraud managers need to trade the internal data they collect on transactions, customers and fraud events more effectively. Shared databases should be consolidated.

Financial institutions' revenue-sharing arrangements with third-party fraud management solutions providers, notably in ID verification and account opening screening, are not new. The practice, however, is not widespread. But both the need and opportunity for such agreements are increasing.

At a time when budgets are tight and fraud managers are faced with rising requirements, the pressure is on to do more with less. Even as financial institutions are hit by newer forms of fraud, the older forms continue, as witnessed by the resilience of check fraud. Since rip and replace is not often an option, investments in new technologies and services typically cannot be diverted from more traditional solutions. Focusing more on revenue-sharing agreements with third-party vendors could help ease this budgetary pressure.

Fortunately, this is a good time to strike such agreements. Since the number of companies supplying ID verification services to financial institutions has increased in recent years, financial institutions have more leverage to negotiate more balanced deals with prospective partners.

Such arrangements would likely lead to several benefits. For example, not all institutions are investing as aggressively as they should in fraud management. A revenue-sharing model would drive revenues to the institutions that help others reduce their losses, essentially creating a virtuous circle that leads to higher standards across the industry.

If financial institutions were to put greater emphasis on revenue-sharing agreements, consolidation would likely ensue among the various shared fraud databases scattered throughout the industry. Institutions have been increasingly willing to contribute to shared databases, thereby allowing them to pull together information on fraudulent activities. Among other benefits, they allow institutions to immediately alert participants when a new fraud scheme is recognized, and to share information on known cases of fraud.

While shared databases are recognized as among the most efficient tools to curb fraud, too many initiatives launched in different directions are creating inefficiencies and adding unnecessary costs for users, making consolidation advisable.

Another issue is the business model that supports shared databases. Developing a shared database requires not just political will, but also hard currency to support proper IT investment. Having a not-for-profit status is a double-edge sword: While it helps in securing support from financial institutions, in the long run, the solutions provider that supports it lacks incentives to invest heavily in developing the technology and marketing the product. Adding a profit motive to the mix would likely generate a better product and help achieve the ultimate goal, which is to reduce the incidence of fraud.

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