Last month, our article focused on the Durbin amendment and what banks can control when faced with legislative mandates with which they must comply.
The article written before the final Durbin rules issued in late June, when things looked bleak for banks because of a 12-cent proposed cap on debit interchange fees (down from an average per-transaction fee of 44 cents).
The position of our article still stands, even though neither debit card issuers nor retailers seems satisfied with the outcome.
The final rules doubled the proposed cap to 24 cents. Specifically, the Federal Reserve Board would set a 21-cent base fee, plus a 1-cent fee for fraud prevention and a 5-basis-points “ad valorem” fee to account for firms’ losses for fraud. It would seem that this increase would be a win for the banks over the initially proposed 12-cent cap and industry analyst commentary that predicted the best case scenario at around 20 cents under the new rule.
However, banks are still struggling with the decision, citing that the revenue losses will need to be made up elsewhere.
Elsewhere seems to be through the elimination of free checking and debit card rewards and raising minimum balance requirements. Shortly after the final ruling USAA Federal Savings Bank announced it was eliminating its debit rewards programs, joining several other banks that had already retreated from this customer offering in light of the fee cap. This makes sense in light of research showing only five percent of consumers are driven by debit rewards.
We can expect that banks will be looking to monetize checking accounts through maintenance fees, higher out-of-network ATM fees, etc. to make up what they are losing on the lower debit interchange fees.
One thing is clear. Banks have an opportunity to demonstrate a proactive fraud prevention program that will bring them extra revenue per transaction based on the new interchange fee formula. More importantly it will save them immensely over time from fraud losses. Many financial institutions are reporting that one of their biggest hurdles right now is managing fraud, so there truly is no better time to implement a high quality fraud solution.
Besides, for the larger institutions with four billion transactions plus per year at a penny a pop; that’s not a bad return.
With the sophistication of fraudsters banks face many challenges when
implementing an effective fraud program.
From account takeover to bust-out fraud there is a different need with every type of fraud. Some of the key areas financial institutions are considering include; device identification, realtime fraud scoring for individual transactions, speed to catch fraud at the point of sale, consistency across all lines of business regarding how to identify fraud and the ability to ensure the person is who they say they are.
A comprehensive fraud program will address all of these areas, but one preventative measure getting a great deal of attention right now is the incorporation of alternative data sources into credit decision processes.
This is not solely for identifying fraud, but is a critical piece of an effective fraud program.
Incorporating multiple data sources is a multi-layered process with a fair amount of complexity if the institution does not have the right infrastructure to do so cost effectively.
The cost and time to make connections to a new data source has been prohibitive for some institutions. In some instances we have been told it can take up to one year and a million dollars to implement one new data provider. In this scenario a single point of contact (SPOC) is necessary to decrease costs and test different vendors.
Furthermore, what these institutions need to do is quickly delineate the type of fraud and respond with the right data, meaning they need easy access to multiple different data sources.
To do this the bank needs to implement specific scoring rules (i.e. device identification or consumer behavior patterns) that will flag potentially fraudulent transactions and identify the type of data that needs to be pulled. Least cost routing can be used to save pulling more expensive data if the fraud can be identified earlier in the process. Another key facet is to be able to tie existing databases within the bank into external data sources for a comprehensive view of each consumer.
All of this needs to be done in milliseconds, not seconds or minutes used in other processes
Banks need to get past the traditional barriers of cost and complexity and figure out how to get this job done. The technology is available today to make it possible for financial institutions to incorporate as many data sources as they need with minimal time or cost. The spoils will go to those that embrace this type of approach.
This is not over just because the rules are written. There will be appeals and surely more lawsuits will be filed (TCF National Bank filed against Federal Reserve Chairman Ben Bernanke and its board of governors in U.S. District Court in South Dakota in October, but later asked the federal court to dismiss its lawsuit).
There will be no shortage of continued debate over the winners and losers in the great Durbin debate, but there will be clear winners in the fight against fraud if the right solutions are put in place. That’s something everyone can agree on.
Eric Lindeen is marketing director at Zoot Enterprises.