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December 02, 2013

Keeping Out the Fraudsters: Who Plays the Role of Gatekeeper?

An excessive number of consumer complaints or returns and chargebacks—these are among several red flags that could indicate that a third-party payment processor is engaged in fraud. And who better to take notice of these red flags than financial institutions? That's the thinking of many regulators, including the Financial Crimes Enforcement Network (FinCEN) when it released its October 2012 advisory on risk associated with third-party payment processors. In that advisory, FinCEN stressed the importance of financial institutions performing due diligence and monitoring their third-party payment processors.

The role of financial institution as gatekeeper was a major topic at the Atlanta Fed's October 30 Executive Fraud Forum, where a panel of industry leaders discussed the evolving role of third -party payment processors in the retail payments space. Representatives from the U.S. Department of Justice's Consumer Protection Branch and U.S. Secret Service, while they recognized the benefits of payment processors, highlighted case studies demonstrating the need for institutions to adjust their due diligence and monitoring to recognize attendant risks. They also stressed the importance of collaboration between institutions and law enforcement agencies in protecting consumers and keeping fraudsters away from payment processing.

Judy Long, who is the executive vice president and chief operating officer at First Citizens National Bank, also noted the gatekeeping role that institutions have with regard to the payments networks. Because banks are highly regulated entities whose primary objective is safety and soundness, she noted, they are in the best position to be the underwriters of payment processors.

As part of her discussion, Long mentioned some important practices for financial institutions in managing payment processor relationships.

  • Because the board of directors plays a critical role in determining the institution's risk tolerance by approving its policies and procedures, it must make itself knowledgeable about the risk factors involved with third-party payment processors.
  • The institution should have as an integral part of its policies underwriting guidelines that set limits for customers.
  • The institution must monitor customers by examining return rates and consumer complaints, providing ongoing customer calling programs, and not just knowing its customer but also its customers' customers.
  • Agreements should clearly explain the terms and conditions for how the institution will conduct business with a customer. These agreements protect both the institution and its customers.


For more details on this topic, watch this interview with Judy Long. You can also view the presentations from the Executive Fraud Forum on the event webpage.

Photo of Deborah ShawBy Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

December 2, 2013 in KYC, third-party service provider | Permalink

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