CARD FRAUD MANAGEMENT SYSTEMS

(1)

CARD FRAUD MANAGEMENT SYSTEMS

Technology Analysis Abstract*

November 2012

CEB TOWERGROUP

RETAIL BANKING & CARDS PRACTICE

Vendor Assessment & Quantitative Teams

* For full copies please contact Peter Johnson at CEB TowerGroup

Brian Riley

Senior Research Director, Retail Banking & Cards Practice

(2)

Retail Banking and Cards Practice

Executive Director Aaron Kissel

Managing Director Joanne Pollitt

Senior Research Director Brian Riley

Quantitative Insight Team

Project Manager Carolina Valencia Research Analyst Ben Fieselmann

Vendor Assessment Team

Project Manager Magda Rolfes Research Analyst Helen McCann

COPIES AND COPYRIGHT

As always, members are welcome to an unlimited number of copies of the materials contained within this handout.

Furthermore, members may copy any graphic herein for their own internal purpose. The Corporate Executive Board Company requests only that members retain the copyright mark on all pages produced. Please contact your Member Support Center at +1-866-913-6450 for any help we may provide.

The pages herein are the property of The Corporate Executive Board Company. Beyond the membership, no copyrighted materials of The Corporate Executive Board may be reproduced without prior approval.

LEGAL CAVEAT

CEB TowerGroup has worked to ensure the accuracy of the information it provides to its members. This report relies upon data obtained from many sources, however, and CEB TowerGroup cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, CEB TowerGroup is not engaged in rendering legal, accounting, or other professional services. Its reports should not be construed as professional advice on any particular set of facts or circumstances. Members requiring such services are advised to consult an appropriate professional. Neither The Corporate Executive Board Company nor its programs are responsible for any claims or losses that may arise from a) any errors or omissions in their reports, whether caused by CEB TowerGroup or its sources, or b) reliance upon any recommendation made by CEB TowerGroup.

(3)

3

ANALYSIS SCOPE & METHODOLOGY

In response to feedback from our membership, CEB TowerGroup and Corporate Executive Board developed this technology analysis product to identify key components of a technology investment decision and effectively compare vendor technology products. Our methodology comes from the knowledge that investment decisions center around the benefit to the individual and enterprise of a technology rather than the feature set alone.

This analysis is tailored to reflect the needs of the end user, in this case the card fraud management system user, to diagnose the technology attributes particular to a firm, and to effectively identify vendor products that align with the firm’s needs. To that end, CEB TowerGroup conducted a series of interviews and surveys with financial services executives, industry experts, and vendors regarding card fraud management technology. The results of this research formed the basis of our anatomy and informed the proprietary five point rating system on which we scored individual products.

CURRENT MARKET & FUTURE INVESTMENT

Rising consumer confidence swells payments volumes and increases demand on fraud management systems. US Consumer Sentiment rose to 68.7 in 2012, the highest it’s been since 2008. As customers’ confidence in economic spending conditions has increased, payment volumes in the top four credit and charge card companies have also increased by up to 16% from 2009 to 2011. This growth is putting new strains on card fraud management systems, forcing executives to reconsider their fraud management strategies.

New innovations in card usage are accompanied by new risks. The number of card not present transactions, stimulated by the increase in mobile and internet banking transactions, will have increased tenfold between 2009 and 2013. Thirty-four percent of fraud-related losses are already attributed to card not present, making this the leading type of global fraud loss. As this type of fraud increases, issuers will continue to invest in fraud mitigation tools to shield against new risks.

Investment in fraud management expected to increase most in developing markets. IT Spend for card products in established markets will remain relatively flat through 2016, but spending is expected to increase by a CAGR of more than 7% in Asia and Latin America. Meanwhile, emerging technologies in the realms of product improvement, performance optimization and operational enhancement are expected to effect a major shift in the industry’s methods of fraud management.

(4)

VENDOR LANDSCAPE & PRODUCT RANKINGS

CEB TowerGroup identified vendors for this analysis based on expert opinion, product maturity, size of installations and technological innovation. This technology analysis includes ACI Worldwide, Alaric, BPC Technologies, FICO, NICE Actimize, Retail Decisions, SAS, and Tieto Corporation. Please note that this analysis compares software platforms only. CEB TowerGroup included profiles of selected Service Models to illustrate how operational enhancements can add depth to platform offerings and recognize that not all FSIs are inclined to manage their software requirements. By combining our qualitative and quantitative data from interviews and surveys of industry experts, financial institutions, and vendors, CEB TowerGroup identified 22 attributes that define a “best-in-class” card fraud management technology. These attributes are grouped into four categories that highlight a firm’s user, customer, and enterprise needs. Product rankings are based on our proprietary five point rating scale for each of the 22 “best-in-class” attributes. The top vendors were designated as best-in-class performers based on their composite scores in each of the technology categories below.

BEST-IN-CLASS TECHNOLOGY CATEGORIES

Financial services executives investing in Card Fraud Management technology should use the Card Fraud Management Systems Diagnostic Anatomy on page 21 to select the vendor that best aligns with their firm’s needs and business objectives.

• FRAUD ANALYTIC TOOLS includes those attributes that provide metrics to card issuers that enable fraud detection, offer insight into risk, and help shield against loss to the FSI.

Leaders are ACI Worldwide, FICO, and SAS (in alphabetical order)

• ENTERPRISE OPERATIONS includes those attributes that affect the comprehensive handling of an account and overall customer exposure across other retail banking products.

Leaders are ACI Worldwide, FICO, and NICE Actimize (in alphabetical order)

• WORKFLOW MANAGEMENT includes those attributes that help card issuers effectively process work by streamlining account and transaction flows, deploying operational strategies, and bringing accounts to a final disposition.

