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IDENTIFYING AND PREVENTING THIRD-PARTY TRANSFER SCAMS IN 2019

Nick D’Ugo, Director of Risk, ISOs & ISVs at Paysafe.

The New York Times reported in 1898 that “one of the oldest and most attractive and probably most successful swindles known to the police authorities has again come to the surface… It is known as the ‘Spanish Prisoner’ game, and it has been in operation for more than thirty years.”

The paper was referring to a confidence trick, in which an individual is duped into giving up money to secure the release of a wealthy prisoner, in return for a reward. Today we would call this imposter or third-party fraud, and over 120 years later, it continues to dupe consumers across the globe. At last count contributing significantly (£145m) to the £500m lost by UK banking customers in 2018.

Historic fraud, new approach

When it comes to third-party fraud, criminals have traditionally followed a similar modus operandi; they impersonate someone, gain their confidence, create a problem or make a promise of riches, and then ask for money. However, with the rapid growth of eCommerce, a new avenue has emerged for confidence tricksters, namely third-party payments.

In this version of the scam the imposter approaches a business portraying themselves as a prospective new customer with the desire to spend lots of money. Contact with the business is usually established via email, sometimes telephone, but rarely in person. The fraudster will enquire about the goods or services on offer, place a large order, and provide a credit card number.

Nick D’Ugo

Then, just before they agree to the sale, they will ask for a favour. Often this favour involves helping them pay a third party, which for some extreme reason they cannot do themselves. Under this pretext they will ask the business to charge their credit card a little extra to cover those third-party fees, and then transfer that amount to that third party via Wire or bank transfer. Some generous fraudsters even throw in a tip to the business owner to thank them for their help; while other ‘thoughtful’ con men go above and beyond to assure businesses that may question their motives, when faced with such a request, to not initiate any transfer to the third party until the credit card sale has cleared and posted in their bank account.

Realising you’ve been duped

So, nothing can go wrong, right? In the short term that is what the business believes, they may even feel great about the large sale, that is until a few weeks later when chargebacks start posting to their merchant account and they realise they have been deceived. Unfortunately, by that time the fraudster has usually disappeared along with the money sent to the ‘third party’.

There are a few reasons that businesses may fall for such a scam. Some may be motivated by the large financial incentives that are dangled in front of them; some feel the pressure to go above and beyond for their clients; and others simply do not see the risk that they are exposing themselves to by making this type of transaction.

Working out it’s a fraudster

All merchants must be on the lookout for this type of scam as it does not discriminate when it comes to potential targets, but one business sector that should remain particularly vigilant is the gym and sports platforms industry.

In this scenario, the imposter contacts the gym and attempts to pay for membership or classes totalling a much larger than usual value before introducing the third-party transfer as a condition of the sale.

Under no circumstances should these requests be granted, and a credit card payment taken. Platforms should contact their local authority immediately if they have any suspicions that they are being targeted by this type of scam.

Reducing your exposure

To limit your exposure to fraud, such as that mentioned above, and maintain best practice there are several steps you should take. These include:

1) Businesses that accept credit cards must understand that they are liable for chargebacks and that processing charges outside of those that have been approved are against Card Scheme rules.

2) Unless the proper Payment Card Industry (PCI) controls are in place, businesses should not accept credit card numbers by email, as this further exposes organisations to potential fraud and additional compliance requirements

3) Businesses must maintain vigilance at all times. There are certain red flags that should be looked out for, including:

  • The consumer using multiple credit cards
  • Decline error codes for lost/stolen or pick up
  • The consumer only communicates by email and uses poor grammar or spelling
  • Any request to send money to a third party

Additionally, businesses should work with their payment service provider (PSP) to run basic checks such as Address Verification Service (AVS), or Card Verification Data (CVD). In addition to these procedures, some businesses have dedicated risk teams that can also implement customised risk rules, or work with businesses to provide guidance if they are faced with a situation that just seems too good to be true.

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RISK VS REWARD: IS AI TAKING OVER?

Xavier Fernandes, Analytics Director at Metapraxis

A study by Oxford University academics into “The Future of Employment” in 2013 prompted apocalyptic headlines which stated that in the future 40% of jobs will be automated thanks to advancing technology.

The researchers subsequently claimed that the truth was in fact a little more prosaic; rather than facing complete automation, the research found that 40% of jobs faced some aspect of automation in their activity. So with new ‘AI processes a likely reality for almost half us, what does that mean for our current roles and should we be worried?

 

The fourth revolution?

The first industrial revolution saw machines replacing muscle, both human and animal. The second and third saw electrical power, mass production and computerisation revolutionise the job market. Now, with daily headlines of AI as an employment superpower, there is some concern that AI is bringing a fourth revolution, and with it, unknown circumstances.

This ‘fourth industrial revolution’ is defined by replacing brain power with machines. Our thinking capacity is what inherently sets us apart from other species, so it’s not surprising that any encroachment on it triggers some existential angst.

 

Xavier Fernandes

Evolve to reap the rewards

While many businesses still don’t fully understand the capabilities of AI, those who fear its development are, instead of embracing it, missing all the benefits that it can bring to the workplace. Businesses that utilise AI appropriately are seeing vast improvements across their entire value chain; better customer experience, reduced costs, and more insightful analysis to support management decisions.

AI is particularly useful for supporting tasks with repetitive activity, for example, performing financial checks and assessing large sets of data within financial services firms. AI performs particularly well within this context, spotting outliers before a human expert would notice them, allowing impending problems to be flagged and avoiding costly mistakes.

There is also an increasing focus on maximising customer lifetime value through the use of AI. Being able to predict existing customers’ needs as well as track trends in their financial circumstances is supercharging the old cross-selling approach with testable, predictable outcomes.

With potential benefits like these on offer, management teams of innovative financial services are increasingly relying on AI to help them with some of the heavy-lifting of analysis. Using advanced data capabilities and learned behaviours, AI analyses market trends to provide predictions of future performance. This insight is invaluable and allows management teams to change direction and  correct any problems accordingly. This offers a huge advantage over those that have not adopted such tools.

 

Supporting the workplace

Algorithms and AI are typically ‘smart’ at doing one, tightly-constrained task, but they can be less helpful with many of the activities that humans find straightforward. In most white-collar jobs, automation tends to replace certain tasks in the job, rather than the role in its entirety, as the need for human intelligence is still highly necessary. In particular, we still need human input to first challenge, and then synthesise, this information before taking action. Employees should therefore work with the business to proactively identify what areas of their role could be automated, so that they can focus on the areas that add real value to the business’ commercial goals.

Challenging AI is certainly still important. We know that algorithms can be much better than humans on certain, bounded tasks. However, many algorithms rely on existing data sets to build their understanding. As a result, when a business unit has ‘symptoms’ that fall outside of that body of knowledge, the algorithm may suggest the wrong course of action with costly results.

Indeed, even with plenty of data, algorithms will reflect any biases the data set contains. We’re seeing this with some legal sentencing algorithms where there is evidence that they are treating disadvantaged people more harshly. Getting the answers to why and how far we should trust our algorithms should therefore become an everyday part of any job affected by AI.

Rather than depending entirely on AI for all decisions, workers should be taking all these new, AI-generated insights and using them to complement the human decision-making process. No manager of a complex business ever has enough time to sieve through all the analysis available, but with AI driven algorithms able to flag up any issues and indicate where action needs to be taken, we may find that we have some AI ’colleagues’ who will cover our backs and suggest innovative options. Yes, there will be times when the algorithms get it wrong, but as long as we’re watching out for those, the future is bright.

 

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HOW TECHNOLOGY IS FUTUREPROOFING STOCK MARKET TRADING

stock market

Tony Shaw, Executive Director, London Office and Head Sales UK & Ireland at the Swiss Stock Exchange

 

Markets are shifting, there’s no doubt. Amid all the disruption and volatility from the past year, the Swiss Stock Exchange asked traders about what they expected in 2020 and beyond in our industry survey. The findings point to a rise in digital to help traders content with external forces.

 

First and foremost, traders are enthusiastic about what digital assets can offer.

Two thirds of traders polled said they’d had a marked rise in interest from their clients for digital assets and crypto-products. Given the interest, traders are increasingly bullish about the potential of these products – so much so that 80% have predicted an increase in overall demand in the long term. Market users believe these assets will help generate cost synergies and streamlining trading and settlement processes by creating efficiencies and ultimately reducing costs.

Our 2019 results reflect what traders have told us when it comes to digital assets and products. Last year, we saw significantly higher trading volumes from products with crypto currencies as underlyings. Overall volumes grew by +8.5% over 2018, but the increase in crypto products alone was +17%, reaching CHF 518.2 million ($534.54 m). There was a year-on-year increase in the number of transactions, as well (+21%): 19,636 trades in total.

The potential digital assets hold is clear – evidenced by the building of the SIX Digital Exchange (SDX), a fully integrated issuance, trading, settlement and custody infrastructure for digital assets.

According to traders, artificial intelligence (AI) is expected to bring further benefits to market operations.

Two thirds of our survey respondents anticipate AI will create more opportunities for the traditional equities business, while a similar number expect it to reduce the cost of trading. Innovation in AI is already – and will continue to be – a key driver in making our industry more effective at withstanding future risks and challenges both within and beyond the market itself.

In Europe, there is growing momentum behind calls for shorter trading hours – this trend was reflected in our survey as well.

Industry groups such as the Investment Association are advocating for stock market trading hours to be cut from 8.5 to 6.5 hours to open the industry to working parents and women who cannot commit to such long workdays. We found traders were largely supportive of this, with many saying that it could even facilitate operational benefits. The roll of AI is clear here in improving efficiency while minimising time wastage: 36% of traders said the introduction of shorter trading hours would prompt greater market liquidity.

Beyond the market itself, geopolitics continue to shape wider market sentiment.

It comes as no surprise that four fifths of traders said their strategies have been – to some extent – influenced by Donald Trump’s tweets. Interestingly, only 39% of those polled viewed Brexit as an influencing factor in trading activity, while three quarters believe the US election will drive trading activity in 2020 and 65% acknowledged trade wars would also have an impact.

More broadly, traders are split on the state of the global economy – 58% are bracing for a global recession while 42% predict stable macro-economic conditions over the next three years. What seems clear is that whatever happens in the wider economy, traders are making headway with new technologies that can improve their strategy, efficiency, and overall market health.

 

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