HSBC Combats Fraud in Split-second Decisions

Case 9.2 in Business case: HSBC combats fraud in split-second decisions
1. Analyze reasons to invest millions of dollars to detect and prevent fraudulent transactions. In your evaluation, do a cost benefit analysis to show why the investment cost is worthwhile.
A big part of a bank’s relationship with customers is giving them confidence that they are protected against fraud. Yet protection must be balanced with ease of access by legitimate customers to services of the bank.

With billions of dollars, corporate reputations, customer loyalty, and criminal penalties for noncompliance at stake, financial firms must outsmart fraudsters. Detecting and preventing fraudulent transactions across many lines of business (checking, savings, credit cards, loans, etc.) and online channels require comprehensive real-time data analytics to assess and score transactions. That is, each transaction has to be analyzed within a split second to calculate the probability that it is fraudulent or legitimate. Fraud losses are operating costs that damage the bottom line, as well as reputation and the customer base.

The company has over 54 million customers. Fraud of only $1 on only 3% of the accounts would amount to over $1.6 million. Assuming a loss of 1% of the accounts due to unchecked fraud or improper customer transaction rejection resulting in account churn, andan average account balance of $1,000 in those accounts, this could result in a loss of business of $540 million, almost 8% of their pre-tax profit for 1Q 2014, easily justifying the investment cost.

2. Review the two outcomes of the fraud scenario. Assess the business implications of each of the following two goals. Explain why these goals are conflicting.

Answer:
a. The following are the two outcomes of fraud scenario:

1. To minimize rejecting legitimate purchases by authorized customers
2. To minimize the risk of making customers victims of fraud.

b. Business Implications:

1. Legitimate purchase rejected: There will be a risk in this situation. The thing is that it has been rejected if the purchase is not successful. Then customer may choose the other card for paying. This may cause some interest fee on banks.
2. Fraudulent purchase accepted: If this is considered then legitimate customer may become victim of a crime.

i.If there is a rejection during purchase than company will get the loss of income from the purchase and also interest fee. During this situation risk of account churn increases.

ii.There will be a small problem if it is accepted the customer may become the victim as it may break the validations.

3. The fraud management solution is based on a scoring model. For example, assume the scores range from 1 to 10, with 10 being the highest probability that the transaction is fraudulent. What cutoff score would you use to decide to approve a purchase? What cutoff score would you use to decide not to approve a purchase? If those cutoff scores are not the same, how do you suggest those falling between scores be treated?

Answer:
Score for Approval: If an authorized customer wants for any transaction then it will be based on the some validation which resembles the cut-off as 10.

Score for Non Approval: This will be given as 1; the customer is violating the tasks provided.

Score for Falling between: This should be taken care and must resolve this problem by providing the validations and acceptance rate to the customer.

4. Why are approval decisions made in split second? Would customers tolerate a brief delay in the approval process if it reduced their risk of identity theft? Explain your answer.

Answer:
Approval is the main part in online purchasing. As we see the authorization from the bank is within few seconds and is able to make the use of card details for establishing the connection for transfer of money. This will be very beneficial for the customers. Because if there is any delay then the customer may feel inconvenient. If a call is taken as authorization, then there will be a loss the product that customer has chosen to purchase. Now-a-days there will be more online transaction and is very fast in accessing the products.
5. Research ATM or other banking transaction fraud. How has a financial firm been defrauded or harmed?
Metro Manila (CNN Philippines) — Jayvi Velar had his first experience of ATM fraud. And this happened just right across his office along this street in Bonifacio Global City in Taguig. Banks are tightening security in ATMs against the sophisticated schemes of fraudsters and hackers. How is the scam done? Hackers attach a clamp at the wires behind the machines. The clamp penetrates wires inside the insulated portion to capture all transaction data. It is attached to a gadget that copies the transactions and even captures the personal identification number or PIN. With PIN on hand, scammers are able to clone the ATM card and produce more than one card so they can withdraw your money anytime in different locations. Jayvi’s experience happened at a so-called on-site ATM or machines located in a bank branch. What more if the ATM is offsite or those outside banks such as malls, transport terminals or standalone machines in convenience stores? Authorities say the hackers even operate in broad daylight. And they do it in malls where there are more withdrawals than in banks. This is how the financial firm has been defrauded.

To counter the scheme, it is requiring all banks to issue cards with Euro pay, MasterCard and Visa or EMV chips beginning January 2017 for debit and credit transactions. This will protect the banking system and consumers from electronic fraud. By next year, a debit card should have a chip embedded at the front of the card. The current magnetic stripe behind the card will be taken out. The Bankers Association of the Philippines (BAP) explains the chip is more secure than the magnetic stripe. A card with an EMV chip has unique codes per transaction. It requires more information from the user so scammers will have hard time stealing information. Existing cardholders won’t be charged for the new cards. The bankers group is giving tips to protect oneself against fraud: Be aware of your surroundings and check if the machine has some unusual attachments; always check out those around you, they might be looking at your PIN; it is important to keep your banking information confidential; and always inquire about your account balance. Bankers are assuring clients their money will be returned if they are able to prove it’s theirs. And Jayvi is confirming this. Meanwhile, according to the official statement of BDO, it cannot comment on individual client transactions.”Nonetheless, we advise the public to be vigilant when using ATM. As much as possible, withdraw in ATM’s inside bank branches since the machines therein are less likely to have been installed with skimming devices,” the statement said. The bank added that ATM cardholders should change their PIN regularly and to never divulge it to anyone or let somebody else withdraw on their behalf.