Explore how a fraud detection solution using soft decline can help your institution combat application fraud.
When people think of guard dogs, they often think of breeds like Alsatians or Dobermans. But while Alsatians will make all kinds of noise and become exercised in the presence of intruders, Dobermans behave quite differently.
A Doberman will happily let intruders into the building they’re protecting, but they are equally keen that their uninvited guests don’t leave. Perhaps surprisingly, this approach applies particularly well to banking application fraud. Let me explain.
Identity fraud continues to grow and the arrival of digital channels is bringing a whole new scale to an old crime. These two trends combine to make it easy, cost effective and low-risk for criminals to perpetrate application fraud.
With the low black-market cost and high availability of personal identifiable information (PII) and stolen identities on the dark web, fraudsters have changed their focus to application fraud for credit cards, personal loans, and deposit products.
The anonymity and ease of online and mobile applications helps fraudsters use stolen or synthetic IDs to gain credit, bust out funds, and disappear. The other rising trend – specific to the digital channel – is the use of compromised credentials for the purposes of Account Takeover.
Competing pressures in financial services
There are competing pressures in financial services; institutions must balance onboarding new clients to grow the book of business with the risk of fraud losses. Customers have decided they want a robust digital channel for banking, with instant access to products and services. This trend will only continue given that there are already 100 million digital natives in the United States, Canada and the UK alone and their ranks continue to grow.
For these customers, immediacy is the expectation, with smartphones the default for both interaction with one’s bank and making transactions. And with more competition and regulation to streamline bank-switching, institutions need to reduce points of friction such as paper-based applications, mandatory branch visits and overly complex questions that cause abandonment. However, fraudsters are feeding off the anonymity these conditions provide.
Too many declined applications impedes growth and costs time and money, and it can also unnecessarily inconvenience legitimate customers. In the US, it also inconveniences banks; under the Equal Credit Opportunity Act (ECOA), banks must tell customers why their application was rejected – or that they have the right to find out.
Keeping the good customers happy and the bad actors out is, needless to say, more complicated than it might first seem. But creating a gate at the point of application is not the only way.
Dobermans, Application Fraud and Account Monitoring
So can a fraud detection system work without slowing down growth and providing a frictionless experience for honest customers?
One way to do this is with a soft decline, which doesn’t reject an application outright but can flag the application for review by the origination system, which may approve the new account with ongoing post-book account monitoring. Remember the doberman?
A robust Application Fraud and Account Monitoring system gives institutions the tools to better understand customer risk. This works from the application and throughout the account lifecycle by looking at suspicious details and customer relationships, as well as customer behaviour while ensuring legitimate customers have a smooth experience.
Just like a Doberman, a fraud detection system can let an application through, then continue to monitor the account for behavior indicative of Early Term Default, Bust-out Fraud, or Account Take Over. Just like the Doberman – if you let them in, don’t let them out!