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Customer Centricity Success Story: Tackling Fraud

I’ve been blogging about customer centricity success stories, and today, I’ll share the fourth FICO case study in my series, a client which I’ll call Bank D. This global leader in credit cards wanted to demonstrate its commitment to protecting customer information and assets from fraud, and its use of innovative technology for that purpose. It understood that customer centricity is not about becoming so focused on engaging customers that we overwhelm them with attention. Rather it’s about making very careful decisions about why, when and how to make contact.

By adding intelligent communications management to analytics-driven fraud detection, Bank D accomplished this goal, while also dramatically improving fraud detection performance and efficiency. The new automated process, which generates batches of alerts every 15 minutes, replaced a slow, totally manual and very costly outbound dialing process.

The diagram below shows how this approach tightly links fraud risk analysis and customer contact actions—with data driving both. Once the transaction is scored for fraud risk, the communications manager pulls together other data from multiple sources in real time to assess whether or not to contact the customer.


Bank D’s business rules drive that decision. If it’s a “go,” a subsequent decision is then made (based on urgency and the customer’s behavior history and preferences) about how to make contact. In many cases, this contact happens in a self-serve mode: Customers can auto-resolve the situation by simply tapping a button or speaking a word to verify that it’s really them making the transaction.

According to a Bank D survey, customers are impressed. Not only were 76% of respondents highly satisfied with auto-resolution fraud checks, but 89% said they had increased confidence in using their cards again.

It’s quite likely that many of these more confident customers will increase utilization, thus positively impacting Bank D’s revenue and profit. In addition, the system has reduced declines by 32% and point-of-sale referrals by 80%, with respective declines in complaint rates of 27% and 11%. These improvements are also likely to raise utilization, fee income and profit.

The stunning thing about these results, to my mind, is that Bank D achieved them while resolving 250% more fraud cases with zero staff increase. Even more evidence that becoming customer-centric is good for bank financial performance.

To read other customer centricity success stories, I invite you to download our new Insights white paper: “Customer Centricity: Four Bank Success Stories” (No 78; login required). Or read my recent blog posts with other customer-centric case studies (Bank A, Bank B and Bank C).


Better Communication with Overdue Customers Is an Award-Winning Strategy for BNP Paribas Bank Polska and Daimler Financial Services


Collections, a trending topic in our blog, is an invaluable tool for providing an outstanding customer experience. The collections unit is one of a firm’s important contact channels.

For proof that the collections practice is becoming a customer service area, just look at the winners of the 2014 FICO Decision Management Award for Debt Management. Both companies — BNP Paribas Bank Polska, which is a part of the international BNP Paribas Group, and Daimler Financial Services, the financing arm of automotive giant Daimler AG — are using customer-centric communication services to improve consumer collections.

BNP Paribas Bank Polska saw an opportunity in its Polish business unit to improve collections by automating contact with customers, segmenting customers more precisely, and identifying the most effective collection actions to take with each customer. The bank uses FICO® Risk Intervention Manager to contact overdue customers with interactive SMS and automated voice messages in order to expedite resolution of overdue debt.

BNP Paribas Bank Polska increased its collections effectiveness on delinquent accounts from 82 percent in 2011 to 86 percent in 2013, while reducing headcount assigned to collections by 39 percent, thus keeping the customers, the relationships and the profitability.

Daimler Financial Services also used FICO Risk Intervention Manager to meet its goals in the Italian market, increasing collections and cutting costs without eroding customer satisfaction. Daimler Financial Services used the FICO solution to understand when and how customers would be most receptive to collections actions, reducing the overall risk of the portfolio.

The results these companies achieved impressed our panel of judges. As Brian McDonough, research manager in IDC's Business Analytics Solutions research service, said: “BNP Paribas Bank Polska and Daimler Financial Services have proven that tailoring the contact strategy to the customer can pay off in a big way, for multiple industries.”

Winners of the FICO Decision Management Awards will be featured in presentations at FICO World 2014 in San Diego, November 11-14.

