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April 07, 2014

Learning from Experience to Handle Suspicious Payment Transactions

In a post earlier this year, we addressed the difficulty of identifying and tracking remotely created checks (RCCs) in the payments stream. Electronic payment orders (EPOs), which are electronic images of "checks" that never exist in paper form, are another payment vehicle difficult to identify and track. EPOs can be created by the payee as an image of an RCC, or created and electronically signed by the payer.

Financial institutions have to address all suspicious payment transactions, whether they occur with traditional payments, like checks and ACH or these new variants, the RCCs and EPOs. Institutions rely on a variety of ways to become aware of suspicious payment transactions:

  • The institution's anomaly detection processes highlight transaction patterns that are atypical for a customer.
  • A bank customer contacts the bank after identifying an unauthorized transaction on the bank statement.
  • Consumer complaints about a business suddenly increase.
  • Another institution contacts the bank with concerns about a particular business.
  • The bank becomes aware of legal actions taken against a business.
  • Returns for a business's payment transactions increase.

Regardless of payment type, institutions can apply the simple approach in this diagram to handling suspicious payment transactions.

diagram on handling suspicious payment transactions

When an institution becomes aware of suspicious transactions, its first step is to take care of the customer. This may include returning transactions, placing stop payments, monitoring account activity, addressing security protocols, or changing authentication tools.

The next step would be to reach out to other institutions, law enforcement, and regulators. Other institutions may not be aware of the issue and can assist with resolving the customer’s concern and addressing the underlying cause of the problem. Support for information sharing between financial institutions includes the safe harbor provisions within Section 314(b) of the U.S. Patriot Act. Submitting suspicious activity reports, or SARs, and contacting appropriate law enforcement such as the local police or FBI enables law enforcement to address fraudulent behavior, monitor the extent of the fraud, and address areas of concern that are affecting multiple institutions. Information-sharing groups, such as the Financial Services Information Sharing and Analysis Center (FS-ISAC) and BITS, are other important avenues.

Critical to the approach is the importance of the affected institution consistently adjusting its identification processes based on its experiences with suspicious transactions. For example, if the anomaly detection system has default settings for origination volume or return rates, and the institution learns that those settings were ineffective in identifying a problem, then the institution should adjust the settings.

As the payments industry continues to evolve, with newer payment types such as RCCs and EPOs, criminals will find new ways to use them to their benefit. And as perpetrators of fraudulent payments adjust their approaches, a financial institution must also be a "learning" institution and adjust its approach to identifying the suspicious payments.

How often does your institution adjust its processes for handling suspicious transactions based on current fraud experiences?

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

April 7, 2014 in fraud, payments, remotely created checks | Permalink

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