ROI of Fraud Detection by Nucleus Research

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G U I D E B O O K
GUARDIAN ANALYTICS
FRAUD DETECTION
P R O G R A M : I N F R A S T R U C T U R E A N D S E C U R I T Y
D O C U M E N T r 6 1  M A Y 2 0 1 7
A N A L Y S T
Rebecca Wetteman

May 2017  Document R61
Copyright © 2017 Nucleus Research, Inc. Reproduction in whole or in part without written permission is prohibited. 2
Nucleus Research is the leading provider of value-focused technology research and advice.
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T H E B O T T O M L I N E
Behavioral analytics is a new and powerful approach that is
transforming fraud detection. Financial institutions are
increasingly challenged to combat fraud in many areas, with
wire transfers and transactions through the Automated
Clearing House (ACH) service an increasing concern. Fraud in these
areas can be particularly difficult to prevent, because of the high volume of
transactions and the increasing propensity for client-generated fraudulent
transactions. In examining the strategies of financial institutions to prevent wire and
ACH fraud, Nucleus found that applying behavioral analytics solutions such as
Guardian Analytics went beyond the traditional rules-based approach to lower
overall fraud, while dramatically reducing false positives, driving increased security,
reducing staff burden, and improving customer relationships.

T H E S I T U A T I O N
Wire fraud is a growing trend impacting financial institutions and individuals
globally. Some estimates put the annual losses from wire fraud at more than $30
billion annually, and that number may be low, as many victims of “phishing” fraud –
a common entry point for wire fraud – are hesistant to report their victimization.
Financial institutions are not typically the victims of wire and ACH fraud (their clients
are), but are nonetheless required by both regulation and client demand to
implement safeguards. Most have traditionally relied on rules-based approaches
that identify potentially fraudulent transactions when an action violates “normal
behavior” for a particular client or client type. However, as wire fraud has become
more prevalent and the perpetrators more adept, traditional rules-based systems
have been challenged to keep up, resulting in an increase in fraudulent transactions
that slip through but also a significant increase in false positives that then must be,
in most cases, manually reviewed by fraud staff.
T H E S O L U T I O N
Guardian Analytics provides a software-as-a-service (SaaS) platform for fraud
prevention that is a departure from the traditional rules-based approach. Instead, it
relies on behavioral analytics to proactively identify anomalies in leading behavior,
such as adding new recipient accounts, higher dollar amounts, or overall changes in
the behavior type of the user, and flags the transaction before it occurs. Applying

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machine learning algorithms to historical transactional data, the Guardian Analytics
platform then flags activity based on their likelihood of risk of fraud so that fraud
staff can review and thwart transactions before they occur. In examining this
approach, Nucleus found a number of advantages over traditional rules-based
systems:
 Attack agnostic. The solution can apply the same machine learning to
multiple channels and multiple – even new – methods of attack, so it can
address multiple areas such as supplier portal compromise, account
takeover, busienss e-mail compromise, fake invoices, and modified wire or
ACH templates. It is also effective against zero-day exploits.
 Automated machine learning. Because Guardian Analytics is continously
adapting its algorithms on an ongoing basis based on feedback from fraud
staff on normal user activity, it evolves as the nature and type of threats
evolve without the need for manual intervention.
 Lower cost of ownership. The SaaS-based nature of the platform and
relatively low initial and ongoing costs – as well as the reduction of manual
processes – enables large financial institutions to thwart threats at scale at a
much lower cost than traditional rules-based applications.
To understand the relative benefit of investing in Guardian Analytics to reduce wire
and ACH fraud risk, Nucleus analyzed the experiences of a number of financial
services institutions that currently use the solution to prevent fraud. These
institutions were large organizations, typically with $50 to $250 billion in assets and
hundreds of thousands of wire and ACH transactions per year. Representatives of
those organizations interviewed included chief information officers (CIOs) and
senior vice presidents with titles including director of fraud and loss management,
enterprise risk manager, deposit operations manager, and director of financial
crimes.
W H Y G U A R D I A N A N A L Y T I C S ?
Nucleus found that customers explored the use of Guardian Analytics for two
primary reasons: either they had experienced a significant fraud event that exposed
weaknesses in their existing processes, or they were concerned about the future
impact of such an event on both risk and compliance. The main reasons customers
selected Guardian Analytics included:
 Higher fraud detection and lower false positives than alternatives. Many
Guardian Analytics clients were impressed during initial testing in the ability
of the solution to both catch fraud and surface far fewer false positives than

