As the leading UK supplier of travel money, First Rate took the opportunity to stay ahead of the curve in fraud prevention and detection. By playing to its strengths as a merchant and by deploying Fractals fraud prevention technology, from Alaric (www.alaric.com) First Rate has successfully maintained a zero tolerance approach to fraud.

First Rate Exchange Services, a 50/50 joint venture between the UK’s Post Office and the Bank Of Ireland, sells travel money and foreign currency through Post Offices and online. The company is highly successful with more than 25% of the UK market, a £3.5bn turnover, 200 employees and operating profit of £80m. First Rate is also the price setter in the market, as they were the first company to remove the commission fees on transactions. This effectively took the travel money market away from the banks in one move.

First Rate started its online sales channel five years ago and since then this side of the business has grown significantly with currency available through either Click and Collect or through Home Delivery. However, a cause for concern in this market is that online sales are highly attractive to fraudsters. In early 2008 First Rate became aware of a noticeable rise in fraud across the sector, although it was not affecting the company’s own transactions. First Rate was keen to find out why there was such a rise, why no attacks had been made and what could be done to prevent attacks from happening in the future. As David Brunsdon Head of Financial Crime Prevention for First Rate explains, “Along with online sales comes card payment and therefore card fraud. Currency is a particularly attractive market for professional fraudsters as it is easily converted and has a high average transaction value or ATV. We noticed a number of our competitors being taken off-line by fraud and yet it had not affected us. We felt an urgent need to understand why this was the case and decided to enhance our fraud prevention systems to ensure that we had maximum protection going forwards.”

Traditionally, many merchants had relied on the 3D Secure protection from card issuers but as Brunsdon goes on to say, this did not provide a sufficient level of protection for First Rate. He notes, “The major threat is that there are people out there selling large quantities of high quality 3D Secure information to fraudsters. If we had to rely on 3D Secure to protect us it could potentially present an extremely significant risk to the online business.”

Brunsdon realised that First Rate needed to act quickly. In his view, “We had to take this new threat extremely seriously. If we had to rely on card issuers to protect us from fraud, we could be out of business. We identified that whilst other merchants had ‘acceptable fraud tolerance levels’, our ‘zero tolerance approach’ made us less attractive to fraudsters and realised that it was this approach that had prevented us from being attacked. However, the challenge that you face in adopting a zero tolerance approach to fraud is that you also might reject a lot of good business. The goal we set ourselves was to maintain a zero tolerance approach whilst not rejecting any genuine customers. These sound like conflicting goals but the secret is in managing the trade-off between the two successfully, something we believe we have perfected.”

Drawing Up The Defence Plan
In his strategic assessment of how best to set the defence lines, Brunsdon could see that as a merchant, First Rate had a number of key advantages when compared to issuers. There was time, for example, to screen orders prior to release. As incoming orders are rich with information and customer details, First Rate had a great deal of information that could be used to identify and prevent fraud. Often, clearly identifiable patterns emerge in the data, where the fraudsters reveal themselves through repeat behaviour. In these cases, First Rate had enough time to contact the customer through its sector-leading fraud prevention team and therein gain more clues to identify a fraud in progress.

As Brunsdon says, “This is in marked contrast to the issuer who has to make instant decisions, has limited authorisation message information and as they can’t see the fraudster’s credentials, are unable to see their modus operandi (MO). As I know from my time as a card issuer, this makes it very difficult for them to identify a fraud from an unusual card transaction. So we knew there was an opportunity to play to our strengths as a merchant. With this in mind, we decided to upgrade our fraud prevention systems in support of our strategy and therein we set about reviewing software suppliers. Ultimately, we knew that we would require an effective and highly automated system solution to support this approach as the value of business increased.”

The system First Rate had originally used was a ‘black-box’ type solution; so called for Intellectual Property reasons, as one was unable to see how it achieved its results when judging transactions. It ran the risk of turning away good business, with the user gaining no idea as to why that business had been rejected. As Brunsdon says, “Once you reject a transaction you don’t know if it was good business or not, as you lose sight of the fate of that transaction.”

There was a clear need therefore to identify a more transparent solution. Having ruled out black-box systems, the other two alternative approaches available to First Rate were the full service option, where an outsourcer does everything for its client, or a software system using business scoring with business rules. It was the software solution that most closely matched First Rate’s requirements. As Brunsdon recalls, “We needed a system that could give us the appropriate depth of protection, a transparent system which would allow us to control the all important trade-off between zero tolerance and maximum acceptance.”

Identifying The Right Solution
As a result, Brunsdon drew up an RFP to identify an appropriate software solution. As part of an in-depth assessment of what was available, First Rate subsequently reviewed systems from 14 potential suppliers, ultimately choosing the Fractals solution from Alaric.

