The digital experience as a competitive advantage
Current context of payment methods
?Before the pandemic, the?world of financial services and payment methods?was already immersed in a?process of profound and rapid transformations?that challenged the dominant position of the traditional market players. The?growing power of consumers, which had significant impacts on other vertical industries, is also strongly manifested in banking activities, progressively forced by the market to?incorporate channels and products?contemplating?new ways of executing financial transactions, better adapted to?the lifestyle and consumption habits?of the population, especially the youngest, who demand?immediacy, mobility, freedom of choice of the channel?to be used and?new products easier to use and costless.
?If we thought that no one could know more about technology?than generations Y (“millennials”) and?Z (“centennials”),?we were very wrong: the?Alpha Generation?arrived, the first one 100%?digital native, made up of those born between 2010 and 2025. The letters of the Latin alphabet are over, so we started using the Greek alphabet.
?The?proliferation of digital channels?was deepened and accelerated and?new products?such as?instant payments?began to appear,?significantly reducing costs?for consumers,?extending without limits the execution windows?of payment transactions and?instantly producing the credit?of paid values,?regardless of day or night schedules, weekends. or holidays. This product began to?benefit Clients – Consumers?and?decreased the margins?of financial institutions.?And new providers of financial intermediation services?known as?FinTech?began to appear, maximizing the use of?digital channels?(hence the Tech) tending to offer?better conditions?for?new and traditional products.
?At the same time, Open Banking?emerged, another?global initiative?in favor of?openness and greater transparency?in the payment methods and financial intermediation arena, which reinforced pre-existing concepts about the right of?consumers to own their general information?(master data) and financial behavior (transactional data), favoring the?arrival?of new players, forcing traditional players?to allow the integration?of these new players through?programmatic interfaces (APIs),and the?exchange?of consumers’ registration and transactional?information, always?with their prior consent, which facilitates the?intermittent use?by Customers of the?services of numerous traditional and emerging players, simplifying processes?and, once again, reducing costs to consumers.?
?In the words of?CPA Enrique Iglesias, former Foreign Minister of Uruguay, and former President of the Inter-American Development Bank (IDB):?“More than in an era of change, we are in a change of era”.
?In this context, we are witnessing an?exponential growth of payment transactions in digital channels, through products that, while better suited to the preferences of consumers by?significantly simplifying their user experience, present?greater vulnerabilities?to attacks by financial criminals, who have also changed drastically, becoming?experts in technology, capable of effectively?using sophisticated tools?such as?Big Data Analytics and Social Engineering, to monitor the activities of Customers until detecting opportunities to execute fraud. And when this happens,?they quickly escalate, exploiting vulnerabilities to produce significant losses in minutes.
?The payment methods are experiencing a?substantial increase in the volumes of digital transactions, and, at the same time, a?considerable increase in fraud. The predominant?traditional?second-generation?defenses,?conceived for another reality, rebelled being?completely ineffective?to contain this wave of?financial crimes in real time,?much faster and more sophisticated, thus emphasizing the urgent?need to build platforms collaboratively integrated by multiple prevention and detection?engines?in what constituted the?third generation?of anti-fraud defenses.
?Exit barriers and “churn”
?FinTech and other new-players in financial intermediation services began to offer?products well adapted to the use preferences of most Clients – Consumers, integrating in them the?preferred concepts of mobility, simplicity, immediacy, and low cost,?unleashing a?fierce competition?for the conquest of Clients and forcing traditional banks to follow the same path with the consequent erosion of their margins.
?Several examples of these products cover the?entire Customer’s lifecycle, starting with the onboarding process, which in this new scenario includes?digital onboarding?offers, without the need for new customers to go to a bank agency, executing the entire process virtually online through the use of advanced technologies such as?biometrics and multi-factor authentication (MFA). Other examples include the execution of “voice contracts” through a telephone connection recording the customer’s voice authorizing to issue, release and deliver of debit and/or credit cards, or the execution of?instant payments through QR codes?from the customer’s phone.
?The?“empowerment” of?Customers & Consumers?is part of a?global social and economic phenomenon?covering every industry, as exemplified by the “number portability” established by legislation in many countries, determining that the?telephone number belongs to the User,?not to the Operator, so, if a User migrates from one Operator to another one, he/she can take his/her number with him/her. The eventual change of the telephone number, known by Customers, colleagues, friends, and relatives, used to be an?exit barrier?that hindered the migration of subscribers from incumbent Operators to other providers. “Number portability” eliminated this exit barrier.?
