TowerGroup Research Examines Emergence of Enterprise Fraud Management in Financial Services

NEEDHAM, MA, June 29, 2005 - As fraud-related news such as the recent theft of millions of electronic credit card records continues to top headlines, new research from TowerGroup underscores the need for more holistic approaches to combating fraud on the part of financial institutions.

TowerGroup asserts that while many financial institutions fight fraud effectively in certain areas of their business, many do so poorly - if at all - across their full spectrum of products and services.

"The financial services industry's response to fraud has historically been to react with point solutions directed at each specific area of threat," said Virginia Garcia, director in the Financial Services IT Strategies & Investments research service at TowerGroup and author of the research. "Over time, institutions have assembled a menagerie of disconnected solutions that vary effectiveness, resulting in a fragmented, inadequate view of the total fraud landscape. An enterprise approach to fraud management is needed so financial institutions can adapt to the shifting sands of fraud in a proactive, timely and cost-effective manner."

Highlights of the research include:

- TowerGroup believes the most reliable indicator for fraud losses across the global financial services industry is found in its annual operational losses of over US$55 billion. TowerGroup estimates that between 20% and 35% of the $55 billion in operational losses is actually fraud. However, these percentages represent a broad estimate and don't include fraud that is never detected. Nor do they take into consideration the misclassification of some percentage fraud as bad debt.

- New fraud types are continuously emerging for which financial institutions have no immediate response - which can lead to losses occurring for months, if not years, before hatches are battened down. Apart from new fraud types, the span of fraud is also widening as criminals coordinate fraud attempts across multiple delivery channels and lines of business.

- In the traditional "siloed" approach to fraud, solutions addressing specific types of fraud sit at the core of fraud strategy. In contrast, enterprise fraud management goes far beyond actual antifraud systems to include best practices in data and business process management, analytics, integration, and data protection.

- Information technology alone is not enough for effective fraud management. Institutions must revamp business processes to manage fraud across the customer life cycle - for example, by streamlining and automating account opening and reporting. In addition, financial institutions must implement internal controls to reduce the opportunities for internal fraud.

"Enterprise fraud architectures can help combat fraud as it occurs to protect the customer relationship across the life cycle and relationship portfolio,"
noted Garcia. "While institutions cannot completely eliminate fraud, they can put architectures in place to detect and report it in a timely manner to minimize impact on the institution, customers, shareholders, and other constituents. Those that approach fraud management as a mandate to protect their reputations and build customer trust will also improve operational efficiencies and see significant payback to their bottom line through reduction of losses."

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