“Disruptive Approaches Are Driving Change” Derek Dempsey On The Fraud Industry: Part Two

Rosalind Madge our consultant managing the role
Posting date: 2/28/2019 9:40 AM




This is the second part of our interview with Derek Dempsey, Fraud Analytics Director for FICO. To read the first part click here.


How have Data & Analytics impacted the detection, and prevention, of Fraud? 

Big Data is interesting. We want to use as much Data as possible but you have to be sure the Data you have is reliable and robust. Bad Data could lead to significant issues for anyone in Fraud detection. 

But really, Data & Analytics are the fuel that drives effective Fraud detection. Our world has used these tools very effectively for many years and we have always been at the forefront in the use of new techniques. Effective Fraud detection relies heavily on using the best Data available and the right analytical techniques to extract useful information. Furthermore, it is constantly evolving as more information becomes available. 

What impact do you think Machine Learning and AI can have on Fraud prevention and detection? 

In the last few years we’ve seen an explosion of new interest and new techniques, with lots of new players coming into the market. 

Companies like FICO have been using Machine Learning for Fraud detection for 25 years so this isn't new. What is new is a whole generation of new technologies, new companies and disruptive approaches that have been driving change. 

For us, apart from increased competitive pressures, one of the other big changes is that companies have built large Data Science teams and have a bigger appetite to build their own solutions using open source technologies. However, it’s one thing building these great models, it’s another getting them to operate effectively and correctly in the real world. The level of governance that we are subject to is enormous just to make sure that our models perform as they should. This will be a challenge to the newcomers. They are here to stay though, and should drive better performance and better Fraud detection. 

Where AI techniques are set to make an impact is in AML and compliance monitoring. These have used rule-based techniques due to regulatory pressures, but it is clear that more advanced techniques are required to provide better detection of money laundering and terrorist financing. However, businesses do require us to provide explainability but regulators are saying the will look favourably on AI usage if it can provide this. The more AI techniques are used, the more this issue of explainability is going to be important. 

Why is the development of analytics, tools and techniques so important within different industries?

I think domain knowledge of the Data and business will always be important. 'Specialisms' occur and always will. The analytic techniques, the tools and languages can be standard although some are more appropriate for different specialities. However, the differences in Data and business model always results in specialised applications to address this. 

For example, something like Card Fraud or AML require techniques that can analyse and process huge volumes of transactions, whereas something like Claims fraud or Application Fraud won't have this requirement and other factors can be more relevant. However, there is little doubt that Financial Services and Telco have actively sought AI technologies while others have been more fearful of so-called 'black box' approaches. 

How are Big Data and Data Science tools, such as Hadoop, helping combat Fraud effectively? 

There’s no question from an analytics perspective that Python and R are the two languages that Data Scientists are using. But it helps to have specialists in technical skills, such as DevOps and DataOps, to provide the technical expertise that allows them to build models and utilise Data most effectively. 

As for Hadoop, it makes sense for Data Scientists to have an understanding, but ultimately I see that skillset as one belonging to the technical specialists. This is why I firmly believe that every Data Science team should have a supporting tech function.  

What are the latest technologies helping combat Fraud? 

From an analytical perspective there has been a recent focus on graph analytics and network analytics as these can be applied to external Data. These approaches have been around for a while however and are limited to certain types of Fraud. We’re also seeing more unsupervised techniques being used as these do not rely on prior fraud case data so can be applied to a wider set of cases. 

Another new area has been adaptivity. This is a model that adapts over time depending on operational feedback from the analysts. Again this is not new but you really need to balance the impact of this new information compared to how the model is currently working and so is very challenging. As long as you can maintain a sufficient degree of explainability you can ensure the process is sufficiently well governed. 

There has been a significant move to cloud-based technologies where companies can reduce their implementation and maintenance costs. We are just about to release our new Falcon X platform, which is a cloud-based fraud platform, that will allow clients to use all the FICO capabilities but also allow them to develop their own analytics as well. 