Leaders are ACI Worldwide, FICO, and NICE Actimize (in alphabetical order)

• ENTERPRISE SUPPORT includes those attributes that influence the enterprise’s tactical fit and strategic alignment with the vendor. Leaders are ACI Worldwide, FICO, and SAS (in alphabetical order)

(5)

Source: CEB TowerGroup Research

Mission Statement: CEB

TowerGroup technology

analysis process provides a

customer-driven,

transparent, and unbiased

review designed to drive

informed business decisions.

 Current Market: Provides a view of industry and customer changes, and best practices for technology investment and implementation.  Future Investment: Forecasts IT

spending and identifies emerging technologies and innovations.  Vendor Landscape: Provides an

overview of key vendors, product features, and market position.  Product Rankings: Highlights

best-in-class attributes and shows a comparative perspective of leading products.

Technology Analysis Presentation Roadmap

Current

Market

Investment

Future

Landscape

Vendor

Ranking

Product

Market Drivers: Assess changes in the industry and customer behavior

Spending Forecasts: Benchmark global Card Fraud Management IT spending in key technology areas

List of Players: Identify key technology firms and their products

“Best-in-Class” Products: See the top products

based on our anatomy categories

Case Study: Learn how a leading bank implemented a new Card Fraud Management system to transfer to a single platform Emerging Technology Landscape: Pinpoint emerging technologies and innovations Diagnostic Anatomy: Choose your investment priorities with our proprietary framework

Ranking Methodology: Review the key

components of an investment decision

Feature Audit: Compare the relative feature offerings by vendors

Vendor Profiles: Understand the key differentiators between products

TECHNOLOGY ANALYSIS OVERVIEW

(6)

6

Current Market

Future

Investment

Vendor

(7)

EVEN IN A RECESSION, THE CARD BUSINESS STILL GROWS

Although consumer

confidence hit a low point in

2011, customers are growing

more confident, so US

payment volumes are

increasing.

Customer sentiment was at its all-time low at the end of 2011 with 40.9 US Customer

Sentiment, but customers bounced back in 2012 raising the US Consumer Sentiment to 68.7, the highest it’s been since 2008.

As customers’ confidence in economic spending conditions has increased, payment volumes in the top four credit and charge card companies also increased by up to 16% (Visa) from 2009 to 2011.

Source: US Consumer Sentiment Index Conference Board, Payments Source

US Consumer Sentiment Index

Indexed at Year 1985=100, 2000 – 2012 95.2 40.9 68.7 20 40 60 80 100 120 140 Q1 2 0 0 0 Q1 2 0 0 1 Q1 2 0 0 2 Q1 2 0 0 3 Q1 2 0 0 4 Q1 2 0 0 5 Q1 2 0 0 6 Q1 2 0 0 7 Q1 2 0 0 8 Q1 2 0 0 9 Q1 2 0 1 0 Q1 2 0 1 1 Q1 2 0 1 2 $1,934 $1,752 $1,860 $2,039 2008 2009 2010 2011

Discover* American Express

MasterCard Visa

US Annual Credit and Charge Card Payment Volumes

(8)

1.2 3 5.6 9.4 14 2009 2010 2011 2012P 2013P

NEW ENTRY POINTS BRING ADDITIONAL RISKS

As issuers empower users

with innovative ways to use

their cards, new risks emerge

in the card fraud industry.

In 2011, fraud rates hit .87% when a card was not present, and were only .05% when the card was present. As card not present fraud increases, issuers will continue to invest in fraud mitigation tools to shield against new risks.

As more people use the internet for online banking, online transactions are expected to increase by a multiple of 1.5 by 2013.

Similarly, the number of mobile banking transactions in 2013 will skyrocket to over 10 times the number of mobile

transactions in 2009.

23.3

26.8 30

33.3 35

2009 2010 2011 2012P 2013P

US Online Banking Channel Growth

Billions of Transactions, 2009-2013P

US Mobile Banking Channel Growth

Billions of Transactions, 2009-2013P

1.5X 10.7X

Source: CEB TowerGroup

Card Present vs. Card Not Present Fraud Rates

Percentage of Transactions, 2006-2011 1.10% 1.30% 1.10% 0.90% 0.88% 0.87% 0.09% 0.08% 0.08% _0.06% _0.05% _0.05% 2006 2007 2008 2009 2010 2011

Card Not Present Card Present

(9)

22%

Lost & Stolen

CARD FRAUD EVOLVES THROUGH MULTIPLE CHANNELS

Financial institutions

experienced multiple types

of fraud within the past year,

and card not present causes

fraud rates to skyrocket.

Thirty-four percent of losses are now attributed to card not present due to the increase in mobile and internet banking transactions. This has made card not present the leading type of global fraud loss.

As mobile payments continue to develop, almost 92% of financial institutions anticipate a change in their fraud strategies.

Q: As mobile payments start to develop, do you anticipate a change in your fraud strategies?

Percentage of Respondents, 2012

Source: CEB TowerGroup, CEB TowerGroup Fraud User Survey 2012

31%

Counterfeit

Global Fraud Losses by Type

Percentage of Respondents, 2011 13% Other 34% Card Not Present 91.7% Yes 8.3% No

(10)

INVESTMENT IN FRAUD SYSTEMS DECREASES LOSSES

As the majority of firms only

have somewhat effective

fraud controls, firms are

looking to enhance their

fraud systems.

