Digital Account Opening Requires a Leading-Edge Fraud Defense

Last month, an enterprise director of fraud for a large regional bank told me 5% of his new accounts were being opened online. He asked me if I thought it was a good idea to continue to invest in fraud tools for the digital channel.

My response? If the bank wants to survive, then they better figure out how to open accounts through the digital channel and that includes investing in fraud tools.

It seems logical that all banks and credit unions would have already figured how to open accounts online effectively. However, this is not the case. Most of the banks and credit unions I talk to say they “want to open accounts online” or are “planning on opening accounts online,” while others will tell you they do open accounts, but only low-risk accounts such as a money market account or CD.

The reason banks and credit unions are not opening accounts online is fraud exposure – pure and simple. For many, they dipped their toe in the water and got burned. For others, they simply know that those waters are murky, and they have not deemed it critical to enter.

On the flip side, consumers are getting more and more comfortable with wanting to do everything digital and mobile, including opening accounts. This puts banks and credit unions between a rock and a hard place. They don’t want to open up the financial institution to significant fraud exposure, yet their prospective future customers want to open those new accounts online in a “frictionless” environment.

What does this all mean for fraud prevention? It means that the industry really has no choice. To meet the demands of consumers, banks are going to have to invest in fraud tools that allow the institutions to open those accounts digitally and effectively manage those accounts.

Grow or Perish

As branch visits dwindle and fewer customers feel constrained by banking geography, many financial institutions understand that growing a larger customer base through national marketing is critical for survival, particularly outside of the bank’s traditional footprint.

This is already happening. Banks like Synchrony, Ally, State Farm and others open all their new accounts online, so this is not a big deal to them; it is just part of the territory.  They fully understand the increased fraud exposure and have managed that effectively. For banks and credit unions that want to grow their footprint digitally, this is good news. It is possible to put up the proper fraud defenses to minimize the increased risk.

What Millennials Want

Digital banking adoption has indeed been slow to grow, but it has grown in direct proportion to the number of digital natives – Millennials and Generation Z – forging bank relationships for the first time.

I only have to look at my 17-year-old daughter. If I told her that she had to go into a branch to open up a new account, her head would explode. Her response would be “Why would you do that?” or “that’s dumb.” It’s more likely she would say “what’s a branch?” Everything this generation does is through a device glued to their hands. It is texting, snapping, video conferencing and yes – banking. They live in a virtual world and this generation of consumers will be voting with their thumbs – not with their feet.

The Role of Technology

I attended the Money 2020 conference this year and spoke with dozens of card issuers. Many shared a similar response: they don’t have a fraud problem, they have a “friction” problem. Their biggest challenge? Creating a frictionless environment for account opening and ongoing support. I agree. Without a frictionless customer experience, it won’t matter because banks will be out of business.

Technology has created many new payment methods and more ways to move money. Likewise, we must leverage technology to reduce the fraud exposure. Especially in the light of all the data breaches, credential stuffing, first party schemes, synthetic identity scams and more.

The keys to success are:  a.) having a best-in-class new account fraud detection platform and b.) relentlessly managing the early lifecycle of the account. If all you did was a.) but did not do b.), you will fail. You need to both and do them very well.

Regarding the new account fraud platform, you need to continue with your legacy risk and ID verification processes, but then go well beyond to look for fraud, because these legacy processes are insufficient, especially in an online account opening environment.

Below is list of many of these necessary components:

  • Email and Internet Protocol (IP) address screening
  • Device identification and screening
  • High velocity patterns. Look for access to solutions that see a large network of new account openings
  • Address attributes. Things like hotels, vacant properties and other nomadic address attributes
  • Phone screening. First party and third-party fraudsters do not like leaving a valid reachable phone number
  • Machine learning. Fraud patterns and trends move at a faster pace and machine learning is needed to keep ahead of the fraudster

By deploying better and more sophisticated tools, this will isolate fraudsters into a smaller container and reduce friction on legitimate customers. Then, once the account has been opened, relentlessly manage the early life cycle of the account by managing permissions, changes to the customer profile and transaction patterns.

The banks and credit unions that prioritize a move to digital account opening must be on the leading edge of fraud defense. Otherwise, new account-seekers will flock to the institutions that provide both simplicity and security. Why not strive for both?


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