I think potentially the biggest change will be the progressive adoption of biometric authentication. SCA is a requirement for all high-value transactions in PSD2 and this requires two-factor authentication from inherence, ownership and knowledge: so something you are, something you have or something you know. I think biometrics will start to play a big role in authentication and, hopefully, will provide much greater identity security. 

Another trend I think we may see is the growth of digital IDs. There is already a well-advanced program in the Nordics called BankID and the concept of a digital ID seems inevitable at some point. 

Derek spoke to Senior Consultant, Rosalind Madge. Get in touch with Rosalind or take a look at our latest job opportunities here.

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Why Businesses Need To Put Fraud Prevention Front And Centre

If Fraudsters are anything, they are opportunists. Once the first new stories about COVID-19 started running, it wasn’t long until they were joined by tales of fraudsters selling face masks and hand sanitiser, asking panicked customers to transfer money and then disappearing without a trace.  And it’s not the first time we’ve seen this. Fraudsters are notoriously wise to periods of heightened sensitivity and uncertainty, often preying on the vulnerable. The 2008 financial crisis saw an increase in email-based phishing scams and a decade’s worth of technological advancements means that Fraud remains a many-headed beast.  Add into the mix a change in working styles and environments, and many businesses are more exposed to potential security breaches than they have been in years. Now, more than ever, companies need to make sure their Data is well protected and secure. THE FIRST LINE OF DEFENCE If you’re part of, or leading, a Fraud Prevention team, there are a number of ways you can support your business and keep on top of the situation. Here are just a few: Increase and update your investigation capacity. This team are the front line of your business’ Fraud defence team, interacting with customers daily and spotting new scams. During an uncertain period, retention and team stability is key. These are the people that understand the day-to-day Fraud challenges you face and will be essential in fighting any future challenges.  Sharing Fraud Prevention knowledge is key. Throughout this crisis, trends will be evolving quickly and working collaboratively across teams, and even other businesses, is the best way to combat this. We consistently hear from Fraud Managers that the key to beating Fraud is to share information and knowledge. Despite this, there is always a hesitation amongst companies to admit that they have been a victim to an attack. Perhaps now is the time to change this. Invest in Machine Learning and real time updates for your Fraud defences. Fraud technology has moved on from script writing in SQL and rule changes. Businesses need a real time reactive response and now is an important time to be embracing new technologies. There are a number AI-driven off the shelf packages available or, for a more bespoke solution, a Fraud Data Scientist can create something internally. Educate your team. It may seem simple, but the Fraud team can play a crucial role in minimising any potential risk from human-error. Educating employees on the risks they may face when working remotely, or what scams they need to look out for, is one of the most effective ways of fighting Fraud.  PREPARING YOUR BUSINESS Success in the fight against Fraud isn’t purely down to the group of individuals that make up the Fraud team. As a business, now is the time to be making decisions that can help you stay ahead of the Fraudsters. Here are some considerations: Consider investing in tech as an your immediate response. Not just to bolster your Fraud defences (although there are plenty of vendors offering AI-based solutions), but also technology for your employees to keep work as normal as possible such a sharing platforms, DevOps technology and video calling networks. One of the best ways to block some of the vulnerability loopholes fraudsters are trying to exploit is to keep working habits as close to normal as possible as you move to a remote solution. Be transparent with your customers. Consumers are being incredibly savvy and noting how businesses respond to the pandemic in a way that could have a big impact when normality returns. But they’re also being more empathetic and are willing to understand difficulties. For example, shopping delivery service Ocado were open and transparent when their system could not initially deal with demand. Having communicated the difficulties, worked through their issues and gone the extra mile to let customers know how they can be supported in this time, the received minimal backlash. There is an understanding that we’re all in this together. Finally, if you have the budget, continue to staff up - particularly in competitive fields such as Data Science. A lot of top Data professionals are currently at home and much more accessible than they have been in a long time. With a number of ways to remotely interview and onboard both permanent and contract staff, if you are able to get begin conversations with them now, you’ll have an edge in what will be a very competitive market come later in the year.  If you’re looking to take your next step in the world of Fraud, we may have a role for you, including a number of remote opportunities.  Or, if you’re looking to expand and build out your Fraud team, get in touch with one of expert consultants who will be able to advise on the best remote and long-term processes. 