Sixty-six percent of firms say that their anti- fraud security controls are somewhat effective, only 10% say they are

effective, and 18% think they have ineffective fraud controls.  When asked to define the

changes made at their firm that contributed to a decrease in losses, 82% of executives said they enhanced their fraud monitoring system.

Source: 2012 Faces of Fraud Survey (ISMG), 2012 Payments Fraud Survey Bank of Dallas

82% 73% 64% 46% 46% Enhanced Fraud Monitoring System Staff Training & Education Enhanced Internal Procedures Adopted or Increased Use of a Financial Service Enhanced Authentication Methods

Changes Made Contributing to Decrease in Losses

Percentage of Respondents, 2012 66% Somewhat Effective 12% Not Effective 10% Very Effective/ Effective 6% Unsure

Current Effectiveness of Card Fraud

(11)

Challenges

Technology Enhancement

Operational Impact

• Disjointed homegrown debit

card fraud management technology inhibits full view of customer transactions across the enterprise.

• New debit card fraud

management technology easily integrates with other platforms, allowing fraud managers to view all customer transactions across the enterprise.

Greater customer visibility equips fraud managers with the necessary perspective to better anticipate and

identify fraud. • Three discrete fraud

management systems exist for credit card, debit card, and nonmonetary transactions, preventing cross-system improvement

• Consolidated fraud management systems enable systems to learn from each other, facilitating mutual cross-system improvement.

Integrated fraud management capabilities eliminate redundancies and increase sophistication of fraud

identification processes. • IT intervention is required for all

rule additions and modifications, slowing bank’s response to the ever-changing landscape of fraud.

• New fraud management system pushes operational controls to fraud managers, eliminating delays and permitting real-time new rule implementation.

Improved agility enables fraud management system to adapt to changing trends and quickly stifle new

methods of fraud.

Source: CEB TowerGroup, Standard Bank, FICO.

CASE STUDY: TECHNOLOGY EMPOWERS THE FRAUD MANAGER

Standard Bank uses

improved technology and

enhanced training to

transform the role of the

fraud manager.

Standard Bank invests in a new card fraud management technology solution to increase fraud managers’ visibility, decrease the required degree of low-skill manual intervention, and improve the fraud

manager’s ability to react and adapt to changing patterns in fraud.

Standard bank is a publicly traded company headquartered in Johannesburg, South Africa. It operates in 18 countries on the African continent and is the largest African bank by assets and earnings. Its three main pillars of business are Personal & Business Banking, Corporate & Investment Banking, and Wealth & Liberty.

(12)

A comprehensive and

standardized training

curriculum equips the fraud

manager to fully optimize

the new technology,

generating quantifiable

operational results.

Improved Fraud Detection

Source: CEB TowerGroup, Standard Bank, FICO.

Effective implementation that supports best practice techniques coupled with continuous knowledge transfer from world class fraud experts enables Standard Bank to achieve impressive results.

DEMONSTRATED RESULTS

CASE STUDY: TRAINING ENRICHES OPERATIONAL SKILLS

10%

65%

Old System New System

Key Results 48% Reduction of Net Fraud

Losses by start of Phase 2 67% reduction in Net Fraud

over 18 months Reduced fraud transactions per

case by 68% 86% increase in operational

productivity Training Curriculum

• Core banking system functionality • Volume sensitivity

• Customer engagement techniques • Effective Metrics

• Targets and expectations • Key deliverables of the

environment

Standard Bank collaborates with a technology vendor to produce a comprehensive training curriculum.

Standard Bank and vendor implemented a one year skills transfer session

Rise of highly skilled fraud managers leads to operational

(13)

Current Market

Future

Investment

Vendor

Landscape

Product Rankings

(14)

REGIONAL FORECAST OF CARD FRAUD MANAGEMENT SPENDING

IT Spend for card products in

established markets will

remain relatively flat

through 2016.

Regional Spend

(In millions of USD) 2011 E 2012 P 2013 P 2014 P 2015 P 2016 P CAGR

North America $794 $794 $799 $800 $806 $816 0.5%

Europe $444 $453 $460 $463 $465 $466 1.0%

Asia Pacific $379 $416 $455 $491 $528 $564 8.3%

Latin America and the

Caribbean $98 $106 $114 $122 $130 $137 7.0%

Middle East and Africa $31 $33 $34 $35 $36 $36 3.2%

Source: CEB TowerGroup research. Note: E indicates estimated values; P indicates predicted values; CAGR: compound annual growth rate. Region Definitions

North America USA and Canada Europe Includes Western,

Central and Eastern Europe Asia Pacific Includes Australia

and New Zealand Latin America and Caribbean Includes Mexico Middle East and Africa Includes Turkey and all African and Middle Eastern countries $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 2011 E 2012 P 2013 P 2014 P 2015 P 2016 P

North America Europe

Asia Pacific $0 $20 $40 $60 $80 $100 $120 $140 $160 2011 E 2012 P 2013 P 2014 P 2015 P 2016 P

Latin America and the Caribbean Middle East and Africa

Developing regions are expected to require larger investments in Card Fraud Risk Management IT spend, particularly in Latin America and the Asia Pacific, as those markets grow.

Regional Forecast of Card Fraud Management Technology Spending

(15)

EMERGING TECHNOLOGY LANDSCAPE IN CARD FRAUD

CEB TowerGroup expects

new capabilities and

functionalities to reflect a

major shift in the industry’s

fraud management.