?Personal Data Protection Laws?approved in most Western countries go in the same direction, by establishing through legal regulation that Customers′ & Consumers′?master, and transactional data, of undeniable market value,?belong to said Customers – Consumers, and can only be used for economic purposes through their authorization. Note that these provisions are a basic part of the concepts of?Open Banking that oblige financial institutions to share their Customers’ data in the market if they so request it, thus paving a path that opens up opportunities?for new emerging players?to participate in the financial market,?increasing competition and producing improvements in the services?received by Consumers at the same time as substantial?reductions in the costs?that such services entail for them.
?In this context of?proliferation of attractive and economical product offerings, the?exit barriers?of Customers from traditional banks are?becoming lower and lower, tending to make it as easy to change from “preferred bank” as “preferred airline”. As FinTech offerings increase, “churn” rates?exceed acceptable percentages?and set off alarm bells for traditional banks.
?The Customer experience
?Never more than now, the main?drivers?of the banks put the?Customer in a central position?(“Customer Centric“). This is a strategic and survival issue in a new era, in which the vertiginous rise of digital transactions and the proliferation of highly sophisticated fraud threats exacerbated the need to implement?faster and more secure processes.
?However, establishing an?excess of controls?could “plaster” legitimate operations, generating?high rates of false positives, which should be avoided at all costs. The reason for this is the growing importance of the?experience of Customers,?increasingly?demanding?and with easier capabilities?to change banks.
?Now, let′s think about the?case of a Customer?who is buying an air ticket online, and after spending a good time browsing to get the “perfect offer”, he tries to make the purchase, but?the bank incorrectly blocks the payment (false alert or false positive)?causing the Customer to lose all the effort made and all the time invested to reach the right offer for his/her needs, thus having to restart everything from the beginning. Imagine the?customer’s irritation?with his/her bank. Indeed,?high rates of false positives?are one of the main?causes of friction and irritation?of Customers, characterizing a?poor Customer experience. On the contrary, offering?services with low false positive rates, not only allows to generate?substantial savings?in the operating costs of the bank in analysis and investigation, but, fundamentally, contributes to?improve the experience of the Clients.?
?Most of the predominant defenses, mainly second-generation, are based on neural networks or statistical modeling engines that perform?indirect detection?(using “consortium data”) in “black box” mode and produce?high rates of false positives.
?The?third-generation anti-fraud platforms?collaboratively combine a variety of fraud prevention and detection engines that perform?direct detection?(through proprietary data) in transparent “white box” mode and allow to?define and know “a priori”?the?desired false positive rates?(the desired level of service), counting with tools and processes that?allow to drastically reduce?the rates of pre-existing false positives.
?That is precisely one of the?competitive differentiating factors of the latest (third) generation anti-fraud platforms: their ability to significantly increase fraud detections with minimal false positive rates. That is why these anti-fraud platforms openly announce that?their false alert rates are significantly lower?and that they can?parameterize the platform to obtain the desired level of service, which typically delivers?false positive rates?in the 1:3 range, as shown by some?real cases?of installations that significantly?reduced their false positive rates?by?replacing their previous solutions?by?third-generation platforms.
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?Such are the cases, for example, of the?National Payment Switch of France STET?with?10 billion annual transactions, sustained peaks of 4,000 TPS, 1 billion euros of savings for avoided fraud and false positive rate 1:1,?or the?North American Processor FIS?that declares having?reduced net fraud by 72% and false alerts by 90%?after replacing its previous second-generation solution,?implementing a third-generation platform.
?But?how is this substantial improvement in the false positive rate achieved? Analyzing this question is particularly relevant.
Let’s start by mentioning that?third-generation anti-fraud platforms (3G-AFP)?are “channel agnostic“, because they?were designed for an environment with?multiple?digital channels.?3G-AFP are “cross channel“, meaning that, they analyze and qualify transactions generating a “score” (scoring) regardless of the channel through which they arrived, and considering?profiles calculated based on all existing channels. Keep in mind that most second-generation solutions proclaim themselves as “multichannel”, because they were designed for some channels and subsequently adapted to other channels, which is very different from being authentically “cross channel“.?
