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PREVENTING ACQUISITION FRAUD EXPERT PANEL JUNE 1, 2018
PREVENTING ACQUISITION FRAUD
EXPERT PANEL
JUNE 1, 2018
Company Overview
• Public company, on NASDAQ: MITK
• HQ in San Diego with offices in Amsterdam, London,
and Barcelona
• Leader in financial services, Mobile Deposit at 95%
market share, and global leader in identity verification
Nearly 100% coverage of
US adult population
Over 2 billion high-value
consumer transactions
54M new identity elements / day
Unique insight into US consumers comes from the ID Network®,
the nation’s first real-time network of cross-industry identity data
Contributory Network
Traditional & Alternative
Industries
Event & Performance Data
Real-Time Updates
Over 250 leading US enterprises rely on ID Analytics solutions every day…
7 of the top 10 card issuers 6 of the top 10 financial institutions 5 of the top 5 wireless carriers
ID Analytics solves fraud, credit and identity challenges
20
15
10
5
01990 1994 1998 2002 2006 2016
Fraud Losses
2010
FICO technologyintroduced in early 90s
Percentage of global payment card traffic covered by FICO fraud solutions65%
Banks participating in FICO’s fraud data consortium – driving insight and analytic innovation
9,000
Active financial accounts protected by FICO worldwide – providing a global perspective
2.6B
Average response time for fraud decisions rendered by FICO’s low-latency real-time engine
10ms
Percent of US credit/debit cards90%
Fraud Prevention and Detection– It’s what we doLeading analytic software company, specializing in decision managementFounded: 1956NYSE: FICORevenues: $943M (2017)
10,000+ clients in 100+ countriesIndustry focus: Banking, insurance, retail, health care
20+ offices worldwide, HQ in San Jose, California2,900+ employees
AI Built To Stop Fraud Using Our
Auto Lending Data Consortium
Who is PointPredictive?
Health & Risk Metrics about Dealerships and their Inventory
• For Auto Finance Companies• Digital Surveillance Technology• Monitor Dealer Behavior• Powerbook detection• Dealer Marketing & Risk Scores
Mitek’s estimate of
fraud’s size
Recent research by
Javelin, current estimates
for overall lending fraud
losses are over $1 billion
“Potentially Randomized SSNs”
Comparing expected and observed new account application rates
0%
1%
2%
3%
4%
5%
6%
7%
Expected Volume of “Potentially Randomized SSNs”
3.6%
5.8%
Observed Volume of “Potentially Randomized SSNs”
2016 2017201520142013
2.2% of all apps
Synthetic ID Fraud: 1 in 50 use fake SSN’s
FICO estimates that fraud is10-20% of Bad Debt
(Allowance for Doubtful Accounts)
$7 billion
$0
$2
$3
$5
$6
$8
2014 2015 2016 2017
What is the size of losses?
In Billions
$6Billion Estimate 2018
Fraud Risk from Dealerships is driven by:• Need to get customers funded• Need for operating cash• Wanting to make more money
2% 3%
8%
21%
25%
17%
10%
5%
9%
4%6%
14%
23%20%
18%
9%
3% 2%
0%
5%
10%
15%
20%
25%
30%
> 3000 2k-3k 1k-2k up to 1k Same up to 1k 1k-2k 2k-3k > 3000
Mark down from advertised price Price Mark up from advertised price
Independent Franchise
5%
5% of Franchise dealers & 26% of Independents raise the sale price
more than $1,000 on averagewhen selling to sub-prime customers
26%
Independents
Franchise
Estimate of Dealer Fraud?
How Mitek defines fraud
Fraud generally is a misrepresentation of facts in order to deceive. Specific to identity, both use of true name (impersonation) and synthetic identity.
Identity theft is not so much “stealing” someone’s identity but misrepresenting identity to defraud.
How ID Analytics defines fraud
First Party Fraud
Fraudster uses own identity
AKAs:
Muling / Gaming Fraud
Diabolical Fraud
Synthetic Fraud
Fraudster establishes fictitious identity
AKAs:
“Frankenstein”
Third Party Fraud
Fraudster steals a victim’s identity
AKAs:
Identity Theft
Identity Fraud
How FICO defines fraud
Fraudulent obtaining of credit (often by falsifying information) without intending to pay it back
FIRST PARTY
Involves identity theft –Refers to fraud that is committed without the knowledge of a person whose identity is used to commit the fraud
THIRD PARTY
What is the definition of fraud?
Intentional and material misrepresentation by the borrower, dealer or fraud ring such that it impacts the decision to lend, or performance of loan.
