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Defeating Insurance Fraud – The Opportunity Is So Close At Hand

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Bill Trueman

Bill Trueman CEO of leading UK Fraud prevention consultancy and analyst UKFraud believes that if the insurance industry has a significant opportunity to drive fraudsters away. Here he outlines the steps the sector should take …..
The insurance industry should accelerate its activity in the management of fraud and fraudsters. For whilst huge in-roads have been made into combatting insurance fraud in the UK, there is an enormous opportunity in these times of big data analytics, for the insurance industry to up its game. This they can do through the more effective sharing of fraudster and criminal information and through better collaborative data management. So in a bid to encourage the industry to be more aggressive with insurance cheats and to keep pace with other sectors such as banking, here is a four point plan for the insurance industry. Its biggest and first aim is to prevent fraudsters from ‘entering the system’ in the first place.

Bill Trueman

Bill Trueman

1.  Know Your Customer and Anti Money Laundering Standards Must Be Applied To The Insurance Sector
In the insurance sector, there is no legislative requirement upon insurers to identify a customer’s identity, or to follow KYC (Know Your Customer) or AML (Anti Money Laundering) standards. This is in sharp comparison to nearly all other professions which must now follow both KYC and AML requirements. Sectors already included are: banks, lawyers, accountants, mortgage and rental providers, card companies, utility providers, gambling organisations and telecom companies. Technology enables professional service companies in all these sectors meet these stringent requirements even before accepting a client’s business. The compliance levels adhered to also include the Prevention of Terrorism Act and Drug Trafficking regulations. Why then, asks UKFraud is the insurance sector free of these standards, even when it is a frequent victim of fraud and can claim annual fraud losses of between £1billion and £2billion, or up to 10% of our premiums in some portfolios?

There is no rationale for this lack of KYC/AML authentication, believing that the absence of such tools encourages fraudsters to target the sector. The solution is for the insurance industry to demand KYC / AML regulations to be extended to the insurance sector, as this move alone could significantly reduce the risk of fraud. This would also reduce the costs of dealing with fraud and change the industry’s entire customer service mix.

2. Deter Fraudsters At The Outset

With the KYC and AML systems in place, all industry stakeholders and interested parties should then also adopt a range of other systems to deter fraudsters and money launderers right at the beginning; at the underwriting stage. This can be achieved through industry wide collaborative reviews of IT systems, document management processes, telecoms applications, call centre logs, internal fraud management policies and marketing collateral. This review should also be backed up by the introduction of the latest fraud prevention systems capable of identifying behavioural pattern anomalies at an early stage, which should include the use of the latest ‘neural’ fraud detection systems to react quicker to changing fraud trends. Using 1980s scoring and red-flag type indicators is particularly outmoded and yet still commonplace.

3.  Keep A Database of the Cheats
88% of all people we surveyed last year believed that a comprehensive industry wide database of such information already existed and was being used extensively across the insurance sector. Only a few inspired insurance companies though, regularly share in anything more than an ad-hoc manner, details of known fraudsters. This is despite the forceful warning messages that most customers hear when they call in to some insurers. Fraudsters know that such databases are rare and exploit this weakness to their advantage. The exceptions are the leading insurers that do share data with the banks, telecom companies and many other sectors through CIFAS who operate such services and are now working positively with many other sectors including a number of leading public bodies. Amongst this group of leading insurers are the really forward thinking companies who find more of the liars and cheats using device identification technology in the sales process (as well as the claims process) and then make sure others are aware.

4.  Zero Tolerance
Complacency to the risk of fraud is the biggest potential risk in the insurance sector. Insurers, says must not get complacent and must not only always look for the next major anti-fraud initiative, but evolve the thinking in the sector and drive forward new initiatives to catch up with and stay ahead of the market – whether this is just the UK market or the global insurance market.