This blog also includes discussions of the winners in the Customer Originations, Customer Growth & Retention and Fraud Control categories.


Customer Centricity Success Story: Reducing Compliance Risk

Recently on the blog, I shared stories of two FICO clients (Bank A and Bank B) that are successfully overcoming challenges to advance customer centricity goals. Today I’ll share the story of a third client, which I'll refer to as Bank C.

Bank C, like many others in its markets, was fined by regulators for misconduct in selling fee-based extra services to new accountholders. Moreover, the light shined on this problem made it clear that over-zealous sales activities weren’t the institution’s only vulnerability to fines and reputational damage from regulatory noncompliance.

Bank C executives began asking questions such as: Are automated originations processes confirming that customers understand and accept product and credit terms? Are collections agents making the required disclaimers at the proper time in the conversation, and avoiding using inappropriate language and threats? The answers convinced them the bank needed to put in place policies, systems and processes to provide better visibility into and controls over compliance risk exposure.

As part of this solution, Bank C deployed analytic models to score new sales for compliance risk. The objective was to identify potential high-risk cases for review and follow up with the customer. To improve efficiency, the bank got started by working with FICO to implement an automated scoring service across a number of different product lines, including credit, savings and insurance.

But in such a dynamic market, where regulations, bank products and customer behavior are all changing, how could the bank ensure that the deployed models continued to accurately identify the risk level of these sales? Factors indicative of high risk today might not be significant a few months from now, and vice versa.

The solution was to also implement centralized, automated model management, illustrated below. Regularly scheduled model validation processes will fully document analytic performance, generate alerts when it drops below specified thresholds and even capture actions taken in response to validation findings. An accompanying model development environment will allow the compliance risk models to be quickly refreshed and deployed back into the scoring service. This framework also has the potential to support other conduct risk assessments, such as those used for collections calls.


To read other customer centricity success stories, I invite you to download our new Insights white paper: “Customer Centricity: Four Bank Success Stories” (No 78; login required).


Research: New Analytics That Boost Fraud Detection

On this blog, I regularly share information about the latest advances in fraud analytics. But our clients are not looking for innovation purely for innovation’s sake. An advance is only worth its salt if it measurably improves fraud detection.

Recently, my team tested the performance of two new fraud analytics that I’ve blogged about before—specifically Behavior Sorted Lists and Adaptive Analytics. In this post, I'll quickly recap each innovation and share those latest performance results.

Behavior Sorted List technology identifies cardholder "favorites"—or recurrences—over the transaction streams. These might include favorite ATMs that are close to work or home, favorite gas stations along a daily commute, and preferred stores for internet shopping. Behavior Sorted Lists can distinguish between frequently repeated transactions that indicate normal spending (what we data scientists call “in-pattern” transaction activity) and infrequent activity that is far more likely to be fraudulent (“out-of-pattern” activity). This ability enables faster fraud detection with lower false positive rates—that is, fewer declines on legitimate transactions.

The graphics below compare performance of FICO® Falcon® Fraud Manager 6 with and without Behavior Sorted Lists, using the most recent International Credit Models (ICM) 12. We observed substantial improvements using Behavior Sorted Lists, looking at both account detection rate and real-time value detection rate. I’ve highlighted improvements at a few account false positive ratios.

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Digging deeper, we analyzed performance on a number of fraud types, including cross-border and card-not-present (CNP) fraud transactions. The following two plots show that the ICM 12 model with Behavior Sorted Lists outperforms the base model. It significantly improves transaction detection rates over a range of non-fraud transaction review rates.

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We also evaluated the performance lift of Adaptive Analytics. Adaptive models work in conjunction with neural network fraud models, continually adapting the neural nets based on ever-changing fraud patterns that emerge over time. This not only improves model performance, but also extends the useful lifetime of static neural network models.

This ability to reduce model degradation is especially helpful in emerging international markets where we observe higher market dynamics. That’s why we tested our latest International Credit Models on not only in-time data (that is, the development data), but also on out-of-time data (outside the development data range). This evaluates whether the model will maintain robustness when deployed in a more dynamic production environment.

