For FIs, Risk Becomes Reputation (And Vice Versa)

Call it connected commerce of a different stripe. It’s not just buyer and seller.

For banks and processors, commerce means customers, of course, transacting across time zones, business verticals and currencies.

And there’s an intangible connection too, one that can sow dividends or destruction. We’re talking about reputation.

In the latest Topic TBD, PYMNTS’ Karen Webster spoke with Jane Hennessy, head of external alliances at of G2 Web Services about the growing need for reputation management – and it’s an endeavor that needs constant attention.

Think of it this way: The age of Know Your Customer is now morphing into the age of Know Your Customer’s Customer. The chain of reputation is only as strong as its weakest link. The weakest link might be hard to spot, buried as it might be in a bank’s portfolio.

Peeling back the onion to sift through the layers of social media, watchdog websites and legal databases, the questionable actors who Hennessy said “may not be operating at the surface level” start to reveal themselves. When considering the processors’ or banks’ portfolios, the risk may not be plainly evident at the parent company level – or, in a sense, the “official” entity that is listed as a customer.

Rather, the warning signs could be found, for example, in d/b/a’s (doing business as, or the fictitious names individuals or companies may adopt) or across several websites operated by the customer.

Hennessy noted that regulators at both the federal and state levels are refocusing on consumer protection. The onus is shifting swiftly onto financial institutions to embrace proactive monitoring of corporate customer reputation, which can presage risk to customers even further down the chain (at the individual level, that is) and to the FI itself.

Reputation management is as much an art as a science, agreed Hennessy and Webster. Simply counting the number of complaints that rack up on sites such as the Better Business Bureau, the CFPB or the Ripoff Report is not enough. The FI must take a holistic view of what reviews, ratings and complaints might be illustrating in terms of materiality.

For the FI, said Hennessy, customer service complaints may matter, but what matters more – and what points toward true nefarious activity – is what is germane to payments and transactions. Waiting for eons in line or having trouble with a call center may not be as much of a warning sign as complaints about a student lender who suddenly jacks up rates without warning by hundreds of basis points.

For proper risk control in banking (and beyond), it’s a must to examine the principals behind the business that is being considered for onboarding, or already is part of the portfolio, said Hennessy.

New Treasury rules governing beneficial ownership come into play in May of 2018, requiring the identification and verification of individuals who own at least 25 percent of a company. According to Hennessy, regulators have informally relayed that FIs should be running negative news when those rules take effect. In other words, verification is simply not enough.

Diligence can be crucial (and significant when it comes to spotting bad guys who may be hidden deep within a portfolio). Through a series of vignettes, Hennessy relayed how an individual can harm others despite signs that are misread – or even altogether ignored – by FIs.

In one example of an especially egregious case, Maria Duval, an alleged psychic who, through the organization Astroforce, solicited and preyed upon vulnerable individuals for millions of dollars. Numerous naïve and well-meaning elderly people lost their life savings. Even as online complaints mounted, indifferent processors and banks continued to allow fraud.

In another example, serial fraudster Glen Burke plied his trade through sham telemarketing and sweepstakes scams, also done through direct mailings, that promised prizes to winning consumers and then never delivered. What might have been a strong line of defense among the FIs was not there.

In more general trends, Hennessy maintained that the need for vigilance is unending – especially when it comes to eCommerce, where wares (and legality) can change in an instant. Consider the case of the online pet store that goes from selling chew toys to cannabis six months after opening its virtual doors and through ancillary sites.

The lesson, as the proverb states, is not to judge a book by its cover. “The scrutiny [of business activity] is going to be much more severe when you open up an account with a financial institution or a processor,” and then may tail off. Again, FIs were guilty of checking off names and addresses, as “a lot of times they are trying to quickly get an account open – if they do not, the customer will go to another bank.”

For G2’s own offerings, the firm has data scientists in tandem with machine learning and algorithms to research hundreds of thousands of data sources, across social media and legal conduits, to search for red flags that may uncover risk heretofore hidden.

Fraudsters disappear and reappear and change what they do, sometimes materially. “Sometimes they get a little lazy” and may leave telltale clues, like cellphone numbers or addresses, that do not change. But given the deluge of data out there, the ever-widening web of commerce and the fact that fraudsters are ever-nimble, the days of Google searches by a lone bank employee looking for bad actors are limited. “You really need to use an outsourced party,” she told Webster, as “these manual processes only skim the surface” when researching reputation.