Payments Fraud Management - Space for service offerings

AFP has published this year's report on Payment Frauds last week. As always, year after year more corporates have indicated they were victims of payment frauds.

From Banker's point of view, this highlights the need to strengthen the service offerings addressing the open risks foreseen by corporates in this domain, parallely to strengthen the operational process, system and people in this line of business. Operational risk as quantified for analysis in Basel II norms translates to quantify fraud risk due to laxity in the above three tiers of operational processes.

Positive Pay is identified as one of the preferred ways to address frauds, as reported by respondents of the AFP survey. Since Banks shifts the final decision on payment to the payer, there is least risk of fraud or Banks transfer risks to customer to take charge of decisioning, since payer becomes the initiator and responder in the cycle, thereby reconciling what he originated and what comes through stack of payment entities to his account. Over and above item processing, if Bank maintains mandates for all debits to customer account, it would be a better practice from fraud management point of view. SEPA Direct Debit scheme planned for launch in Nov 09, envisages mandate prenotification and mandate information exchange with Creditor's Bank (ODFI) and Debtor's Bank (RDFI). Banks are required to validate mandate under defined time lines where first or one-off payments have wider time window considering Debtor Bank's initial responsibilities of validating the mandate probably with Debtor on authenticity of payment.

Bank is an agent of customer and needs to act as per terms of mutual agreement beyond signed letters. Protection of customer's financial interest need to be the primary interest of bank. Confidence of customer in Bank's services, the confidence that Bank has adequate services and processes to protect their interests would only bring in trust and relationship to Bank in big way.