*As defined by the Auto Lending Fraud Consortium 2017
For managing dealerships, we suggest a focus on “suspicious activity” whether or not it is fraud.
Dealership Suspicious activity includes:
• Abusing what the lender or consumer expects
• Behavior that seems underhanded (e.g. might be illegal or fraud)
• Doing this repeatedly or in a systematic way
Much easier! “Fraud” is too strict. When fraud is the criteria, lots of borderline stuff gets through. Focus on suspicious activity to protect your business and run a clean operation
How we define the “Fraud” problem
The biggest gaps in the industry today
Understanding what is normal loss vs. fraud loss.
The biggest gaps in the industry today
Income Verification
Accurate Fraud
Measurement
Aligned Incentives
The biggest gaps in the industry today
Data Aggregation and Orchestration: Access and decision with a coordinated approach across critical internal and external data including device, geolocation, email reputation, and more
1
Fuzzy matching: Give your fraud team control to manage strategies across key indicators such as shared personally identifying information and application metadata
2
Investigate Smarter: Compare records-side by-side with automatic match highlighting, add fraud elements to Hotlists and Fraud Files with one-click, and visualize connections and patterns across multiple degrees of separation
3
Dashboards and Reporting: See trends of growing cases and fraud types, operational indicators including applications processed by channel, and heat map the problem geographies
4
Layered Controls Are Essential to Stop Brute Force Attacks Rapidly, Agilely, and Efficiently
What are the biggest gaps?
1 No Shared Industry Fraud Data
2
3
No Holistic Application Fraud Scoring
Limited collaboration on stopping serial fraudsters
The Gaps Are Large in Auto
Anticipating which dealerships will still be here tomorrow. Too much focus is on loan level issues. However predicting dealership “business” risk is important too. There is great data to facilitate this, easily accessible. But only a few companies are doing it.
What is the biggest gap?
What is preventing the industry
from moving forward?
• Cost – change is expensive
• Complacency – status quo is easier
• Incentives – are not always aligned
What is preventing the industry from moving forward?
Focus on Market Share
Regulatory Focus
Fraud Fighting is
Collaborative
What is preventing the industry from moving forward?
CALL TO ACTION1
INDUSTRY COLLABORATION2
What prevents industry from moving forward?
Only 33% of auto fraud is known
67% of fraud isHidden below thesurface.
2 issues:
a) Profitability. The industry is not getting hammered yet. This will change when volumes level off in the coming years especially as dealers struggle.
b) Hunger for volume. Lenders may not be interested in scrutinizing too closely, knowing they have a good repo strategy if the deal fails.
What prevents the industry from moving forward?
How has interest in fraud prevention changed over time? What is driving the
change?
More and more interest in combating
fraud. Terrorist organizations and
organized crime have increased the
stakes. EMV, data breaches, and
increased usage of digital channels
are creating gaps and driving change.
How has interest in fraud prevention changed over time? What is driving the change?
Remote Originations
Economic Cycle
Data Proliferation
How has interest in fraud prevention changed over time? What is driving the change?
Explosion of new productsand channels How to monitor all of these, in real-time?
Risk management complexities: fraud and compliance monitoringHow to get a complete view of customer with limited information?
The Growing Need for Improved Application Fraud Controls
Rising costof fraud and compliance monitoring How to improve a company’s ability to prevent bad people from entering the books and to know when a good customer goes bad?
30
How has interest in fraud prevention changed?
80%
20%80% of lenders have increased their anti-fraud spending year over year for last 2 years
*PointPredictive Auto Lending Fraud Survey 2017
Spending more
Spending same
How has interest in fraud prevention changed over time? What is driving the change?
Companies are now experienced getting burned by rogue dealers. So now we have interest in learning how to anticipate that. Also lenders are seeing how badly priced loan contracts hurt both the consumer and lender. Only the dealer benefits.
How does Mitek see the industry
evolving digitally to address fraud?
Elimination of knowledge-based
authentication. Multi-factor identity
techniques combining verification
of identity documents and devices
combined with biometrics.
How does ID Analytics see the industry evolving digitally to address fraud?
Consumer Convenience
Data ScienceJudgmental Lending
Connected Technologies
How does FICO see the industry evolving digitally to address fraud?
Converge controls across products, channels, and threats for a holistic fraud program1
Free data from silos2
Invest in analytics3
Leverage cross-industry expertise, experience, and lessons learned4
How will fraud technology evolve digitally?
• Bank Statements• Employment• Identity• Drivers License• Income• Utility Bills• SSN
100% of Verifications Move To Mobile
Use digital surveillance to:
Monitor and measure dealers via their website.