The industry must then work together and collaborate closely to drive such a strategy. In doing so, they should adopt and reinforce a ‘zero tolerance’ approach to driving fraudsters operationally ‘out of insurance’ for the long run. The tools are there, including the latest developments in personal identity verification systems, device identity technology and behavioural analytical systems together with use of big data analytics, and change-event screening / scoring. This must also include increasing the number of ways in which companies share experiences and data with others.

The sector needs to find a renewed and strengthened attack and momentum. In my view, there needs to be a much stronger, infrastructural change in what the industry does to drive a major part of the problem away from the insurance sector once and for all. Between £30 and £60 of every policy is added to pay for fraudsters. And with up to £2billion in insurance fraud each year something has to be done. It is no good just dealing with the problems when they arise, the industry as a whole should be doing much, much more to prevent, deter and to stop the liars and cheats setting up policies in the first place; or to find them much sooner if they manage to do so.

Finance

Risk Mitigation vs. Risk Avoidance: Why FIs Need to Maintain Risk Appetite and Not Place All Bets on De-Risking

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Risk Mitigation vs. Risk Avoidance: Why FIs Need to Maintain Risk Appetite and Not Place All Bets on De-Risking 1

De-risking aims to protect financial institutions from the increasing pressures placed by regulators and threats, associated with clients operating in high-risk GEOs and market segments. Agnė Selemonaitė, board member of ConnectPay, states that FIs should not focus entirely on de-risking to mitigate all potentially dangerous prospects, rather strive to continuously improve their tools for risk control and consider dividing the market among banks and EMIs for more strategic risk management across the entire sector

October 22, 2020. The payments sector has always been under the microscope in terms of regulatory compliance. Now, with a number of scandals and compliance discrepancies, financial institutions have responded in a growing trend of terminating accounts deemed high-risk—a process also known as de-risking. While in the risk management space the term describes hedging against precarious exposures, within the payments sector it has become synonymous with avoiding risks.

Since the financial crisis of ’08, FIs have been hit with approximately $36 billion of non-compliance fines. The significant growth corresponds with the ever-tightening AML/CTF rules, as well as the general tendency of policies becoming more and more strict. With a continuously toughening regulatory environment, financial institutions are less inclined to take on dubious clients and would rather eliminate any viable threats than risk getting fined by the regulatory authorities. Agnė Selemonaitė, board member of ConnectPay, emphasizes that while de-risking is necessary, it should not become the basis of the entire approach to how financial institutions tackle risks.

Although de-risking has been gaining traction in the payments sector, it is important to disclose the shortcomings associated with the practice. The case of Malta, a EU country bordering the Mediterranean sea, is a good example of how strict de-risking policies can impact the payments landscape and alter a country’s image on a global scale.

Maltese FIs have been under mounting pressure from the European Central Bank, as well as local regulatory authorities due to a significant number of ambiguous industries thriving in the country. For instance, the gaming sector accounts for 13.2 % of Malta’s overall economic activity. Called out to re-evaluate their risk profiles and strengthen AML and CFT strategies, FIs chose to not risk sky-high fines, rather terminate riskier customer bases. This has pushed many businesses to direct their payments to out-of-country vendors, while Maltese institutions lost trust due to unbalanced de-risking.

“Now, businesses operating in higher-risk markets are hesitant to rely on a single regulatory jurisdiction to mitigate risk exposure in terms of payments security. Yet provider diversification leads to missing out on a number of benefits, for example, potential discounts, offered due to high payment volume associated with a client,” explained Agnė Selemonaitė. “We’ve noticed this tendency amongst our own clients too. Many are being overly cautious and choose to carry out only a small fraction of payments, fearing for things to take a similar turn, as it did in Malta, and become the ones deemed high-risk.”

“However, higher turnover helps to better mitigate client-specific risks. For instance, the more vendors from any given corporate group are onboarded, the more we can learn about the payment behaviors in their industry, and, consequently, introduce better risk controls to prevent ML, TF and other threats to clients’ funds.”

