Data-Sharing Consortiums: The Solution for Bank Deposit Fraud?
- Consortiums are proving effective in fighting fraud
- Key to success is a collaborative approach
- Privacy concerns and regulatory hurdles are among the challenges faced
The evolution of banking fraud has drastically changed over the past decade. Most notably, fraudsters are no longer performing their schemes solo. The internet has enabled fraudsters to not only perform more fraud, but also easily and effectively share tactics and data.
For financial institutions, taking a similar tactic and turning to data-sharing consortiums can combat these threats -- particularly deposit fraud, where FIs have limited to no information about the paying account. As PYMNTS.com explains, data consortiums have the ability to identify patterns that would otherwise go undetected by individual institutions.
When multiple organizations share data, patterns that would otherwise remain invisible emerge. For instance, a fraud ring using the same IP address to target different banks would likely go undetected in isolation. A consortium, however, can flag that IP as suspicious in real time.
How Data Consortiums Work
There are many different kinds of data consortiums that can assist banks in the fight against fraud. As we noted previously, financial institutions need to understand the differences between an Open Consortium vs Closed Consortium -- particularly when it comes to check fraud.
What is an Open Consortium?
Open consortiums enable more than just FIs to be contributors. Other check processors, such as service bureaus, are able to contribute their data to the consortium, while also leveraging the data for fraud detection.
What is a Closed Consortium?
Closed consortiums are open only to financial institutions. This means that only the FIs that have signed up and are contributing to the consortium have access to leverage the data, limiting the transactions and data available.
What is an Information Sharing Consortium?
Over the past few years, we've seen several banking and payment associations -- including the American Bankers Association (ABA), ECCHO, and NACHA -- create new information-sharing consortiums. Participating FIs are able to provide internal contacts whom other FIs can contact about fraudulent activities.
Why Participation is Important for Consortiums
While it might be rudimentary, it's critical for financial institutions to participate in these data consortiums-- in terms of both leveraging data and contributing data. Fraudsters are not targeting single FIs; rather, they are exploiting multiple FIs to steal funds and launder money.
Fraud is no longer a one-bank problem. Criminals operate across institutions, exploiting the lack of cross-bank visibility. A siloed approach doesn’t work anymore, and data-sharing consortiums aim to bridge this visibility gap by pooling anonymized data on fraud attempts and successful breaches from member institutions, which can include banks, FinTechs and sometimes government agencies.
Consortiums aim to bridge this gap and strengthen the broader financial ecosystem.
The Challenge
However, data-sharing comes with its own challenges, from privacy concerns to regulatory hurdles. Additionally, financial institutions see one another as competitors -- rivals for deposits and accounts.
“Companies and enterprises are increasingly facing a dilemma between how much they want to leverage their data versus how much they want to keep it secure and protected,” Pyte CEO and founder Sadegh Riazi told PYMNTS in June...
... A consortium is only as strong as its data pool. If large banks dominate or smaller institutions opt out, the insights generated may be incomplete. Designing incentive mechanisms, such as reduced consortium fees or shared fraud prevention rewards, can also help to encourage participation and build trust.
However, when it comes to fighting fraud, FIs need to understand that this is an industry problem, not just an issue for one FI. For the fight against check fraud, participating in a data consortium -- while also leveraging other technologies like image forensic AI and validation checks -- enables banks across the industry to mitigate risk and reduce fraud losses.