• It’s more affordable than “on site” audits, usually can replace them
• It reveals how much the dealer invests in advertising
• It reveals how many cars they move in a month
• It predicts a dealer’s business health
• It estimates the volume you can expect to receive from a dealer
Digital surveillance is done via web crawling, just like Google.
Evolving digitally to address fraud…
How are companies using the Mitek
solutions successfully?
Three primary adoption paradigms:
• Front-end of process, identity verification as
part of application/onboarding
• Back-end of process, identity verification a
point of transaction or ahead of final funding
• Yellow-path, failure of primary mechanism,
waterfall to IDV
How are companies using ID Analytics’ solutions successfully?
ID Score identifies a portion of the population with an 11% credit bad
rate (overall credit bad rate is 3.4%)
0%
2%
4%
6%
8%
10%
12%
0%
1%
2%
3%
4%
5%
6%
7%
8%
200 300 400 500 600 700 800 900 1000
Bad R
ate
% o
f P
op
ula
tio
n
ID Score
Overall Population Bad Rate
Note: 45,000 credit bads
How are companies using the FICO solutions successfully?
Challenge: Check each airline passenger against a series of watch
lists, no fly data, and white lists to determine whether they can fly,
in order to keep terrorists off airplanes
Solution: FICO® Identity Resolution Engine technology
Results:
• Performs 5+ million searches per day with burst rates of over
500 per second
• Searches in real time through data spread across dozens of
departments and locations
How are companies using PointPredictive successfully?
Reduce EPD Loss by 50%
Accelerate dealer detection up to 120 days
Streamline 20% of low risk applications
0%
2%
4%
6%
8%
10%
12%
14%
16%
Loan Apps Marked up > $2k• Reducing contracts submitted with
large markup
• Faster review on questionable deals, faster funding
• Calling out dealers on bad behavior, improving overall behavior
• Floor plan lenders track how their inventory is marketed online
How companies use us successfully
… and finding the best dealers to target
What is the role of emerging technologies
like AI and biometrics in fraud prevention?
AI, specifically machine learning, and
biometrics are enabling automated and
real-time experiences that outperform
human identity verification tasks.
What is the role of emerging technologies like AI and biometrics in fraud prevention?
Artificial Intelligence
Machine Learning
What is the role of emerging technologies like AI and biometrics in fraud prevention?
Advanced threat detection using machine learning
Continuous risk scoring of devices and users through proven streaming behavioral analytics
Broad detection coverage of threat types: malware, stolen credentials, data exfiltration, and insider threat
A standard, trustworthy measure of enterprise security risk
Assess and monitor network risk introduced by vendors and partners
Cloud-based platform continually monitors Internet-scale data for changes in security indicators
What is the role of emerging technologies AI and Biometrics?
The sole role of these technologies is to enable lenders to achieve the perfect, frictionless balance between fraud and sales
To control dealership fraud, Digital Surveillance is the future.
Digital surveillance is monitoring and measuring a dealer via their website.
It scales better than “on site” audits and usually replaces them.
Digital surveillance is done via web crawling, just like Google
What emerging technologies will help…
What is the future of fraud?
More fraud! As some companies adopt stricter practices,
fraud will shift to other companies that maintain relaxed
policies
In auto finance, 10 years from now the concept of car
ownership will change. Autonomous vehicles, alternative
financing models, and sharing economy will drive
competition in this space.
What is the future of fraud?
What is the future of fraud?
Merchant
CNP Fraud
App Fraud
Internal
ATO
RTP
Counterfeit
DDA
Threat Environment
Control Set Relative to
Peers
Payment Trends Regulation
Stolen
Emerging/Evolving
Existing
What is the future of auto lending fraud?
• Shared Intelligence
• AI enabled detection
• Mobile enabled verifications
• STIP Streamlining
What is the future of fraud?
Fraudster dealers seek the path of least resistance.
They can either steal from lenders or consumers.
If lenders protect themselves effectively, the fraudsters will go after consumers.
Therefore, the future of fraud is in protecting consumers from illicit schemes
Contact
Steve Craig
Director, Product
Mitek Systems
Or follow on LinkedIn
Contact
Criag Stokum
Sales Director, Auto Finance
(858) 312-6389
Garient Evans
VP, Client Services
(858) 312-6273
More Information?
Frank McKennaChief Fraud [email protected]: www.pointpredictive.comBlog: www.frankonfraud.com
Joel Kennedy
Director
240.308.2169
www.spinnakerconsultinggroup.com