How Will New Financial Risk Regulations Affect European Banks?

How Will New Financial Risk Regulations Affect European Banks?

The financial crisis of 2007-2008 changed banking. The world moved from taking mortgage loans in our dogs’ names to introducing strict regulations for banks prohibiting them from giving out loans to “anyone” without assessing Risk properly. In 2010 the Basel Committee on Banking Supervision (BCBS) introduced BASEL III, a regulatory framework that builds on BASEL I, and BASEL II. This framework changed how banks and financial institutions asses risk. It introduced an Advanced Internal Rate Based Approach (Commonly known as the AIRB approach).  Now, the committee has introduced new changes and, by 2022, all banks and institutions will have to implement the revised IRB Framework, as well as new revised regulations for the standardised approach, CVA Framework and new frameworks for Operational Risk and Market Risk. So, what does this mean for those working Risk? Change Is Coming Change is inevitable, no matter what you do. If you work in Risk Management and Compliance, change is something you can expect to happen, often. As mentioned above, by 2022 there will be lots of changes. The Basel Committee calls this initiative the “finalised reforms”, or BASEL IV which builds on the current regulatory framework BASEL III. Quickly summarised, the changes limit the reduction in capital that effect banks IRB models.  This change is predicted to impact banks in Sweden and Denmark the most, with estimations that capital ratio will fall by 2.5-3%, far higher than the 0.9% expected for the average European bank.  So what does all this mean for Swedish and Danish banks?  What’s Happening Now? One of the main things that Swedish and Danish banks need to revise for these new regulations, are their internal models. The new regulations introduced a new definition of Probability of Default, measured through a model commonly known as a PD model. Effectively this means that every bank must “re-develop” their internal PD Models in the IRB approach. Consequently, we are already seeing a clear response from the banks in their strategies moving forward. It has already become quite apparent that many banks are looking to make IRB model development their focus for 2019-2020 and 2021. This has resulted in a boom in the hiring space for developers with experience in IRB Modelling and Credit Risk Modelling in general, which in turn has led to high demand in the face of the low supply of these types of candidates. Understandably aware of this, modellers are now looking to negotiate higher salaries.  What You Can Do  For candidates that hold the right experience, there are good opportunities at hand. If so inclined, they can utilise this chance to finally see if the grass actually is greener on the other side, or not. However, there are a couple of things worth considering before making a move.   Firstly, are you actually keen on switching jobs? Your skills are probably equally in demand at your current employer and, if you are having doubts about moving from the get-go, you may well be able to negotiate a rise without pursuing a new opportunity. However, if you are serious about finding something new, this is a great time to do so. The majority of banks have found that these new regulations are creating an unsustainable workload,  and are now looking for talent externally to expand their teams. This means that the experienced modeller can pretty much have their pick of the litter.  Furthermore, if you are a junior modeller, there are now plenty of opportunities for you to enter a niche area known for being exciting and innovative. So, wherever you are in your career, these regulatory changes  are likely to have a large impact and open up new avenues for you to explore.   We all know that regulations in banking and finance are now essential, we all agree, even if they can be a little frustrating. However, what people often fail to think of are the opportunities new regulatory requirements create. In the case of BASEL IV, we’re already seeing an increase in demand for strong talent, and a demand for people who are passionate about Risk Management and model development.  For businesses, new regulations also provide the chance to not only improve their teams, but to  create new models that can be utilised to optimise and automate. A lot of financial institutions are already aware of this and are using these models to gain competitive advantage over their competitors, as well as to stay one hundred percent compliant.  If you’re looking to build out you Risk Management team or take on a new Risk opportunity for yourself, we may be able to help. Take a look at our latest opportunities or get in touch with one of our expert consultants to find out more. 

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