Ms. Selemonaitė notes that hasty de-risking could contribute to other issues as well, like the growth of the shadow market. “The higher number of such accounts are rejected, the more inclined they become to look for alternatives to continue their business,“ she adds. “In a way, de-risking might increase the very thing it aims to mitigate for a more transparent market.”

That is why it is crucial for governments to establish a clear position on where the entire country stands in terms of risk tolerance. “Regulators implement changes that are passed down to them by the government. If the latter clearly communicates their stance beforehand – there is less room for distrust and ambiguity from the business’s perspective too.”

Agnė Selemonaitė, Board member of ConnectPay

Agnė Selemonaitė, Board member of ConnectPay

Selemonaitė argues that FIs should retain a healthy risk appetite and pool more resources into controlling dubious activities, rather than rely solely on de-risking as the basis for risk mitigation. “De-risking is a necessity – we have leveraged the practice ourselves. However, we are more focused on enhancing our overall risk control capabilities.”

She also raises the idea that sharing the market between banks and EMIs may be even more reasonable in terms of keeping risks at bay. “EMIs are more agile and prone to technology innovation, this allows them to have laser-focus on a single sector and become experts on its common threats. Thus deliberate market division creates the conditions for more strategic risk management across the sector.”

According to her, encouraging a dialogue between the regulators, fincrime watchdogs, market players and other institutions is equally important, as they determine the ins and outs of de-risking. Selemonaitė notes Lithuania’s State Tax Inspectorate (in Lithuanian – VMI) initiative as one of the examples of encouraging back-to-back communication: instead of handing out fines for possible compliance violations, they reported them back to the companies and gave a timeframe to address the issues. “In 6 years, this helped cut down on the auditing almost twice, as well as increased general trust in VMI, which rose from 25 to 75 percent, showing just how important it is to maintain a direct line of communication between regulators and regulatees.”

The TMNL initiative in the Netherlands is also a good example of how consistent dialogue can pave the way for more efficient and transparent process control. Following the initiative, banks are working closely with government parties, such as the Ministries of Finance and Justice and Security, to combat threats related to AML/CTF compliance via real-time transaction monitoring network.

“A joint approach on detecting suspicious patterns enables to take a firmer stand towards mitigating risks, emphasizing the point that, essentially, this is a two-way street: further growth and security in the sector depends on both sides’ efforts to keep communication open and transparent.”

Overall, refusing to work with certain customers or markets focuses only on avoiding risks. As she summarized, “the main goal should be not to shy away, but to increase the capacity to control risks on your own terms.”

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Finance

Cash and digital payments – a balancing act to aid financial inclusion

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Cash and digital payments – a balancing act to aid financial inclusion 2

By Matthew Jackson, Head of Partner Development, EMEA at PPRO

The cashless debate is one that continues to spark both conversation and controversy. The pandemic, which has seen many merchants discourage the use of cash to limit the spread of the virus, has accelerated these discussions. M-Pesa, a Kenyan mobile money transfer service, for example, waved its fees to support the move away from cash during the pandemic. Today, many global economies are now questioning whether they should continue to offer cash payments or go cashless by converting solely to digital. Critics say this move would disenfranchise unbanked, cash-dependent consumers and does not drive financial inclusion, while others claim that a failure to go cashless limits innovation in the fintech sector. So, what exactly is the answer?

The solution lies somewhere in the middle.

The truth is cash and digital payments don’t have to be mutually exclusive; this is not a zero-sum game as the two payment options can exist together. According to recent PPRO data, over half of US and UK consumers will stop the checkout process if it is too complicated or their preferred methods are not available. Consumers prefer having multiple payment options, whether it be using a bank transfer, a credit card, a mobile wallet or even cash. Payment flexibility is a crucial factor in offering a seamless checkout experience. Some shoppers never carry cash while others view cash as the only way they want – or are able – to pay.

The key is for merchants to offer a personalised experience for each and every consumer.

