United Front: Why Financial Services Needs to Collaborate With Other Industries to Fight Fraud

The financial services industry may be one of the most at risk when it comes to fraud, but they can be more effective at combating fraud if they cooperated with other industries in sharing fraud data.


People who commit fraud in one industry are increasingly emboldened to exploit other industries as well. The lesson for financial executives is that, like countries that join Interpol to fight cross-border crime, financial institutions can be more effective at combating fraud if they cooperated with other industries in sharing fraud data.

Those sentiments were confirmed in a recent cross-industry survey of 800 fraud mitigation professionals by LexisNexis Risk Solutions. It found that today’s criminals are more sophisticated than ever with cross industry fraud occurring in 84 percent of cases, according to respondents.

From banking to credit lenders to mortgage and real estate, the financial services industry may be one of the most at risk when it comes to fraud. The estimated impact is in the billions of dollars, and fraud losses are accumulating from synthetic or manipulated identities, account takeovers, counterfeiting, hacking and other emerging criminal activities.

Financial organizations are desirable targets for fraud because of the potential size of the prize, and the sheer volume of transactions at a fraudster’s disposal. What’s more, today’s fraudulent activity targeting the financial sector is frequently driven by organized fraud rings that tend to amass a great deal of damage quickly. Challenges will continue to grow as on-demand service expectations from legitimate customers and mobile banking gain prominence.

Once fraudsters have made their score, it is highly probable that they move on to exploit other system gaps to fraudulently claim government benefits or participate in telecommunications or retail, for example. The most egregious fraud activity is perpetrated by sophisticated, organized fraud rings or individuals that essentially make their living by engaging in fraud.

It is also an increasingly costly problem, with fraud professionals indicating that 78 percent of fraud cases have a moderate to high financial impact on their companies. And nearly half (48 percent) reported that some fraud cases caused extreme financial damage. The estimated annual combined cost is in the billions of dollars of losses.

In addition to those in financial services, the study included fraud mitigation professionals in insurance, health care, retail, communications and government. Across the board, respondents agreed that they could be much more effective at their job by having access to known fraud data from other organizations (both inside and outside their industry) for their investigations.

The need for cross-industry cooperation Anecdotal evidence of fraudsters’ cross-over behavior abounds in the media, but a systematic study of cross-industry fraud was lacking. In addition to the survey, LexisNexis validated—and tested—the concept of cross-industry fraud in a small, internal study comparing data from one industry to others. The analysis showed that if an individual had indicators of suspicious activity in another industry, there was a 2.5 times higher likelihood that person would show up in the suspicious population for the target industry when compared to individuals without such “cross-industry” indicators.

Fraud mitigation professionals have long used anti-fraud measures such as Special Investigation Units, business rules and predictive analytics to identify fraud. Despite their benefits, traditional analytics tools are limited in that they have focused primarily on data sets that are too narrow. This means, for example, that a professional processing a mortgage application may not be aware that the applicant has previously falsified income to obtain a consumer credit card.

As a result, fraud fighters are looking beyond the usual methods to collectively pool their information about suspicious transactions and share key data points related to their investigations. A coordinated approach can be accomplished through a cross-industry contributory database, where member organizations contribute potentially fraudulent events, allowing members to access reported events from other participating organizations. Beyond giving contributors a more comprehensive view of a suspect or entity, a cross-industry initiative helps organizations intercept fraud before it happens, to safeguard from losses due to fraud.

A contributory database also expedites data access. As organizations gain a clearer view of the fraud landscape ahead of them, they can do more to make informed decisions that will help them navigate that hazardous terrain. Finally, access to information about outside cases helps contributors to respond quickly and accurately with the insights needed at the individual, business or transaction level. Bringing more data to bear on any given transaction can help mitigation professionals to more quickly prioritize the transactions that are safe and should be fast-tracked. This can reduce frustration and financial or emotional friction for customers at the point of application or service.

Mortgage companies are a good example of where this kind of cross-industry collaboration is already working. Mortgage lenders have collaborated with insurers for decades by submitting information describing incidents of subscriber verified fraud and material misrepresentation involving industry professionals to an industry-contributed database known as the Mortgage Industry Data Exchange (MIDEX). Contributing subscribers use information services derived from the MIDEX database as a risk management tool to protect against mortgage fraud perpetrated by industry professionals.

This interest in sharing data to fight fraud was supported in the study. Approximately 86 percent of professionals said they would consider contributing their investigative outcomes to a contributory database if they could receive the outcomes data back from other industries. Financial services and insurance companies, in particular, place a high value on data coming from organizations outside their industry because they experience widespread cross-industry fraud and believe it has a high financial impact on their organization.

Challenges of collaboration Though the benefits of sharing data seem evident, execution is easier said than done, as a number of barriers to implementation block the path forward. The biggest concern is the impact on customer service. The study revealed that as these organizations add security measures to prevent fraud – particularly online – they may risk diminishing the customer experience.

Another issue is false positives. To balance the pervasive problem of fraud with limited resources, fraud teams typically focus on the highest risk cases in their investigations. Suspicious activity is not always what is seems, and there will always be a portion of transactions identified as potentially fraudulent that prove to not be fraudulent at all. Nobody wants to falsely accuse a customer of fraud. It is particularly irritating for good customers to be caught up in cumbersome fraud detection efforts.

Final thoughts Implementing a cross-industry culture of collaboration and information sharing promises many significant benefits to preventing fraud in financial services as well as across all industries. Contributory databases can help organizations better detect and intercept fraud as it is attempted, protecting their bottom lines.

This cross-industry view will enable financial executives to optimize their fraud-fighting processes with access a whole spectrum of information that had traditionally been siloed across other industry partners and government agencies.


Vikram Dhawan is the Sr. Director Product Management of LexisNexis Risk Solutions.