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other methods. As one client said, “We were seeing higher incidence of wire
and ACH fraud. When we tested solutions, Guardian caught every single fraud
and had fewer than 50 false positives – far lower than other solutions.”
 End-to-end usability. The intuitive user interface, customizable dashboards,
and simple workflow management capabilities enabled clients to bring their
fraud teams up to speed on the solution with relatively little training.
Additionally, the ability to easily drill down into any flagged transaction gave
fraud staff confidence in the system even though it was a departure from
traditional approaches.
 Web service integration. Guardian Analytics’s API and Web services
capabilities made it relatively straightforward for clients to integrate with
multiple systems and platforms, thereby supporting a consistent approach
across multiple channels.
 Vendor relationship and support. With relatively straightforward
implementations, typically lasting about 90 days, and ongoing proactive
support from the Guardian Analytics team in areas such as tuning, clients
said Guardian gave them confidence that they had an ongoing partner
focused on their success. As one client said, “They are very responsive any
time we ask or need help. We had one green – and they went in and retuned
systems and presented improvements. Any fraud that they didn’t catch they
make changes.”
 Ease of tuning. Compared with other solutions that required significant
manual review and ongoing retuning, clients found Guardian automated a
significant portion of tuning efforts.
K E Y B E N E F I T A R E A S
Clients found Guardian Analytics delivered a number of benefits, including reduced
fraud, reduced false positives, reduced staff burden, and improved client
management.

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REDUCED FRAUD
Simply put, Guardian Analytics’s behavioral analytics approach enabled clients to
reduce fraudulent transactions despite increasing transactional volumes and the
increasing and evolving sophistication of perpetrators.
Depending on the level of sophistication of their previous systems, the volume of
transactions, and the number of transaction channels support, clients found they
were typically able to reduce fraud by 80 to 90 percent, with some experiencing
even greater reductions. Clients said:
 “We did it on the front end before – malware protection solution, RSA tokens,
dual controls – the originator and approver had to have one. The difference
between their [Guardian Analytics] product and any other was the ability to
catch the fraud that we wouldn’t have prevented with our front-end systems.”
 “We handle roughly 25,000 wires a month. About 6.5 percent get flagged as
red. Before there wasn’t anything really in place until a customer alerted the
bank that a transaction was fraudulent.”
 “We had built an internal risk engine that was fairly basic and rules based. It
didn’t give coverage across all channels, and now we have reduced fraud and
are surfacing things that we wouldn’t have seen in our legacy process because
we didn’t have the coverage.”
REDUCED FALSE POSITIVES
The other related benefits clients noted was a significant reduction in the amount of
false positives Guardian Analytics delivered compared to rules-based solutions, and
the ability of the solution to reduce false positives on an ongoing basis automatically
as new forms of attacks emerged.
The reduction in false positives enabled clients with large volumes of transactions to
accelerate processing while improving customer interactions. Clients said:

