Debit cards: Banks Brace for Fraud

The bankers' corollary to Murphy's Law: For every payment system developed, enterprising criminals will quickly find ways to compromise it. And enterprising vendors will follow closely with solutions to manage the risk.

Though off-line debit fraud is not yet a pressing problem-Visa USA says the percentage of fraudulent transactions is far below the 0.8 percent recorded for all its card transactions-the burgeoning market is creating a need for fraud detection systems to manage the unique risk associated with debit transactions.

Bank One Financial Card Services recently licensed Nestor's PRISM DebitAlert fraud detection system for its worldwide brokerage clients, a move analysts say is prudent. "If the banking industry is going to be pushing off-line debit, which they seem to be doing, they better be prepared with the kind of fraud detection models that the credit card industry's promoted for credit cards," says Barbara Smiley, research director at Meridien Research.

Nestor's PRISM product, which competes with Falcon Debit from HNC Software, is neural network technology that updates the risk model with new fraud patterns as they develop. "The rules-based systems are good for known experiences," says Sushmito Ghosh, vp, financial solutions at Nestor. "Unfortunately once you know a pattern, it's typically late and...the pattern can change very easily."

Sources say the difference between the Nestor and HNC products is in who does the updating. Nestor allows clients to update the fraud model based on their experience. HNC requires users in its debit consortium to submit transaction data quarterly and updates the model using the expanded sample. "We don't deploy what's called a 'live model' because it learns things that won't last very long, or it will learn something in one area and the guy across the street won't have learned the same thing," says Patricia Campbell, marketing manager of HNC.

PRISM DebitAlert can provide either real-time or near real-time transaction authorization scoring. "Bank One is offering it in near real- time," Ghosh says. "Most customers go this way initially, and, based on confidence,...are willing to take the next step."

The product requires an initial license fee "in the low six figures," says Ghosh, as well as usage fees.

-sausner tfn.com

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