Performance results are shown in the graphics below. “AA” stands for Adaptive Analytics. The green curve represents the base ICM 12 performance—without Adaptive Analytics—on the in-time data that the model was built on. The red curve shows performance of the same model evaluated on out-of-time data. As you would expect, we see some performance degradation compared to the green curve. The blue curve shows the performance of the adaptive model on the same out-of-time data.

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The adaptive model clearly outperforms the base model on the out-of-time data. Compared to the in-time performance of the base model, the adaptive model’s out-of-time performance is close for account detection rate, and approximately the same level for real-time value detection rate. It’s strong evidence that using Adaptive Analytics is highly effective in preventing model degradation.

Clients of our International Credit Models can take advantage of both Both Behavior Sorted Lists and Adaptive Analytics with the release of v12 later this year. ICM 12 has been trained on a more comprehensive pool of international credit consortium data, and it is capable of identifying a wide spectrum of credit fraud patterns across continents. These improvements will allow our clients to keep up with the latest fraud schemes in their respective regions.


Nationwide Building Society Makes More Credit Available Using FICO-Powered Strategic Risk Infrastructure


One day your bank is at the top of the online pricing table for loans, with the most competitive pricing. The next day, your rival is on top. What do you do?

If you’re the UK’s Nationwide Building Society, the world’s largest building society with over 14 million members, you can whip your way right back to the top of the table. That’s one of the advantages of the Strategic Risk Infrastructure Nationwide built using advanced decision management technology from FICO. The SRI has enabled Nationwide to increase lending by at least £25 million a year.

The project’s results have made Nationwide this year’s winner of the FICO Decision Management Award for Customer Originations. 

The key aim for Nationwide was to make more credit available. Using FICO® Blaze Advisor, Nationwide have replaced all the disparate systems previously used in its mortgage and personal loans operations, enabling the society to treat each customer more consistently.

One important way the SRI helps Nationwide extend more credit is by enabling the approval of qualified applicants who would otherwise be declined for affordability reasons. If a customer applies for a loan that has regular payments they may not be able to afford, FICO Blaze Advisor can review the affordability of the loan spread over a longer term, and if appropriate present that option to the applicant.

This is a good example where asking the right questions is key to growing the number of loans. However, it is also important not to ask too many questions. The SRI has streamlined the sales process, reducing the number of questions asked during a loan application process by focusing on those with the greatest relationship to an applicant’s creditworthiness. This has reduced the consumer abandonment rate during application by approximately 17%.

Another benefit for consumers is the speed with which Nationwide can implement new competitive deals using the SRI.

“Changes in pricing strategy that used to take 10 days to deploy can be made the same day now,” said Mark Tuton, senior risk manager at Nationwide. “We have used this capability to remain at the top of ‘best buy’ credit tables published by third parties. When a competitor changed its prices in an attempt to put itself at the top of the table, we reviewed our strategy and made a change the same day to remain at the top.“

Read more about this award winner in our news release. Plus, check out the awards for Garanti (Fraud) and Westpac (Customer Growth & Retention).


European ATM Fraud Proves That Thin Is In


Many of us can remember a time when everyday electronics and technology—from computers to cell phones to TVs—required more space to house their inner workings. Much of our technology has been continuously shrinking over the years, and fraud technology is no exception. Case in point: A recent article posted on security blogger Brian Kreb's website discussed how European ATM card skimmers are getting smaller and more difficult to detect. 

The organization EAST, or European ATM Security Team, recently released a report revealing a diminutive ATM skimming device that, according to American Banker, is “so small it’s easy for the human eye to miss.” This thin or mini skimmer is designed to fit inside the card slot of an ATM machine, as opposed to a more typical skimmer that would fit over the card slot. As with their larger brethren, thin skimmers require the use of a miniature camera to capture the cardholder's PIN entry.

