Every decision a bank makes about a potentially fraudulent transaction affects a customer, whether it's a real scam or a false positive.
Because of this, Bangor Savings Bank, which is based in Bangor, Maine, and has just over $6 billion of assets, is willing to let a little fraud through in the moment if it means it can devote more resources to customer care.
When addressing potential fraudulent disputes from customers, the bank's own cost-benefit analysis found that each of the 500 to 650 disputes it handles every month could take up to half an hour a day to investigate, according to Andrew Grover, the bank's executive vice president and chief risk officer.
Ninety percent of those could turn out to be false positives, which are transactions that raised flags with the bank's fraud monitoring system but turned out to be legitimate. That leaves 10% of flagged transactions that are actual fraud — but aren't worth the time and effort it takes to catch them in action.
"You could be spending a lot of money for no reason," Grover said during American Banker's Card Forum. "The investigation is going to cost you more than the money that you'd actually get back, so it's better off just to move forward."
Later on, the bank can decide how to deal with a customer that keeps making false claims. But the immediate concern is whether the bank's risk management process is tying up honest customers with false positives, Grover said. "You're going to have fraud, that's a known fact."
False allegations "erode your reputation" because customers will tell their friends about a bad experience of being accused of fraud, he said.
Another important part of Bangor Savings Bank's strategy is updating its fraud rules on an almost daily basis, and examining where they're causing problems for customers.
For example, at a time when a lot of fraud took place at gas stations, the bank's rules incorrectly flagged many fuel payments as potential fraud.
"People could not travel because they'd go to a gas station and get blocked," Grover said. "We didn't want that. We fixed those rules, we analyzed our approach, and now people can travel freely … you've got to pay attention to those things."
When the bank sends a fraud alert to a customer, it sees that as the beginning of a customer service interaction. If the customer does not respond to an alert, a bank representative will reach out to check in with the cardholder.
For cases of legitimate fraud, this process can help calm a panicked customer who did not know how to react to the alert, Grover said. Customers can also get peace of mind by using the bank's app to turn the card on or off on their own — putting the consumer in control of a situation in which they may otherwise feel powerless, he said.
If the customer's next transaction gets blocked, the experience can actually be reassuring, Grover said.
"Being the risk guy, I'm paranoid all the time so I put my card in secure mode all the time," he said. The next time he uses his card, the transaction gets blocked, but "that's the key, it's that control. I have some control over my security."
Banks that have too many false positives may face allegations that they've deprived consumers of their legal rights, said Kimberly Monty Holzel, partner at Goodwin's financial industry, consumer financial services and fintech practices.
"If your fraud filters are too tight, you run the risk of cutting consumers off from their funds, denying their rights under Reg E and Reg Z where they're entitled to reimbursement for unauthorized transactions," she said. This can lead to costly lawsuits for banks.
But at the same time, being too lax allows fraudsters to double dip by disputing an authorized transaction and receiving a reimbursement, she said.
Banks have another reason to make sure their fraud rules are flagging the correct transactions — if they don't, the banks won't even know they're being robbed, said Paul Siegfried, senior vice president at TransUnion.
"The industry has become more educated on how to identify synthetic fraud, how to score it, and then how to approach it," he said. But "if we don't define it correctly, we won't see any [fraud], or we will see a reduction just because it wasn't defined correctly."