?Secondly, 3G-AFP?use a wide range of information sources?in their decision process, not only?transactional data?(primary data), but also?Master Data?and information from other?external sources?such as “black” and “white” lists, and device reputation and IP addresses (secondary data), which allows them to perform?direct detection?(with proprietary data), but also to combine it with?indirect detection?(with consortium data).
?Finally, 3G-AFP?combine these data sources with the use of functionalities?that allow them to?voluntarily dose, in order to reduce the false positive rate, such as their powerful?Entity Profiling?capabilities. Profiling consists of?recording typical behaviors of different entities,?to be accessed very efficiently?(through?indexes). Profiles are calculated from?past information?of those entities (statistical capability). The entities subject to profiling can be numerous, such as “transactional sequence patterns” (financial crime?types), devices, Customers and Merchants, to name a few of the main entities subject to profiling.
?The?combination?of the “cross channel” condition (not to be confused with multichannel) with?numerous sources of information?and with the functionalities of integral profiling, or?profiling through all channels,?allows 3G-AFP to generate in milliseconds a?360o insight of Customers′ behavior,?which makes it possible to produce?fewer false positives?and a?360o insight of the criminal activity, that allows to?obtain higher detection results.
?Let’s look at an example. A Brazilian bank receives a credit card payment transaction belonging to a Customer who typically only executes transactions initiated from Brazil. The IP address of the device is from Japan and the account to be credited belongs to a Japanese bank, which is?completely?different from?the Customer’s usual behavior pattern.
?A?second-generation solution will recommend declining?to process the transaction, while a?third-generation anti-fraud platform (3G-AFP), through cross-channel profiling, will confirm in milliseconds that the Customer made an online purchase a few days ago from a Merchant, who is an airline company, and that he also made a withdrawal from an ATM in Tokyo the previous day. The result:?the third-generation platform will recommend the authorizing system to process the transaction, thus paying the Japanese restaurant, considering it legitimate, avoiding the Customer unnecessary hassle.?All in less than a hundredth of a second!
?It is also pertinent considering?3G-AFP?simulation functionalities, which allow the bank’s Anti-Fraud Analysts to work?with real production data from the past?and with?profiling results, in a?simulation model (“Challenger”)?to carry out?fine tuning?activities on the?parameters?and?rules, dosing and knowing “a priori” (before placing anything in production) which would have been the result of applying this model in simulation, in terms of?fraud detection and false positive rates.?That is another example of the?truly cognitive characteristics?of 3G-AFP (because they?combine the automatic functionalities?of prevention and detection engines with the?knowledge of the Analysts) and of?transparency (“white box”)?by allowing the Analysts not only to visualize the rules that would be applied, but also to adjust these rules and to know “a priori” what their result would have been if they had been truly executed in production.?In other words:?the control and the last word will always be in the hands of the bank’s Analysts, not in the software′s hands, and even less in its provider′s hands.
?Banks have always been concerned with customer loyalty and retention; this is not a novelty of this era. But if we combine some elements of the current scenario, we will find the ingredients of a “perfect storm”:
Conclusions
Today,?real-time anti-fraud systems are more demanded than ever, due to the?significant increase in digital transactional volumes?through?products and channels increasingly comfortable?for Customers – Consumers, with?greater vulnerabilities and?fraud opportunities.
The banks’ “traditional recipes”?are?insufficient?to deal with?increasingly rapid and sophisticated fraud.?Making an illustrative comparison with Medicine:?it is not possible to combat “new diseases” with “old medicines”;?using traditional second-generation anti-fraud solutions at this time would be like trying to fight cancer by bleeding the patient instead of using the emerging discoveries of immunotherapy and other therapies resulting from the latest advances in medical science.
The new?“FinTech” players do not have “the backpack”?of?old second-generation anti-fraud?solutions.?They directly?combine their innovative digital banking products with?third-generation anti-fraud platforms, offering their Customers a doubly comforting experience: by adapting to their habits of lifestyle and consumption habits and by avoiding the frictions?and frustrations?of?false positives.
For the above reasons, the Implementation Project of a new Anti-Fraud Platform will allow traditional banks to reconfirm a?leadership role in technology and services, offering their Customers* an?improved experience of safe and efficient use of their financial services,?with the most advanced technological components of Artificial Intelligence and Machine Learning protecting?the most innovative products available in all their preferred channels.
SME in real time Digital Fraud
Member of the World Council for a Safer Planet
Member of ACFE (Association of Certified Fraud Examiners)