Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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April 6, 2015
What Can Parenting Teach Us about Data Security?
My older child often asks if he can play at his friend's Mac's house. If his homework is completed, my wife and I will give him the green light, as we are comfortable with where he is heading. This level of comfort comes from our due diligence of getting to know Mac's parents and even the different sitters who watch the children when Mac's parents might be working late. Things often get more challenging when he calls to tell us that he and Mac want to go to another friend's house. And this might not be the last request as our son might end up at yet another friend's house before finding his way home for dinner. We might not be familiar with these other environments beyond Mac's house so we often have to rely on other parents' or sitters' judgment and due diligence when deciding whether or not it is okay for our son to go. Regardless of under whose supervision he falls, we, as his parents, are ultimately responsible for his well-being and want to know where he is and who he is with.
As I think about my responsibility in protecting my children in their many different environments, I realize that parenting is an excellent metaphor for vendor risk management and data security. For financial institutions (FI), it is highly likely that they are intimately familiar with their core banking service providers. For merchants, the same can probably be said for their merchant acquiring relationship.
However, what about the relationships these direct vendors have with other third parties that could access your customers' valuable data? While it probably isn't feasible for FIs and merchants to be intimately familiar with the potentially hundreds of parties that have access to their information, they should be familiar with the policies and procedures and due diligence processes of their direct vendors as it relates to their vendor management programs.
In today's ever-connected world, with literally thousands of third-party solution providers, it is necessary for FIs and merchants to be familiar with who all has access to their customers' data and with the different places this data resides. Knowing this information, it is then important to assess whether or not you are comfortable with the entity you are entrusting with your customers' data. Just as I am responsible for ensuring my children's safety no matter where or who they are with, financial institutions and merchants are ultimately responsible for protecting their customers' data. This difficult endeavor should not be taken lightly. Beyond the financial risks of fraud losses associated with stolen or lost data, businesses might also be subject to compliance-related fines. And you are highly likely to take a negative hit to your reputation. What are you doing to ensure various third-parties are protecting your sensitive data?
By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
March 16, 2015
Squeezing the Fraud Balloon
A number of our posts over the last year have discussed the U.S. migration to EMV (chip) cards. As we've mentioned, one of the primary motivations for the migration has been the ease with which fraudsters in our magnetic-stripe environment can create counterfeit payment cards. Other posts have mentioned that ubiquitous tenant of the criminal world—the person always on the lookout for the weakest link or the easiest target. And that criminal does not close up shop and go away in the chip-card world. There is clear evidence from other countries that criminals, after an EMV migration, look for, and find, other targets of opportunity—just as when you squeeze a balloon, you're constricting the middle, but both ends simultaneously expand.
One major area that criminals target post-EMV is online commerce, an activity referred to as card-not-present (CNP) fraud. However, criminals also target two other areas, according to speakers at the recent 2015 BAI Payments Connect conference: checks and account applications. Well before the EMV card liability shift occurs in the United States (October 1, 2015), a number of financial institutions have reported a marked increase in counterfeit checks and duplicate-item fraud, usually by way of the mobile deposit capture service. In many cases, the fraud takes place on accounts that have been open for more than six months, long enough to allow the criminal to have established an apparent pattern of "normalcy," although there are reports of newly opened accounts being used as well.
Canadian financial institutions report that fraudulent applications for credit and checking accounts have increased as much as 300 percent since that country's EMV liability shift. Criminals are opening checking accounts to perpetrate overall identity theft fraud as well as to create conduits for future counterfeit check or kiting fraud. And they're submitting fraudulent credit applications to purchase automobiles or other merchandise that they can then sell easily.
The time to examine and improve your fraud detection capabilities across all the channels customers use is now. Financial institutions should already be evaluating their check acceptance processes and account activity parameters to spot problem accounts early. Likewise, financial institutions should make sure their KYC, or know-your-customer, processes and tools are adequate to handle the additional threat that the credit and account application channel may experience. Be proactive to prevent the fraud in the first place while ensuring you have the proper detection capabilities to react quickly to potential fraudulent attempts. If we want to constrict the balloon of fraud, we're going to have to constrict the whole thing with consistent, equal pressure.
By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
December 2, 2013
Keeping Out the Fraudsters: Who Plays the Role of Gatekeeper?