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 Thin ATM skimmer insert (left) and mini camera installed over PIN pad (right)                         Source: KrebsonSecurity 

While Europe has become an early target for the use of thin skimming devices, the greatest risk for fraudulent payment card losses may very well be in the United States and other countries that have not yet transitioned their card infrastructure to EMV compliance. That’s because it’s much easier to encode stolen data onto magnetic stripe cards than on the chip-and-PIN cards used in Europe and elsewhere. And eventually, ATMs outside Europe could fall prey to thin ATM skimming devices, amplifying the problem even further. 

Of course, a smaller device is not the first skimming innovation from card fraudsters. These days, a number of ATM skimmers are manufactured with a translucent plastic that enables the card-reading devices to evade visual detection. Many skimmers today also employ mobile technology so that fraudsters don’t need to retrieve skimming devices at the ATM, thus helping them avoid arrest.

Technology advances aside, we can’t prevent the deployment of ATM skimmers. We can, however, fall back on best practices with a proven track record for reducing risk exposure. Some are as basic as frequent physical security inspections, 24/7 video surveillance, participation in FICO’s counterfeit ATM fraud detection service, and employment of an analytics- and rules-based fraud detection solution. While the technology criminals employ may be shrinking, our commitment to fundamental anti-fraud practices should not follow suit.


Video: Mortgage Lenders See Real Estate Bubble Forming

There is a lot of media interest in our latest quarterly survey of North American bank risk officers! In this short video clip, TheStreet recaps our survey results and talks about a possible real estate bubble. Our survey found lenders in both the U.S. and Canada are concerned that home prices may be growing too quickly in many cities.

You can find more details about our survey results in the blog post I published a few days ago.


Westpac Scores Transaction Data Daily to See Customer Risk More Clearly


Beauty really does lie in the detail. We have all gazed at the splendor a professional high-resolution image and understood, after snapping away for years on a compact camera or phone, that there is richness in more information. Higher resolution means seeing details you haven’t been able to see before.

This is exactly what Westpac Banking was aiming for when it looked to FICO to introduce a daily transaction score. Westpac was looking to improve its ‘financial resolution’ by assessing its customer risk and attrition every day, instead of the industry standard of every 30 days.

FICO® Transaction Scores are based on a customer’s card usage patterns and updated with every transaction authorization, yielding a more precise and current assessment of customer risk and purchase behavior that can be used to target cardholder decisions.

The impact of this predictive analytics project for Australia’s second-biggest bank has been far-reaching. Paul Deall, senior manager of unsecured risk at Westpac, and his team have fundamentally changed the way the bank manages its 3 million credit card accounts. The FICO solution is on track to deliver $6 million per year in increased revenue and reduced bad debt expense. This significant achievement is even more remarkable in that it was implemented in 12 months and is future-proofed and scalable.

The project results have made it a worthy winner this year of the FICO Decision Management Award for Customer Growth and Retention. Winners will be featured in presentations at FICO World 2014 in San Diego, November 11-14.

Paul Deall said, “Improving the speed with which we can identify and act on changes in customer behavior has given us an edge. Customer communication is also a major contributor to account retention, so improving our reaction time has helped us hold onto customers.

“In a fiercely competitive banking market such as Australia, the main financial players are fighting for share of wallet, with customer service as the principal battleground.”

Read more about this award winner in our news release. You can also check out the winner of the Fraud Control category, Garanti.


Garanti Bank — An Award-Winning Story of Enterprise Fraud Management


As I’ve noted several times in this blog, enterprise fraud management is something of a “holy grail” for banks. Few have managed to make it a reality. Today, FICO gave an award to one that has – Turkey’s second largest bank, Garanti.

Garanti took home the 2014 FICO Decision Management Award in the Fraud Control category. The bank is using its deployment of the FICO® Falcon® Platform to centralize fraud protection and case management across credit cards, debit cards and current / demand deposit accounts (DDA). In addition, Garanti uses FICO application fraud models to detect potential fraud in credit card and consumer loan applications.

