Rethinking Fraud Protection
By Gregg A. Bennett, Director of Fraud Solutions, JMFA
The Check Clearing for the 21st Century Act (Check 21) and emerging electronic payment mechanisms are changing the way financial institutions protect themselves from transaction fraud and loss. It is crucial to safeguard transactions, regardless of whether they are paper checks or next-generation electronic payments, such as automated clearinghouse (ACH) and debit cards. 
Gone are the days of randomly reviewing checks against signatures kept on file. In fact, that strategy was never truly effective. Today, institutions must consider safeguards for all incoming checks and electronic payments.
To thwart crooks and limit losses, financial institutions need to put adaptive fraud protection systems in place that combine continuous payments monitoring and intelligent evaluation and authentication capabilities.
The stakes are high. Annual losses from check fraud in the United States are peg ged at between $10 and $20 billion, and the costs of fraudulent electronic transaction attempts are steadily rising. What’s more, the financial industry’s migration to electronic check clearing and payment processing relies on its ability to safeguard transaction integrity, regardless of the payment type.
Financial institutions recognize they face fraud threats from any and all transactions. That’s why a growing number are taking an aggressive, all inclusive, “Swiss Army knife” approach to fraud protection. Many institutions like the idea of having safeguards for all transaction types furnished by a single solutions provider. And, most are in a position today where they’re being forced — by cost, risk management policies, and service issues — to consider this approach seriously.
The Case for Integrated Protection
To help battle transaction fraud on multiple fronts, institutions should have an arsenal of detection and response mechanisms in place – such as payment pattern analysis and positive pay in operation – preferably using a single fraud software solution for ease of integration, management and tracking. JMFA FraudMANAGER evaluates every incoming check and ACH transaction for traits that would indicate fraud or a need for special handling or review. Based on each organization’s unique parameter settings, the software perfor ms a wide battery of tests on each transaction including:
• previewing the physical size of paper checks;
• checking the payment method or transaction type;
• screening the amount;
• looking at the account’s historical activity and ownership relationship;
• checking the time the account has been open; and
• verifying the ACH originator.
Using the results from the screening criteria, JMFA FraudMANAGER flags potential counterfeit checks, forgeries, unauthorized drafts, and unusual payment activity – all on the same day the transaction is received, enabling users to return most fraudulent items within the 24-hour returns window.
The unique capabilities of the JMFA program provide an innovative way to leverage existing systems to enhance the safeguards for fraud and loss protection, and to help financial institutions:
• decrease transaction vulnerabilities, allowing them to implement Check 21 and electronic payment initiatives with tools to identify substantial fraud and loss risks;
• detect fraudulent electronic transactions – which are not addressed by the traditional check centric fraud protection solutions now used by most financial institutions; and
• reduce overhead costs associated with internal fraud management and fraud losses.
By using the standard ACH and Magnetic Ink Character Recognition (MICR) presentment or proof files for the source data, the JMFA fraud software requires no core system interface and can operate in any item or image-processing operations environment. The JMFA FraudMANAGER application can be installed on a local server or offered as an outsourced solution hosted on JMFA’s servers. These options allow an institution to select the configuration that best meets its security needs.
For many financial institutions, fraud software’s biggest drawback is its cost. However, a single, automated solution is generally less expensive than an amalgamation of dedicated, manual fraud reviews. Plus, financial institutions will see enhanced performance. By challenging every incoming check, ACH and electronic transaction, JMFA FraudMANAGERSM is less likely to miss the phony items that pass through the selective or one-time reviews now done by most institutions.
Flagging and stopping fraudulent transactions means your institution will have lower fraud losses, thus better financial performance. Plus, having a fraud loss solution in place will give your account holders piece of mind, knowing you are actively working to protect their assets.
Despite technology’s relatively recent emergence, fraud and loss protection solutions are expected to become the industry norm during the next few years, pushing aside selective, check-centric applications. Payment mechanisms are converging, and new risks are constantly on the rise, driving an evolution in the industry, which is dramatically changing how fraud and loss protection products are built – and how financial institutions will use them.
About John M. Floyd & Associates
John M. Floyd & Associates (JMFA) is a profitability and performance improvement consulting firm and a leading provider of overdraft privilege programs serving more than 2,000 financial institutions in 49 states and Central America. JMFA is also recognized for training, account acquisition, executive placemen, fraud protection solutions, and earnings enhancement programs, as well as product, service, pricing and technology improvement consulting. As a direct result of our programs, JMFA has helped thousands of clients dramatically improve their performance and bottom line. To contact the Director of Fraud Solutions Gregg Bennett, call him at 800-809-2307 or email him at . To learn more about JMFA, please visit www.JMFA.com.