Anti-fraud intelligence

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WYLDE: One area we are looking at is detecting suspicious behaviour by our internal staff.

HSBC's global head of fraud risk explains how modelling customer behaviour could help spot fraudulent transactions.

Lenders may be increasing their efforts to tackle fraud, but criminals are never slow to find weaknesses in each improvement in processes or technology.

As the world's second largest bank by market capitalisation, and with operations in 83 countries, HSBC faces all kinds of attempts at fraud by unscrupulous individuals.

As a result, it is constantly improving its ability to detect and defend against criminal activity, and part of this initiative will see it take a completely new approach to detecting and defending against fraud.

The group recently announced its investment with technology vendor SAS to develop a fraud monitoring solution that will initially be used in the fight against plastic card fraud.

"We believe it takes us a significant way forward in the fight against card crime," says Derek Wylde, head of group fraud risk, HSBC Holdings. "It's a true partnership because we didn't just go to SAS and say sell us your product, they actually developed it for us."

However, the product will also be sold to other card issuers, and in the UK, HBOS (Halifax Bank of Scotland) has already purchased it.

HSBC does not consider that it will be losing a competitive advantage by allowing its rivals to use the solution it has helped develop. "We actually prefer SAS to sell it to other banks and card issuers," says Wylde. "The reason we encourage that is we want to share the data."

Wylde says there are generally two ways to construct fraud models: with just the data available to a particular institution, or as part of a group with other banks.

"I believe that the consortium way gives you better results, because they may be seeing fraud that you're not currently seeing," he says. "Sharing the data is always a more effective approach - you find more fraud and you find it early, in my experience. We want to take that data sharing concept forward with SAS, and with any other banks or card issuers that will buy the product."

The new solution improves on HSBC's previous software because it can score every transaction in real time, producing a figure that represents the probability that a transaction is fraudulent.

Its earlier solution could only score a fraction of its customers' transactions. The new solution also works with a larger set of rules and uses less IT resources.

"It can work faster, it can work better, and we think we got quite a good deal on it in commercial terms, so for us it's a bit cheaper than our previous systems," says Wylde. "It stops more fraud and stops it earlier."

Another big advantage is that SAS has developed customer signatures. "The system learns how you or I as card holders typically spend and it profiles that," explains Wylde. "It then compares your historic spend with the spend it's seeing on your card today, and throws out anomalous spending."

If the system sees patterns of spending that resemble fraudulent transactions it has seen in the past - for example, spending in merchants, regions or countries with a high level of fraud - then it will raise an alert.

It will generate a higher alert level if the customer has never spent in that retailer or visited that country before.

When an alert is raised, HSBC will first attempt to contact the customer to inform them of the activity and ask them to confirm whether it is genuine.

But if it is not possible to contact the customer, the bank faces a tough decision: either block suspicious transactions, which could inconvenience some customers making payments legitimately; or allow them to go through, running the risk that a customer's credit line could be used up by criminals.

"There's a huge customer service/fraud management balance in action," says Wylde. "Trust me, we're fully aware of that. That's a balancing act we have to manage every day, and it's one of the toughest things we have to do."

The SAS system currently covers 30 million cards in the US, and will be rolled out in the UK later this year, to be followed by Hong Kong and three or four other countries in the Far East.

HSBC has a joint venture in China with Bank of Communications to issue cards and is currently discussing the prospect of deploying the solution there.

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