Concern that fraud is threatening consumer confidence in the payment system is prompting some banks to collaborate on new security measures.
Banks have cooperated in the past — for example by supporting the industrywide security standards, issued by the major credit card companies, or by sharing data to identify the sources of security breaches.
And this week five large banks have banded together in an agreement to buy a fraud management company.
Bank of America Corp., JPMorgan Chase & Co., Wachovia Corp., Wells Fargo & Co., and BB&T Corp., have agreed to take equity stakes in a First Data Corp. subsidiary, Primary Payment Systems. First Data would retain a minority stake in the venture, which is to be renamed Early Warning Services LLC. The deal was announced Monday and is expected to close soon.
“All financial institutions have a responsibility to build a level of confidence in the system for the users of the payment system,” said Paul Finch, the chief executive of Primary Payments, who is to remain CEO at the new company.
Mr. Finch said that fraud is growing, morphing into new ingenious forms every year, and that financial companies must “do everything they can to eliminate fraud from the system.”
Two of the banking companies, BB&T, of Winston-Salem, N.C., and Wells Fargo, of San Francisco, already held small equity stakes in Primary Payments, but both would increase their ownership in it considerably through this deal, according to Leslie Altick, an executive vice president for Wells Fargo.
The plan is for Early Warning to allow the banking companies to share their fraud prevention expertise and assess risk when dealing with new and existing customers. The deal also includes IDLogix, a small First Data subsidiary that sells technology to authenticate consumer identification cards at retail stores. Early Warning is to use IDLogix to let banks identify and authenticate potential customers.
Ms. Altick said that for the participating companies “to really be comfortable in sharing best practices among the major financial institutions, and other financial institutions, we all felt far more comfortable in having the major financial institutions have a representative voice” in Early Warning.
Mr. Finch said that though the five banks and First Data would own Early Warning, smaller banks and credit unions are to have a voice in it through an advisory committee. “One of the fundamental principles of this company is that fraud is not a competitive issue,” he said. “So to the degree that you have knowledge or information that can help the industry overall eliminate fraud from the system, everybody wins.”
And, if nonowner banks are able to provide information that helps other companies, they too might be entitled to a share of Early Warning’s revenue.
Ms. Altick said that establishing Early Warning is not intended solely to generate money. “We did it not so much for the revenue it’s going to add to our bottom line,” she said. “It’s not going to change the [revenue] picture significantly in the next couple of years. We did it to reduce fraud. We did it to make sure this growing problem gets better contained.”
Bruce Cundiff, a research analyst with Javelin Strategy and Research in Pleasanton, Calif., said that taking a stake in Early Warning means that “each of these banks has more skin in the game now. Each of these banks has a concentrated desire now to really affect the way PPS does business. They don’t look at it as, ‘Oh, this is another company, or another service that’s provided by First Data.’ ”