Technology

State

ROI

Potential

Market-Ready In Pilot Low High Product Improvement technologies include: • Customer Alerts • Real Time Transaction

Control

Performance Optimization

technologies include:

• Channel Specific Coverage • Integration of External Data • Biometrics • Voice Printing • Device Tracking Operational Enhancement technologies include: • Enterprise Fraud Management

• Mobile Payment Controls Enterprise Fraud

Management

Customer Alerts

Real Time Transaction Control Integration of External Data Channel Specific Coverage Biometrics Voice Printing Device Tracking Mobile Payment Controls Definitions

• ROI Potential: Measures the relative returns an institution can expect to receive from an investment in the technology • Technology State: Measures the technology’s level of development

• User Impact: Measures the level of benefit the technology will have on the portfolio management user Minimal Moderate Medium High

User Impact

(16)

LEVERAGING PRODUCT IMPROVEMENT

CEB TowerGroup suggests

that card issuers reconsider

their channel strategies in

order to address the

challenges of authorization,

transaction fraud and

merchant malfeasance.

_ROI

Potential Market-Ready In Development Low High Minimal Moderate Medium High User Impact Product Improvement Matrix

Technology State

Customer Alerts

Real Time Transaction Control

Key Takeaways from Product Improvement

Definitions

• User Impact: Measures the level of benefit the technology will have on the portfolio management user

• Improvements outside of the US, such as EMV smart chip cards, will have little-to-no impact to the United States, which has operated with 100% transaction authorizations for the last 30 years.

• Customer alerts, such as real time or near real time SMS messaging and emailing to confirm transactions provides a low cost risk enhancement.

• Real time transaction controls provide issuers with the ability to react quickly to fraud challenges in both the physical and virtual world.

(17)

MAXIMIZE PERFORMANCE OPTIMIZATION

As new products enter the

marketplace, CEB

TowerGroup expects card

fraud vendors to maximize

performance optimization

through a variety of

emerging capabilities.

_ROI

Potential Market-Ready In Development Low High Minimal Moderate Medium High User Impact Performance Optimization Matrix

Technology State Channel Specific Coverage Integration of External Data

Key Takeaways from Performance Optimization

Biometrics Device Tracking Voice Printing Definitions

• As card issuers make entry points easier for customers, they create new opportunities for thieves to attack the payments system.

• Proven fraud prevention technologies, such as predictive scoring and neural networks, worked well for decades but must be enhanced with additional layers of security to keep issuer technologies ahead of fraudsters.

• Channel specific strategies that focus on the specific transaction venue such as mobile, online, point-of-sale, and telephone show promise for card issuers.

• External data that goes beyond customer and merchant profiling can provide better customer visibility and tighter risk control.

• Over the next three years, CEB TowerGroup expects that fraud enhancements involving biometrics,

voice printing, and device tracking will help card issuers augment their strong logical tools with tools that protect the physical vulnerabilities of card based transactions.

(18)

FOCUSING ON OPERATIONAL ENHANCEMENT

Card issuers should

anticipate no improvement

from newly mandated EMV

smart cards. Logical controls

remain the strongest

protection layer but they

must be augmented with

stronger physical controls.

Potential ROI

Market-Ready In Development Low High Minimal Moderate Medium High User Impact Operational Enhancement Matrix

Technology State

Enterprise Fraud Management

Key Takeaways from Operational Enhancement

Mobile Payment Controls

Definitions

• Card issuers must continually develop their fraud staff to ensure that high powered software solutions can address the full features of their capabilities.

• As the card industry deals with saturated markets in high volume countries, cross-selling other financial service products becomes an essential strategy to protect revenue.

• Cross-selling provides opportunity to maximize customer revenue but brings a higher level of exposure to issuers, particularly for first party fraud.

• Mobile payments will be adopted slowly in the US, but issuers must prepare for high volume/low value transactions once they begin to gain traction.

• Card issuers need to consider how the world of payments is evolving, particularly as it affects non-regulated companies who facilitate transactions and do not typically operate with business disciplines such as audits, balancing, and financial reserves.

(19)

Current

Market

Future

Investment

Vendor

Landscape

Product

Rankings

19

(20)

MAPPING THE VENDOR LANDSCAPE

CEB TowerGroup identified

vendors for this analysis based

on expert opinion, product

maturity, size of installations,

and vendor stability.

We included 8 large platform vendors and profiled 3 large service models. The service models are not ranked in this technology analysis because they enhance platform software with additional capabilities such as analytics.

Platform Software

ACI Worldwide Proactive Risk _Manager

Alaric Fractals

BPC

Technologies SmartGuard

FICO Falcon Fraud _{Manager 6}

NICE Actimize Actimize Card _Fraud

Retail Decisions ReD PRISM

SAS _ManagementSAS Fraud

Tieto Corporation Card Suite Fraud Management Service Model

First Data First Data Fraud

Management

FIS FIS Card Fraud _Management

TSYS _ManagementTSYS Fraud

Vendor:

Product:

(21)

CARD FRAUD MANAGEMENT SYSTEMS ANATOMY

Business Intelligence

The technology offers a broad set of real-time business tools including predictive, adaptive, and statistical analytics to deliver insight into potential fraud.

Enterprise Screening

The technology can broadly address the portfolio by transcending the enterprise and searching for potential relationships, link analysis, and linkage to the customer.

Behavior Tracking

The technology can identify key transactional behaviors and spending patterns in order to recognize uncharacteristic transactions and to address merchant accounts.

False Positive

The technology automatically and effectively manages and reports false positives with feedback loops to allow operational adjustments.

Case Management

The technology offers a comprehensive tracking system that allows a high level of investigation by attaching account transactions to potential fraud rings.

Alert Management

The technology possesses alerts that identify issues with merchants and customers and can react within the authorization stream to prioritize at user levels.