Garanti has been able to increase detected credit and debit fraud cases, keeping its fraud losses down during a period when fraud attacks were doubling, whilst at the same time minimizing impact upon genuine consumer spend. To do this, last year Garanti Bank expanded its use of FICO Falcon Fraud Manager to cover all transaction channels for its current/demand deposit accounts (DDAs), in addition to debit and credit cards.

The most impressive part of their approach is that Garanti’s anti-fraud team now uses FICO Falcon Fraud Manager to protect multiple accounts for each individual, and to view them at the customer rather than simply the transaction or account level. Supervisors can write and define rules and improve the agility of their parameters, which enables the bank to respond faster to high-priority risks, to better delineate between fraud and genuine transactions, and to stop flash fraud as it’s unfolding.

If a risky transaction is identified, Garanti can now create a new case, temporarily block the relevant account facilities and send an SMS or other notification to the customer, instantaneously. Multiple actions give the bank’s analysts a chance to make contact with the customer much more quickly, and through the customer’s preferred channel, giving them a better experience.

As Beyhan Kolay, the former senior vice president for Anti-Fraud at Garanti who oversaw the centralized fraud protection and case management initiatives, notes in the news announcement: “Garanti Bank is the first bank in Turkey to integrate different fraud controls in the same department, using a customer-centric approach. Our approach enables us to carefully manage the impact of fraud management controls on customers, so that we can not only protect them but also keep them engaged, thereby making them more profitable for us.”

Garanti is also using application fraud models from FICO to stop first-party and third-party fraud applications. This is critical in Turkey, where banks demand relatively little documentation in order to simplify the lending process for customers. In the first six months of use, FICO’s application fraud models have been able to detect 80% of third-party and first-party fraudulent applications.

Garanti’s results and advanced approach impressed the panel of industry analysts and journalists who judged the FICO Decision Management Awards. Congratulations to Garanti’s Anti-Fraud team on this well-deserved win!

Read about our winner in the Customer Growth and Retention category, Westpac.


Housing Bubble Inflating?

The latest installment of our quarterly survey of risk managers at U.S. and Canadian banks shows real concern about a possible re-inflation of the real estate bubble. In the survey, 56% of respondents directly involved in mortgage lending expressed moderate to heavy concern that “an unsustainable real estate bubble is inflating.”

Risk Survey - Housing Bubble 450

The actual data I’ve seen is a mixed bag. There are roughly six million homeowners in the U.S. still underwater on their mortgages. The average negative equity among those six million households is 33%. That level of negative equity won’t disappear anytime soon.

However, home prices are soaring in many cities, and total homeowner equity in the U.S. is at its highest level since late 2007.

I’m not sure that is a tenable situation. Given that state of affairs, I understand why many lenders in both Canada and the U.S. are concerned about the risk in residential mortgages.

The survey also found that bankers are paying close attention to consumer debt as the re-leveraging trend continues. For the last two quarters, about 65% of our respondents said they think credit card balances are headed higher. Those are the two highest figures we’ve ever seen in our survey.

And when we asked our respondents about the underwriting process (for all types of consumer loans), most of the folks we polled (59%) cited “high debt-to-income ratio” as their top concern when reviewing loan applications. The second and third most common concerns were “multiple recent applications for credit” (13%) and “low FICO® Score” (10%).

Risk Survey - Underwriting Concerns 450

So while we have yet to see lenders really pull back on lending, I interpret the results of our latest survey as evidence that bankers are wary of a return to reckless borrowing. It will be interesting to see if and how this concern manifests itself in the coming months.

On a more positive note, the survey responses regarding small business lending were quite optimistic. While 34% of respondents last quarter expected delinquencies to rise on small-business loans, only 26% expected such an increase this quarter. And last quarter, 40% of respondents felt credit supply would fall short of demand for small-business loans. That figure dropped to 28% in the latest survey.

Risk Survey - Small Business 450

To view all survey responses, I invite you to download the full report. As is often the case, this quarter's survey results have sent us mixed messages. But one thing never changes – the results are always fascinating!