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 “My biggest thing is the ability to catch the fraud without creating a ton of
false positives. We’ve only had one since we’ve installed Guardian, and they
went in and immediately retuned to avoid future ones.”
 “Facing increasing false positives is an ongoing problem. Guardian enabled us
to move away from rules-based fraud prevention because updating rules just
doesn’t cut it.”
It is important to note that, because of multiple systems and processes, many clients
didn’t have an accurate picture of the number of false positives generated before
Guardian Analytics was deployed. That said, they reported false positive rates of
fewer than 1 percent on monthly transaction volumes of 20,000 to 64,000 wires per
month, with similar results for ACH transactions, conservatively estimating a 5-fold
reduction in false positives compared to other systems.
REDUCED STAFF BURDEN
Nucleus found that the benefits of automation and better identification of fraud
through Guardian Analytics enabled clients to manage growing volumes of
transactions and more sophisticated threats without increasing staff. In many cases,
it enabled them to devote fraud staff resources to other activities. Clients of
Guardian Analytics can avoid or redeploy at least 2 full-time fraud resources while
increasing both fraud detection and transaction volumes.
Clients said:
 “There’s a huge enhancement in efficiency with which we process wires,
especially with commercial clients that use online wire transfers. We don’t
have to worry about manual review – Guardian automatically detects potential
fraud and quarantines them.”
 “Our wire volume has increased 29 percent over the past two years, so if I were
still performing our old reviews I would have added one or two people to the
team by now to keep up with the volume.”

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 “Prior to Guardian we looked at every wire over $250,000 for secondary review
and every individual ACH originated between $9000 and $9999.99. We added
Guardian and took away the manual reviews, took on some more reviewing on
other products and lowered the thresholds on some other reviews.”
 “With the rising fraud, we would have needed an army to catch all of them.
With Guardian we just need one to two people.”
IMPROVED CLIENT MANAGEMENT
Beyond basic compliance requirements, Nucleus found financial institutions using
Guardian Analytics were able to be more proactive and use a data-driven approach
to reduce fraud risk for customers. In many cases, clients said that they had many
cases where a customer had the authority to initiate a wire, but because of Guardian
Analytics their fraud department was able to contact the customer and convince
them that it was fraud. The Guardian Analytics alerts put them in the position to ask
the right questions and protect customers, in many cases, from themselves. Clients
said:
 “We’re expected to take reasonably available business measures to protect our
customers: the bank should have know it wasn’t my typical behavior. We
needed to automate this to make it efficient.”
 “The biggest benefit is precenting loss for our customers. With Guardian we can
see a transaction is fraud and have them change their minds. In a commercial
issue you’re not going to reimburse them, and they still get mad at the bank.
It’s always the bank’s fault anyway. Now we help that relationship.”
 “Every single day we see employees with desktop wire authority that will fall
victim to fraud. With Guardian we can protect them from themselves.”
 “If the originator is being duped, the bank doesn’t ultimately have liability for
that. But we’re helping our customers avoid losses – protecting our customers
better because we’re stopping a lot of fraud that we wouldn’t have stopped in
our old processes.”

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 If we get a request for proposal or need to do a commercial bid, we state what
fraud systems we use. Guardian Analytics is a differentiator.”
C O N C L U S I O N
As fraud continues to challenge financial institutions, the benefits of applying
behavioral analytics to combat fraud are clear from Guardian Analytics customers:
lower cost, reduced risk, improved client relationships, and competitive advantage.
Nucleus found that Guardian Analytics clients were able to take a much more
sophisticated and proactive approach to battling fraud by leveraging behavioral
analytics to change their fraud review processes. In many cases this represented a
significant change in mindset for fraud teams that weren’t familiar with analytical
models. We found that clients were most successful when they took advantage of
the usability and drill-down capabilities of the solution to enable reviewers to
validate the decision process the model used, increasing their confidence in future
fraud alerts.
The volume and sophistication of fraud attempts is increasing, and, in many cases,
financial institutions are put in the position of protecting customers from
themselves. Using a data-driven approach eases that conversation with customers
while ensuring the appropriate safeguards are in place to thwart fraud. Leveraging
the SaaS model of Guardian Analytics and a new approach to monitoring for fraud
that leverages machine learning and a highly usable interface enables Guardian
Analytics clients to achieve rapid payback while reducing fraud and improving client
relationships.

ROI of Fraud Detection by Nucleus Research

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