Business Rules

The technology can suggest, create, and automate business rules for card present, card not present, and unattended transactions with no vendor interaction. 6 5 4 3 2 1 UI Configurability

The technology has a fully configurable real-time user interface and dashboards that can trigger options for new rules based on entitlement levels and user permissions.

Process Account Alerts

The technology can process all branded products and can tag related accounts in and out of the system and apply business rules from the account alert.

External Data Capture

The technology communicates with required external regulatory agencies to automate the collection of customer, account, and product information.

Geographic Flexibility

The technology can discern fraud activity in multiple currencies, and can determine geographic product, fraud, and language differences.

9

10 7

8

Transaction Conditions

The technology incorporates the geographic location, MCC, and entry types into the neural networks and can respond to incoming data based on the type of card.

Neural Networks

The technology is built on a comprehensive data platform that can rapidly redefine instructions, follow the transaction through the billing cycle, and adjust decisioning.

User Support

The user help functions are easily identified, broad in scope, and numerous in interaction options.

Pricing Flexibility

The vendor offers multiple pricing options with flexibility surrounding installation and customization.

Training

The vendor provides robust training for IT users and webinars and other training modules for non-IT or operational users at no additional cost. 13 15 16 17 18 12 Technology Innovation

The vendor possesses a proactive strategy to incorporate innovative technology and practices into its product development roadmap.

Product Maturity

The vendor possesses a mature product with a growing market share and client base.

Collaboration

The vendor effectively identifies and aligns technology implementation to enterprise needs.

20

19 21

Fraud Analytics Tools

En te rpr ise S upp or t

Workflow Management En te rpr ise Op er at io ns

Current Effectiveness Potential Impact

5 = Superior Capability We or our vendor offer this regularly, systematically, and at the highest standard.

5 = Very High Impact Our firm considers this attribute mission critical when performed at the highest standard. 4 = Strong Capability We or our vendor offer this regularly

and systematically.

4 = High Impact Our firm considers this attribute highly important when performed at the highest standard. 3 = Adequate Capability We or our vendor offer this regularly

but in an ad hoc manner.

3 = Moderate Impact Our firm considers this attribute moderately important when performed at the highest standard.

2 = Marginal Capability We or our vendor offer this irregularly and in an ad hoc manner.

2 = Low Impact Our firm considers this attribute somewhat important when performed at the highest standard.

1 = Weak or not at all We or our vendor do not do this at all. 1 = No Impact Our firm does not consider this attribute important when performed at the highest standard.

Attribute Grading HOW TO USE ANATOMY

The anatomy is designed to assist financial services executives better assess and prioritize components of their technology investment. As you take this anatomy, please consider your firm’s business strategy and current technology maturity.

1. Rate the impact of each attribute to your business and your firm’s effectiveness on a 1-5 scale using the grading scale below.

2. Map the results on the scorecard to identify areas that are most important, but where your firm is least effective.

Data Integration

The technology integrates and performs with front and back end systems such as CVV, collection system, case management, and customer records.

11

Vendor Stability

The vendor has an established industry presence and can provide long term support for institutions.

22

Backup Management

The technology has a backup system with full tolerance to accommodate overflow and diversion of the system and separates essential and non essential information.

(22)

DIAGNOSTIC ANATOMY SCORECARD

Score Your Technology

Needs With the Anatomy

Scorecard.

Financial services executives should complete the scorecard using the card fraud

management anatomy diagnostic tool.

Attribute Categories Alignment Attributes Potential Impact Importance of Improvement

1. Business Intelligence 2. Enterprise Screening

Fraud Analytics 3. Behavior Tracking

Tools 4. False Positive 5. Case Management

6. Alert Management

Enterprise 7. Business Rules

Operations 8. UI Configurability 9. Process Account Alerts

10. External Data Capture 11. Data Integration

Workflow 12. Geographic Flexibility

Management 13. Transaction Conditions 14. Backup Management 15. Neural Networks

16. User Support 17. Pricing Flexibility

Enterprise _{18. Training}

Support _{19. Technology Innovation}

20. Product Maturity 21. Collaboration 22. Vendor Stability

(23)

DIAGNOSTIC ANATOMY SCORECARD

Map Your Technology

Needs:

Financial services executives should map their attribute scores from rating their impact and effectiveness on the Anatomy Scorecard. P o tenti al I m pac t 5 =Very High 4 =High 3 = Moderate 2 =Low 1 =No Impact 1 = W eak 2 = Ma rg in al 3 = A deq ua te 4 = St ro ng 5 = Su per ior Current Effectiveness 23 © 2012 The Corporate Executive Board Company. All Rights Reserved.

(24)

Feature Definition

Account Verification Value The system can integrate Account Verifications Value (AVV) into the authorization process.

Batch Review Capability The system operates in real time but can provide batch functions for offline processing.

Fraud Early Warning The system has a proactive process to mitigate fraud and to reach out to customers.

Input Channels The system can accept input from POS, ATM, branch systems phone, and online channels.

Internal Fraud Control The system has controls in place to mitigate internal fraud.

MasterCard SecureCode Integration The system can integrate with MasterCard SecureCode cards.

Multichannel Protection The system can add layers of protection based on a transaction source.

PCI Compliant The system conforms to all functions in the Payment Card Industry Data Security Standards and is capable of identifying data breeches.

Track I Name Matching The system can match “name on card” for Card Not Present (CNP) transactions.

Transaction Blocking The system can block potential high risk fraud categories.

Transaction Clearing File The system has day-end review of transaction file to ferret fraud trends.

Traveling Customer Accommodation The system can discern traveling customers for out of region activity.

Verified by Visa Integration The system can integrate with Verified by Visa cards.

Visualization Tools The system can create a summary of key business metrics customized to an organization.