An excessive number of consumer complaints or returns and chargebacks—these are among several red flags that could indicate that a third-party payment processor is engaged in fraud. And who better to take notice of these red flags than financial institutions? That's the thinking of many regulators, including the Financial Crimes Enforcement Network (FinCEN) when it released its October 2012 advisory on risk associated with third-party payment processors. In that advisory, FinCEN stressed the importance of financial institutions performing due diligence and monitoring their third-party payment processors.
The role of financial institution as gatekeeper was a major topic at the Atlanta Fed's October 30 Executive Fraud Forum, where a panel of industry leaders discussed the evolving role of third -party payment processors in the retail payments space. Representatives from the U.S. Department of Justice's Consumer Protection Branch and U.S. Secret Service, while they recognized the benefits of payment processors, highlighted case studies demonstrating the need for institutions to adjust their due diligence and monitoring to recognize attendant risks. They also stressed the importance of collaboration between institutions and law enforcement agencies in protecting consumers and keeping fraudsters away from payment processing.
Judy Long, who is the executive vice president and chief operating officer at First Citizens National Bank, also noted the gatekeeping role that institutions have with regard to the payments networks. Because banks are highly regulated entities whose primary objective is safety and soundness, she noted, they are in the best position to be the underwriters of payment processors.
As part of her discussion, Long mentioned some important practices for financial institutions in managing payment processor relationships.
- Because the board of directors plays a critical role in determining the institution's risk tolerance by approving its policies and procedures, it must make itself knowledgeable about the risk factors involved with third-party payment processors.
- The institution should have as an integral part of its policies underwriting guidelines that set limits for customers.
- The institution must monitor customers by examining return rates and consumer complaints, providing ongoing customer calling programs, and not just knowing its customer but also its customers' customers.
- Agreements should clearly explain the terms and conditions for how the institution will conduct business with a customer. These agreements protect both the institution and its customers.
For more details on this topic, watch this interview with Judy Long. You can also view the presentations from the Executive Fraud Forum on the event webpage.
By Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
July 29, 2013
Suspicious Activity Reports: What the Numbers Show
Initially intended to help law enforcement identify individuals and organizations involved in money laundering and terrorist financing, Suspicious Activity Report (SAR) filings are also used to help detect activities related to consumer fraud and identity theft. Depository institutions (DIs) and money services businesses (MSBs) together file about 98 percent of all SARs submitted annually to the Financial Crimes Enforcement Network (FinCEN). Industry groups are constantly working to educate SAR filers about the various types of activities that they should document so these activities can be properly tracked. FinCEN recently updated its statistics to include SAR activity in 2012, and the summary volumes are shown in the chart below. The Retail Payments Risk Forum believes that an ongoing educational effort of customers, as well as DI employees, is a vital element in recognizing and mitigating fraud in our payments system. As part of that effort, I think there would be benefit in examining the shifts among the different SAR activities and gain an understanding as to possible reasons for these shifts.
As the above chart shows, the number of SARs filed by DIs has risen steadily over the last two years. SARs from MSBs, on the other hand, dropped 14 percent from 2011 after seeing an average annual increase of 15 percent over the previous two years. So why the ups and downs?
From a pure numbers standpoint, the answer to the question lies in the details of the activities that can trigger a SAR. In the case of SAR filings from DIs, for example, 2012 saw a dramatic increase in identity theft and check fraud filings, while mortgage loan fraud SARs dropped. This shift is explained by the increased diligence being placed on mortgage loans and the alarming growth of identity theft and check fraud incidents. By contrast, SAR filings from MSBs showed a substantial decrease in the category where the person reduced the amount of money order or traveler's check purchase to avoid having to complete a funds transfer record (but still generating a SAR). One wonders whether this reduction represents progress in the fight against money laundering and terrorist financing, or have the individuals engaged in these illegal activities changed their money handling tactics by performing lower dollar value transactions to avoid suspicion and identification?
Every federal judicial district has a SAR review team. This team of regulators and federal and local law enforcement reviews SARs to determine whether they need to initiate new investigations or supplement the filings to existing cases. The efforts of these teams illustrates how more comprehensive reporting, improved data analysis, and stronger monitoring capabilities can help detect and address fraud and abuse within our payments system. FinCEN publishes a semiannual report—Trends, Tips & Issues—that provides a summary of key findings from the teams' reviews of SARs. These reports let involved parties know how they can use the information to provide greater protection to potential victims of fraud. We encourage you to read copies of FinCEN's reports to better understand current fraud trends so you can educate your employees and customers.
By David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed