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Detecting Suspicious Activity in Loan Payments


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It's an unfortunate fact of life that as we proceed through our days and focus on our to-do list, we may get so engrossed in our work that we miss other items that need our attention. Also, unfortunately, in the financial institution world, missing the importance of a transaction or two can cost our businesses big money.

When it comes to finding ways to move money, opportunists are nothing if not inventive, continually devising new ways to infiltrate accounts and bring financial benefits to the perpetrators. As you update your practices and payment methods, individuals move just as quickly to adopt new ways to exploit those new opportunities. To stop these activities and retain the streams of money pilfered from our systems and account holders, we must be militant—not only when it comes to our own side of the loan and payment process—but watchful on our many partners' and vendors' sides as well.

As you work to satisfy the Bank Secrecy Act (BSA) and anti-money laundering (AML) regulations, you may sometimes focus compliance efforts on placed payments from you own accounts or credit cards and fail to scrutinize your account holders' use of self-serve payment channels from accounts that are not native to that financial institution. According to CUNA's September 2016 statistical report, the nationwide checking account penetration rate for credit unions was just under 56%. That means 44% of credit union members have checking accounts elsewhere or don't have a checking account at all. Given that criminals and other opportunists will happily take any available chance to move money illicitly, you can't afford to overlook suspicious activity on payments made from outside institution relationships. You must monitor third-party payment transactions using the same level of fraud and AML detection that you use on internal accounts and cards.

In addition to the innumerable types of fraud we must guard against, we must watch for technically legal but problematic activity. One example of legal but questionable and costly payment activity is manufactured spending.

What is manufactured spending?

Manufactured spending is the process of purchasing a large-sum cash equivalent, such as a gift card or money order, with credit cards for purposes of racking up rewards points. Most manufactured spenders intend to turn around and liquidate their new gift cards or money orders to pay bills, including the bill for the credit card used in the cash equivalent purchase, so they receive the rewards points but don't actually spend a dollar of their own money.

Manufactured spending is like the "extreme couponing" of the payments world. It is:

  • Legal

  • Practiced by a small group of extremely dedicated and active customers

  • Costly to merchants

Aside from the obvious costs involved in paying out large amounts of rewards cash, manufactured spending can rack up huge costs for financial institutions, such as:

  • Transaction fees for payment submissions

  • Labor paid to swipe and process cards

  • Resources devoted to investigating questionable activity

  • Write-offs on unpaid and fictitious accounts

Detecting Suspicious Payment Activity

To guard against suspicious activity, we must have processes in place to detect the signs immediately. Your institution's BSA, AML, and other official fraud-detection procedures are an excellent start. However, you also need to seek out activity that does not rise to the level of fraud but still must be addressed to save your financial institution massive costs. Here are some things to look for when you're trying to uncover unwanted activity like manufactured spending:

  • Unusual payment activity on an existing account with a previously stable history (e.g., payments 2+ days in a row on an account that had seen only once-per-month payments previously)

  • Multiple transactions or payments made to an account in a single day

  • Larger-than-normal payment amounts on established accounts

Though it's easy to get caught up in day-to-day tasks, financial institutions must be vigilant about checking all account activity because opportunists are chomping at the bit to get to your institution's funds. Taking a step back to make sure we examine both potentially fraudulent and suspicious or unusual activity through every possible channel is always time well spent.

For more in-depth information on the current state of the payments industry, payment regulation and compliance, and related technology, click below to download our free ebook: Meeting Consumer Self-Serve Payment Demand.

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