In a Nutshell: FICO, a leading analytics firm, provides lenders with a better understanding of credit risk. FICO’s software products protect consumers and businesses from illicit activity that can harm both parties and can reduce the likelihood of fraud. FICO’s ever-evolving technology works behind-the-scenes to fight fraud before it happens. The company uses algorithms and artificial intelligence to determine whether a transaction is fraudulent and sends a real-time alert to potential victims before they get burned.
2021 has been the biggest year for fraud yet. The FTC received 2.8 million fraud reports in 2021, with total losses of close to $6 billion. That is a 70% increase over 2020.
The spike is prompting companies that track credit histories to take action. FICO, a leading analytics software company, is an independent standard in credit scoring. Its methods are trusted by lenders and investors. The company’s technology not only makes credit more widely available, but also helps lenders better more accurately detect fraud.
FICO Platform utilizes a combination of machine learning and algorithms to stop fraudulent transactions in their tracks.
“It’s really just finding out how to get the best answers to any questions you might have about customers so that you can serve them better, you can protect them better, and businesses can protect themselves better as well,” FICO Senior Director of Portfolio Marketing, Global, Fraud and Compliance Sarah Rutherford said.
FICO Can Reduce Risk for Businesses
For financial institutions managing fraud is a complex and costly process that touches every interaction they have with their customer.
From initial application to every time a customer uses their account or makes a purchase there is the potential for fraud. But, of course, most customers are not fraudsters, and most transactions are perfectly legitimate – it’s a double-edged sword stop the fraud but without ruining customer experience for everyone else.
At the beginning of the customer relationship there are two potential fraud issues, first-party and third-party fraud.
First-party fraud, which occurs when an applicant promises a business future repayment in exchange for credit, goods or services without the intent to repay.
This normally happens when applicants exaggerate their income or employment status to get more credit. In this case, approving the account is bad for both parties because the applicant will take on more debt, and the business will have to deal with money that may never be paid back.
FICO software interrogates application information to look for anomalies that are indicative of fraud, for example if a job title and employer is compatible with the claimed income. If something seems off, the lender or business can make the decision not to approve or to amend the offer to lower risk.
The next mission is combating third-party fraud, which includes crimes such as identity theft. In these scenarios, the bad actor is able to open a new account and manage it sometimes for as long as several years. Then, at the opportune time, the criminal will raise the account’s credit limit and cash out.
Application fraud based on identity theft is an organized crime with fraudsters submitting hundreds of applications in the hope of just a few getting through fraud controls. To manage all of these applications fraudsters have to reuse data elements, for example the same mobile phone number may be used in multiple applications from apparently different individuals.
FICO software helps financial institutions to detect third-party fraud by looking across applications and customer records to spot where there are connections to other applications or accounts that would not exist in a legitimate application.
Once an account is open the fraud risk does not go away, this is particularly true when it comes to making payments. Every time someone purchases a product with a credit or debit card, whether it be online or at a physical store, there are multiple handshakes that take place between merchants, the payments ecosystem and card issuers before the transaction goes through.
The entire process only takes a few seconds. If one of the systems finds the transaction to be out of the ordinary, it is declined and does not go through without further verification.
The need to protect against fraud and financial crime extends beyond reducing losses and improving customer experience. People care about the moral aspects of crime prevention.
According to a FICO study on the effects of fraud on consumers, 69.5% of the 1,000 people surveyed say they would switch banks if they found out their bank was involved in money laundering. As such, sound anti-fraud and financial crime policies become a vital part of a financial institution’s Environmental, Social, and Governance approach.
Leveraging Data to Weed Out Criminals
Throughout the pandemic, people all over the world have spent more time indoors in an effort to social distance and prevent the spread of Covid-19.
The social distancing led to an onslaught of people using the internet for the first time, and people who were already online spending more time on the web. Being online for extended periods increases the risk of falling victim to a scam, especially for people who may not know how to look for signs of fraud.
Having your identity stolen is a traumatic event that is difficult to recover from. Scammers with sensitive information can take out credit in the victim’s name and default on it, which can cause negative impacts to innocent consumers’ credit scores.
FICO recommends consumers check their credit reports often for any unrecognizable accounts or credit activity they did not initiate. But evolving fraud techniques means banks need to also bolster their analytics and models to be accurate and adaptable.
FICO uses artificial intelligence models that can be trained to recognize fraud using data that illustrates both what fraud looks like and what normal behavior is. FICO also provides models that are self-learning.
This means that they can spot behavior that is out of pattern and indicative of fraud, this is particularly useful in detecting new types of fraud where there is no data available to train AI models with. But financial institutions must walk a tightrope when deciding how it enforces its policies. Blocking all checks creates false positives and stops people from continuing to do business with the institution.
At the other extreme, giving free rein to transactions will allow all fraud to go through. FICO Platform helps financial institutions strike the balance between the two. The mission is keeping customer experience high enough so customers don’t turn to competitors.
“We like to think of it as appropriate friction,” Rutherford said. “There is a narrative that all friction is bad, and that you should never get in the way of what your customer wants to do. But fraudsters usually operate by trying to put time pressure on people, making things sound urgent, and making them think that they really have to have to do it.
“If you look at fraud detection as a continuum, then at one end you have obviously legitimate activity and at the other obvious fraud. It’s the middle where accuracy is required. If you can accurately detect fraud when the signals are less obvious, then you can onboard more customers that at first glance have fraud risk indicators.
“Having a deeper understanding of the fraud risk faced allows you to adapt what you’re going to offer customers, for example, if an account application has some risk indicators but could equally be a legitimate customer you can adjust how you treat them, rather than refusing to open an account you can adapt your offer perhaps lowering credit limits or delaying access to funds while you investigate further.”
Fraudsters normally start small by opening accounts such as mobile phone contracts in the victim’s name. Then they use that leverage to “verify” their identity to the card issuer or bank and then drain the account.
Unleashing the Power of AI to Make Smarter Decisions
The recent media coverage of cryptocurrency has drawn people to this digital form of currency. As cryptocurrency prices skyrocketed, many consumers looked to cash in as well.
Unfortunately, the advent led to millions of scams where fraudsters persuaded people to use real-time payment schemes, such as Zelle, to send them money to buy cryptocurrency. Once initiated, these payment transactions cannot be canceled or altered, by the time the victim realizes they have been tricked it is too late the money has gone to the fraudster and they cannot reclaim it.
“The fraudsters are always playing a numbers game,” Rutherford said. “They’re always looking for mass attacks, and some people fall for it. The problem with this kind of scam is finding where the liability lies, and how do you prevent it?”
FICO offers AI models for real-time payments this detects payments that seem suspicious, banks can then take a sophisticated approach to managing potential fraud cases for example using FICO platform they can send a real-time alert to the potential victim. The system could then walk the potential victim through a process to determine if they are being scammed.
“Banks can push an instant notification to someone that’s personal to that transaction that says, ‘are you sure you’re paying who you want to pay?’” Rutherford said. “Questions can be asked such as if they’ve checked with the person they’re supposed to be paying, that way you can actually try and put some thinking time and some blockers in the way because most of the time, it’s fine. But when it’s not fine, you can really lose life changing sums of money.”