Feature Type Definition

Standard Native Feature The feature is standard to the system and is offered as an out-of-box functionality of the base product.

Premium Native Feature The feature is part of an optional module to the solution developed by the vendor, and is offered for an additional fee on top of the base price.

Emerging Feature The feature is emerging and will be offered in the next 12 months.

Developing Feature The feature is in the development stage and will be offered in the next 12-24 months.

FEATURE AUDIT DEFINITIONS

Platform Software Only

Feature Definition

Coding The system has a proprietary code that only licensees can customize.

m

(25)

FEATURE AUDIT

Features FICO FALCON

FRAUD MANAGER 6 % of Vendors Offering as Standard Feature Int eg rat ion – Pl at form Softw are Account Verification Value

l

100% MasterCard SecureCode Integration

l

100% Input Channels

l

100% Verified by Visa Integration

l

100% Fr aud Prot ec ti on – Pl at form Softw are

Internal Fraud Control

l

100%

Multichannel

Protection

l

100%

PCI Compliant

l

100%

Transaction Blocking

l

100%

Fraud Early Warning

l

100%

Anc il lary C apa bi li ti es – Pl at form Softw are Batch Review Capability

l

100% Track I Name Matching

l

100% Transaction Clearing File

l

88% Traveling Customer Accommodation

l

88% Visualization Tools

l

75% Coding

l

100%

Feature Type Definition

Standard Native Feature

The feature is standard to the system and is offered as an out-of-box functionality of the base product.

Premium Native Feature

The feature is part of an optional module to the solution developed by the vendor, and is offered for an additional fee on top of the base price.

Emerging Feature The feature is emerging and will be offered in the next 12 months. Developing Feature The feature is in the development stage

and will be offered in the next 12-24 months.

m

(26)

FALCON FRAUD MANAGER 6

FICO

26

Company Overview:

Founded in 1956, the Fair Isaac Corporation (FICO) is a pioneer in the development and application of decision

management solutions, most notably the FICO Score. FICO’s businesses are organized into 4 primary segments: ubiquitous scoring services, applications for decision management, tools for decision management, and professional services. Seeking to expand its service offerings, in 2012 FICO launched the FICO Merchant Monitor Solution, which limits merchant-related risk to banks and acquirers. It also acquired Entiera, a provider of SaaS-based marketing platforms, and Adeptra, a firm specializing in mobile customer engagement and risk intervention.

Product Overview:

A pioneer among modern fraud solutions, Falcon Fraud Manager was launched in 1992 with proprietary neural network models for card payments. Today, Falcon Fraud Manager is an end-to-end enterprise fraud detection and case

management solution capable of supporting any electronic payment or account access channel. The current release, Falcon 6, introduced significant analytic innovations that automate the refinement of detection models through machine learning and feedback mechanisms.

Product Demonstration Highlights:

• Data Consortium: FICO manages a data consortium of 2.5 billion active payment card accounts. The data consortium enables customers both small and large to benefit from the experiences of their peers and enables FICO to build effective detection models with a highly controlled false positive rate. The predictive analytic models based on the consortium data offer the industry’s largest test bed of card production data.

• Implementation Options: Falcon Fraud Manager operates in more than 20 countries for more than 9,000 clients. FICO offers its platform directly to medium and large card issuers and supports a wide range of service models through leading card management programs offered by companies such as First Data, FIS, Fiserv, SINSYS and TSYS. When implementing Falcon Fraud Manager, a company may access FICO’s broad training and consulting resources. • Data Integration: CEB TowerGroup estimates that FICO platform and service model versions of FICO Falcon help

protect more than 2.5 billion cards around the world, representing 66% of outstanding cards. Integration is standard with most card systems.

CEB TowerGroup View:

FICO’s long standing and pervasive exposure to card analytic functions makes Falcon well worthy of consideration, though CEB TowerGroup suggests that both platform and service models benchmark results for champion and challenger

transaction files. As the market leading solution in fraud, FICO constantly enhances its Falcon system through upgrades, like its innovative adaptive analytics and global profiling techniques. Specifically, Version 6 enhancements include Falcon’s profiling techniques that utilize global profiles targeting high-risk ATMs, merchants, risky geographic regions, and other criteria. FICO’s consulting services, coupled with its extensive training options and user support, ensure a smooth transition to Falcon.

Key Statistics

Company Type: Public

HQ: Minneapolis, MN

Founded: 1956

Employees: 2,079

Revenue: $619.6 million

Client Base: not disclosed

Global O v er $ 1 5 B ill io n 96% B et wee n $5 -15 B ill io n 2% U n d er $5 B ill io n 2% C li ent S ize (by A ss et s) Target Target Market

Platform

(27)

Current Market

Future

Investment

Vendor

Landscape

Product Rankings

(28)

CREATING OUR “BEST-IN-CLASS” PRODUCT RANKINGS

Categories:

Fraud Analytic Tools

Those attributes that provide metrics to card issuers that enable fraud

detection, offer insight into risk, and help shield

against loss to the FSI.

Enterprise Operations

Those attributes that affect the comprehensive

handling of an account and overall customer exposure across other retail banking products.

Workflow Management

Those attributes that help card issuers effectively

process work by streamlining account and

transaction flows, deploying operational strategies, and bringing

accounts to a final disposition.

Enterprise Support

Those attributes that influence the enterprise’s

tactical fit and strategic alignment with the

vendor.

Phase 2

Recognizing that all attributes are not equally important, CEB TowerGroup divides them into tiers to reflect their level of

importance as mission critical, strong priority or differentiators.