The future of cash

Despite a seemingly rapid shift towards digital payment methods, cash is not going anywhere. Many regions across the globe are tied to cash-based payments. For example, in Latin America, 21% of e-commerce transactions are completed by cash. Via cash vouchers, many consumers are able to access the global, online marketplace: at the checkout page, consumers are shown a barcode for their order. They then take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.

Cash is often preferred for a plethora of reasons: It can be easier to use cash for smaller purchases, older consumers may be wary of digital payment methods, and avoiding credit can help shoppers stay within budget.

Conversely this  year, Bristol was revealed as the contactless capital of the UK, with London leading the way when all card payment types were considered. Tottenham Hotspur’s brand new stadium was also the first stadium in the UK to go completely cashless in a bid to provide the best possible fan experience. The stadium claims fans can now expect increased service speed, shorter queue times and better hygiene as staff won’t be handling cash. With many other venues following this trend, merchants must be able to provide multiple options to consumers or risk excluding part of the market.

Ensuring inclusivity with digital payments

Financial inclusion is not just limited to offering cash payments. Each region has its own nuances that influence consumer payment preferences. Consumers want to pay with the payment methods they are comfortable with; a majority of online shoppers will abandon their cart and purchase items on another site if they aren’t offered their preferred way to pay.

Local payment methods serve as the bridge to connect shoppers with merchants across the globe.

A great example of this is the rise of the mobile payment method M-Pesa in Kenya. According to PPRO research, more Kenyan consumers have a smartphone (60%) than a bank account (56%). Payment innovations have helped solve consumer needs and enable financial inclusion by turning a smartphone into a virtual bank account. Similarly, in southeast Asia, GrabPay, which started out as food delivery and on-demand taxi app, has evolved into a leading payment method used by 115 million consumers across the region. These sentiments resonate in the UK as well with 45% of UK consumers believing cash will be a thing of the past in just five years.

Striking a balance

Whatever the way forward, ultimately payment methods need to enhance the consumer shopping experience and a combination of  both cash and digital payments is a way to enable this. For many regions the lines between cash and digital payments continue to blur.  For example, in Argentina, Mexico and Brazil, cash-based payment methods like RapiPago, Oxxo and Boleto Bancario give many cash-dependent consumers a chance to shop online. Merchants must come to realise that cash can actually complement many digital payment methods, not necessarily restrict them.

To be able to continue to satisfy the needs of all consumers, merchants need to understand the factors driving consumer behaviors around the world and offer the specific local payment methods to fulfil those needs. In some cases, this is cash and others a digital method. Having a choice is what will not only drive inclusion but also increase sales around the globe. Innovation does not necessarily mean cashless, but rather the industry creating solutions to solve consumer needs.

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Finance

The value of digital identity in payments

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The value of digital identity in payments 3

By Vince Graziani, CEO, IDEX Biometrics ASA

In ever more challenging times, the payments industry needs to maintain trust by finding a way to protect consumers from the constant threat of payment fraud and theft. Consumer’s wishing to limit physical contact during the current pandemic has led to the popularity of contactless payments which has accelerated in multiple territories.

In the US, one in five shoppers have made a contactless payment for the first time during the pandemic according to research published in August by the National Retail Federation and Forrester. The bad guys have unfortunately taken note. This has led to a real need for the industry to fight back with enhanced security.

At the 2019 Money2020 Europe conference, there was a universal call for a comprehensive form of digital identity (ID) to enable digital payments. A form of digital identity that would make cashless payment interactions – secure, intelligent, efficient and private. The feeling was unanimous: without functioning digital ID, the payments revolution will stall.

Unlocking the payment ecosystem

In an increasingly connected world, consumers find themselves needing to authenticate their identity daily. Whether that be with financial institutions, retailers, government departments or healthcare providers. Yet, it is rarely known where consumer data is stored, how secure it is or how it may be traded. Privacy regulations such as the European Union’s General Data Protection Regulation (GDPR) have attempted to restore some trust, but the industry still has a way to go.