Fractals is an intelligent fraud detection and prevention framework. The Fractals Rules Engine enables fraud analysts to create and deploy powerful fraud detection rules within minutes, ensuring that fraud losses are minimized.

“Having conducted our review of the systems available, the Fractals solution from Alaric was the only one that did things the way we felt they needed to be done and took the approach that we wanted to take” notes Brunsdon adding, “The system allows you to easily set business rules for transactions. I want to be able to manage that trade-off (between zero tolerance and maximum acceptance) fully, in that I want to see all the relevant data and analyse everything that we need to establish appropriate business rules very quickly. Fractals delivers this effectively. Indeed, no other system can tackle fraud like this. It simply automates the analysis of information in real-time, recognising fraud patterns in the data. The Fractals system is also self-learning and can be adjusted quickly and easily as required. All this drives up acceptance greatly, whilst allowing our team to manage any fraudulent transactions extremely closely.”

With Fractals automatically screening the data and then spotting suspicious patterns and transactions, First Rate can utilise the opportunity to contact the customer directly. First Rate’s highly trained team is so experienced that they often recognise the fraudster’s voice, traits or behavioural mannerisms. In short the fraudster’s MO characterises them and First Rate profiles them by a wide range of criteria; sex, accent, age, ethnic origin etc.

As Brunsdon says, “We are the innovator here, as we have re-invented a completely different approach to fraud prevention. We’ve taken Fractals; a product most commonly found in the Issuer’s world and brought it into the Merchant’s space, where Alaric has adapted the software to meet our very demanding requirements. Issuers just don’t see or understand the advantages that as Merchants we have in fighting fraud in this way. Moreover, at a technical level, to have an on-premises system that combines sophisticated fraud detection with the ability to influence the authorisation cycle creating a powerful Fraud Integration Hub is also unique.”

So now the First Rate strategy for fraud prevention is two pronged:

A – Target known fraud patterns by:

    Spotting known fraud credentials such as mobile numbers email and postal addresses

    Identifying their behavioural characteristics

    Targeting suspect areas such and hot spots

B – To identify First Rate’s safe customers where:

    First Rate already has positive experience of transactions

    The safe customer’s credentials haven’t changed

    The characteristics of the transaction are deemed overall to indicate low risk and are likely to deliver a positive outcome

The Strategy Pays Off
Ultimately, the acid test of how well any fraud prevention system or methodology works is the impact it has in preventing fraud. By utilising Alaric to help manage the trade-off between zero tolerance and maximum acceptance effectively, First Rate has reduced the percentage of turnover that is fraudulent to an industry leading level.

Ever conscious of the risk from evolving and future threats, Brunsdon is also happy to outline the role Fractals plays in keeping First Rate ahead of the curve. He notes, “The powerful information analysis Fractals delivers allows us to keep our antennae up all the time; monitoring, learning, testing and deploying new approaches to applying business rules rapidly. In addition, it also allows us to disguise our methods of fraud prevention.”

And whilst Fractals has ensured that First Rate is very much in control of its zero tolerance strategy, the relationship with Alaric has proved successful too. As Brunsdon says, “Overall, Alaric as a company delivers very good mindshare on the customer service side and the technical support is also good. It certainly helped in our decision making process that the company is clearly of a reasonable size and exceptionally well backed. All in all, there has also been a very good rapport between the two companies. In short, it has been a good experience.”

The zero tolerance strategy has also seen some other more dramatic benefits too. Should First Rate identify a fraudster, they will often know where they will be waiting to collect the money with 24 hours notice. This has led to close co-operation with the police and a number of subsequent arrests and convictions. This of course reinforces the image that First Rate is a company that fraudsters should steer well clear of.

And with the fraudsters scared off, First Rate can ensure that when it comes to making the all important trade off, they are now able to offer maximum acceptance whilst ensuring zero tolerance. Indeed, First Rate has only inconvenienced two genuine customers in 12 months – an astonishing statistic.

Fighting Fraud In The Future
Alaric’s Fraud Integration Hub supports First Rate’s zero tolerance policy in real time enabling the company to extend its product range by accepting higher risk business with confidence. First Rate is moving towards introducing more negative scoring and geographical mapping features together with a device recognition facility, in connection with which it is working with Alaric on some key product developments.

In Conclusion
So with Alaric working in unison with First Rate, fraud levels have fallen to nearly non-existent levels. It seems that Fractals has successfully made the leap to fit the innovative merchant side strategy created by David Brunsdon and his team. It is fitting therefore that the last word should go Brunsdon whose strategic vision has been proven in the battle against fraud. In his view, “We are delighted to have taken a lead here and to use Fractals technology and innovative business practices in a successful fight against the fraudster. We have always committed to zero tolerance balanced with maximum acceptance and through taking a strategic approach have been able to deliver on this commitment.”