Phase 1

Utilizing qualitative and quantitative data, CEB TowerGroup identified 22 attributes that define a “Best-in-Class” Card Fraud Management System, which are grouped into four categories.

Phase 3

Certain products are recognized as “Best-in-Class” after scoring each product based on its performance at an

attribute level. “Best-in-Class” _{Fraud Analytic} Tools “Best-in-Class” Enterprise Support “Best-in-Class” Workflow Management “Best-in-Class” Enterprise Operations Mission Critical  Enterprise Screening  Behavior Tracking  Business Rules  Process Account Alerts

 External Data Capture  Data Integration  Neural Networks  User Support  Training Requirements  Technology Innovation  Vendor Stability Strong Priority  Business Intelligence

 False Positive  Alert Management

 Geographic Flexibility  Transaction Conditions  Product Maturity  Vendor Collaboration Product

Differentiator  Case Management

 User Interface

Configurability  Backup Management  Pricing Flexibility

Attributes

(29)

PRODUCT RANKING MATRIX

Overall, high performing

vendors exhibited excellence

in multiple categories.

Product Leaders are the top

scoring products in a given

category and are chosen

based on the differentiation

in scoring a particular

category.

Fraud Analytic Tools includes those attributes that provide metrics to card issuers that enable fraud detection, offer insight into risk and help shield against loss to the FSI.

Enterprise Operations includes those attributes that affect the comprehensive handling of an account and overall customer exposure across other retail banking products.

Workflow Management

includes those attributes that help card issuers effectively process work by streamlining account and transaction flows, deploying operational strategies, and bringing accounts to a final disposition. EnterpriseSupport includes

those attributes that influence the enterprise’s tactical fit and strategic alignment with the vendor. Fraud Analytic Tools Enterprise Operations Workflow Management Enterprise Support Vendor A Product A 4.81 4.82 4.81 4.84 Vendor B Product B 4.24 4.29 4.46 3.84 Vendor C Product C 4.43 4.35 4.42 4.26 FICO Falcon Fraud Manager 4.86 5 4.85 4.84 Vendor D Product D 4.67 4.76 4.81 4.39 Vendor E Product E 4.38 4.29 4.27 4.10 Vendor F Product F 4.86 4.41 4.65 4.68 Vendor G Product G 4.10 3.76 4.08 4.13 Ranking Methodology

Vendor rankings are based on our proprietary 5-point rating system for each of the 22 attributes in our card fraud management systems anatomy (see page 21).

= Best-in-Class in Anatomy Category

(30)

30 Vendor B Vendor A Vendor A Vendor A Vendor F Vendor D Vendor D Vendor D Vendor E Vendor D

FICO FICO FICO FICO

Vendor C Vendor B Vendor B Vendor C Vendor E Vendor E Vendor F Vendor A Vendor C Vendor C Vendor B Vendor E 0.25 0.50 0.75 1.00

FRAUD

ANALYTIC

TOOLS

ENTERPRISE

OPERATIONS

WORKFLOW

MANAGEMENT

ENTERPRISE

SUPPORT

“Best-in-Class”

Products

MAPPING THE VENDOR LANDSCAPE

“Best-in-Class” Product Rankings

(31)

CATEGORY SCORING ANALYSIS

Fraud Analytic Tools

Business Intelligence: Runs on flexible rules engine with 3+ consortium data and a fraud predictor that provides merchant profiling and adaptive analytics with 56 fraud patents.

Behavior Tracking: Includes multiple levels of user-defined profiles which enable clients to build their own profiles to track behavior at the customer, account, or service level.

False Positive: Integral rules engine can override false positives and learn retrospectively using tools that analyze false positives and return to refine algorithms.

Enterprise Operations

Alert Management: Automatically sends SMSs and sets up rules so fraud manager can focus on high risk accounts and can categorize rules into different modes such as manual, priority, and round robin.

Business Rules: Flexible rules engine holds unlimited data and provides a set of performance statistics to enable users to develop business strategies.

User Interface Configurability: Customizable user interface provides extensive options for queues, user and group options, page options, filters, and a variety of others.

Workflow Management

External Data Capture: Automatically communicates with external reporting and regulatory agencies; includes the ability to call client systems for a customer and to produce account updates.

Data Integration: Integrates seamlessly with front and back-end systems including over 100 CVV systems, 20 collection systems and over 100 customer records.

Neural Networks: Provides accessibility to FICO fraud consortium data with over 2.4 billion payment card accounts and the ability to adjust decisioning based on previous outcomes.

Enterprise Support

Training: Includes multiple training options at FICO university including case management training, expert business rules training, consulting for operational and system integration training.

Product Maturity: Industry-leading product initiated scoring in the card sector and owns roughly 60% of the marketplace.

Vendor Collaboration: Offers several customer collaboration outlets to enhance FICO’s product including customer forums, FICO world, fraud alert networks, business reviews, and surveys.

“BEST-IN-CLASS” ACHIEVEMENTS FOR FICO

FICO Falcon Fraud Manager

6 received “Best-in-Class” in

Fraud Analytic Tools,

Enterprise Operations,

Workflow Management, and

Enterprise Support.

Fraud Analytic Tools include those attributes that provide metrics to card issuers that enable fraud detection, offer insight into risk, and help shield against loss to the FSI.

Enterprise Operations include those attributes that affect the comprehensive handling of an account and overall customer exposure across other retail banking products.

Workflow Management includes those attributes that help card issuers effectively process work by streamlining account and transaction flows, deploying operational strategies, and bringing accounts to a final disposition.

Enterprise Support includes those attributes that influence the enterprise’s tactical fit and strategic alignment with the vendor.