Currently, authentication is fragmented and unwieldy. It requires a mix of hardcopy documents, online login credentials and digital wallets. This is not only frustrating for consumers but leads to the reuse of passwords and PINS that make the user vulnerable to fraud. Mastercard believes there is a clear need for a verified identity that is accepted globally and across multiple digital touchpoints and doesn’t involve aggregating more information in potentially vulnerable data stores, but instead gives the individual control over their identity data.

An integrated digital ID scheme would enable the payments industry to fight fraud on a global scale. It would also meet the pressing need for a payment authentication system that consumers can access anytime, anywhere, and on any device. This joined-up approach is vital to ensure no consumer is left behind as the world continues its digital transformation.

Providing access to a singular, unified digital ID will not only streamline the identity process, but also unlock new and enhanced consumer experiences during this digital transformation. Particularly in the new breed of smart buildings and cities, where everything from travel to payment systems will be connected to a user’s identity.

What form should our digital ID take?

While the need for digital ID is well established, the form it will take is less clear. There are two main challenges that payment providers need to overcome with a potential new identity solution: onboarding new users and ensuring the digital ID is compatible with all transactions.

Placing individual consumers at the centre of their own digital interactions will ensure confidence and broader adoption of new technology payments and services. Yet, for this to be successful, the payments industry must adopt a process that is simple, familiar and easy to understand.

Fingerprint biometrics as a digital identity

The use of fingerprint authentication to unlock a smartphone is now deeply entrenched. As far back as 2016, 89 percent of users with compatible iPhones were using fingerprints to unlock their devices. The solution for a frictionless onboarding has been at our fingertips the whole time.

Payment providers can incorporate fingerprint biometric sensors directly into their new breed of smart payment cards. A biometric payment card may be a new concept, but payment providers and retailers across the world are already using contactless card technology in the payment process, so it is the next logical step. Consumers are now used to carrying a card and tapping it for contactless payments. Plus, as we have seen, consumers are used to using their fingerprint as an authentication mechanism. Perhaps biometric cards could be the catalyst for financial inclusion desired by the World Bank, as they don’t require the ownership of expensive smartphones in developing nations.

Building a chain of trust with biometrics

Continuous developments in payment regulation mean that secure authentication is imperative. Under the second Payment Service Directive (PSD2) European banking regulation, all payment transactions will soon require Strong Customer Authentication (SCA) to validate users at the point of transaction to reduce fraud and increase security for customers. SCA requires two forms of authentication for every transaction above the contactless limit. While one is generally something you have like a smart card, the second can be something you are like a fingerprint.  Using a fingerprint means that it can be used across multiple platforms and is always at hand. There should be no trade-off between convenience and privacy and fingerprint biometrics delivers on that expectation.

Biometrics can play an essential role in digital ID, significantly limiting exposure to potential fraud and criminality. The addition of a biometric sensor onto a payment card creates a secure ‘chain of trust’ that indelibly connects the user to the card. Furthermore, digital ID has the scope to be extended far beyond payments and used as a unique identifier in areas such as access, government ID and even across IoT devices.

Securing the future of the payments industry

While the world is becoming ever more cashless, commentators and analysts all agree – without a fully functioning digital ID, the payments revolution will stall. As Tony McLaughlin, Emerging Payments and Business Development at Citi put it recently: “If we fix digital identity, we fix payments”. I couldn’t agree more. Both consumers and the payments industry need a user-centric digital ID that is owned and managed by the individual, so they can unlock the full advantages of a transformative digital payment ecosystem.

Using fingerprint biometrics as a digital ID in a payment card will transform the way people authenticate transactions. This integration would enable consumers to confirm their identity wherever they are, on any device, and across every transaction. It will change the face of digital identity as we know it.

We believe that digital interactions should be privacy-enhancing, secure, intelligent, and efficient. To facilitate this, consumers require a user-centric digital identity that is owned, managed, and controlled by the individual. It is time to place individuals at the heart of their digital interactions globally.

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