(32)

Business Intelligence The technology offers a broad set of real-time business tools including predictive, adaptive, and statistical analytics to deliver insight into potential fraud.

Enterprise Screening The technology can broadly address the portfolio by transcending the enterprise and searching for potential relationships, link analysis, and linkage to the customer.

Behavior Tracking The technology can identify key transactional behaviors and spending patterns in order to recognize uncharacteristic transactions and to address merchant accounts.

False Positive The technology automatically and effectively manages and reports false positives with feedback loops to allow operational adjustments.

Case Management

The technology offers a comprehensive tracking system that allows a high level of investigation by attaching account transactions to potential fraud rings.

Alert Management The technology possesses alerts that identify issues with merchants and customers and can react within the authorization stream to prioritize at user levels.

Business Rules The technology can suggest, create, and automate business rules for card present, card not present, and unattended transactions with no vendor interaction. 6 5 4 3 2 1 UI Configurability

The technology has a fully configurable real-time user interface and dashboards that can trigger options for new rules based on entitlement levels and user permissions.

Process Account Alerts The technology can process all branded products and can tag related accounts in and out of the system and apply business rules from the account alert.

External Data Capture The technology communicates with required external regulatory agencies to automate the collection of customer, account, and product information.

The technology can discern fraud activity in multiple currencies, and can determine geographic product, fraud, and language differences.

Geographic Flexibility 9 10 7 8 TransactionConditions The technology incorporates the geographic location, MCC, and entry types into the neural networks and can respond to incoming data based on the type of card.

Neural Networks The technology is built on a comprehensive data platform that can rapidly redefine instructions, follow the transaction through the billing cycle, and adjust decisioning. User Support

The user help functions are easily identified, broad in scope, and numerous in interaction options.

Pricing Flexibility

The vendor offers multiple pricing options with flexibility surrounding installation and customization.

Training The vendor provides robust training for IT users and webinars and other training modules for non-IT or operational users at no additional cost. 13 15 16 17 18 12 Technology Innovation The vendor possesses a proactive strategy to incorporate innovative technology and practices into its product development roadmap.

Product Maturity The vendor possesses a mature product with a growing market share and client base.

Collaboration The vendor effectively identifies and aligns technology implementation to enterprise needs.

20

19 21

Fraud Analytics Tools

En te rpr ise S upp or t

Workflow Management En te rpr ise Op er at io ns Data Integration The technology integrates and performs with front and back end systems such as CVV, collection system, case management, and customer records.

11

Vendor Stability The vendor has an established industry presence and can provide long term support for institutions.

22

Backup Management

The technology has a backup system with full tolerance to accommodate overflow and diversion of the system and separates essential and non essential information.

14

CARD FRAUD MANAGEMENT SYSTEMS SCORING METHODOLOGY

Scoring Methodology

To arrive at a vendor ranking, CEB TowerGroup developed a proprietary scoring metric outlined by the attributes within this anatomy that highlights the major elements of an enterprise investment decision. This metric assumes that every element is not equally important, and therefore assigns a higher level of importance to those attributes critical to a card fraud management system. The remaining attributes are then divided further into two tiers to reflect their level of importance, highlighted below.

Tier 1 Attributes – “Mission Critical”

Tier 2 Attributes – “Strong

Priority” Tier 3 Attributes – “Product Differentiators”

Enterprise Screening Behavior Tracking Business Rules Process Account Alerts External Data Capture Data Integration Neural Networks User Support Training Technology Innovation Vendor Stability Business Intelligence False Positive Alert Management Geographic Flexibility Transaction Conditions Product Maturity Collaboration Case Management User Interface Configurability Backup Management Pricing Flexibility

(33)

UNDERSTANDING OUR SCORING METHODOLOGY

CEB TowerGroup developed

a unique and proprietary

scoring methodology that

highlights the key priorities

for an executive’s

investment decision.

Every vendor product featured in this report is scored against each of the 22 attributes outlined in the Card Fraud Management System Diagnostic Anatomy on a standardized 1-5 scale.

We calculate the weighted average of a product’s attribute scores in each of the four categories of the anatomy to arrive at an overall category score.

Anat

omy

Category Fraud Analytic Tools Workflow Management

Attribute Title _{Enterprise Screening} _{Neural Networks}

Attribute Definition

The technology can broadly address the portfolio by transcending the enterprise and searching for potential relationships, link analysis, and linkage to the customer.

The technology is built on a comprehensive data platform that can rapidly redefine instructions, follow the transaction through the billing cycle, and adjust decisioning.

Sc ori ng M et ri c

5

The technology can broadly address the portfolio by transcending the enterprise and searching for potential relationships, link analysis, and linkage to the customer.

The technology is built on a comprehensive data platform and can rapidly redefine instructions, follow the transaction through the billing cycle, and adjust easily decisioning based on previous outcomes.

4

The technology can transcend the enterprise and can search for potential relationships but has limited ability to link to the customer and perform link analysis.

The technology can refine the instructions, follow the transaction through the billing cycle, but has limited capabilities in adjusting decisioning based on previous outcomes.

3

The technology can transcend the enterprise but has limited searching ability for potential relationships and cannot link to the customer.

The technology can refine the instructions, follow the transaction through the billing cycle, but cannot adjust decisioning based on previous outcomes.

2

The technology can transcend the enterprise but cannot search for potential relationships.

The technology can refine the instructions, but cannot follow the transaction through the billing cycle.

1

The technology cannot transcend the enterprise and cannot link potential relationships to the customer.

The technology does not support a neural network.

Attribute Score:

5.0

3.0

SCORE

Sample Technology Analysis Internal Anatomy Scoring Guide

Illustrative

(34)