How can a Bank prevent Online Banking Fraud?

While online banking has been around for many years, virtually no cases of fraud have been reported until recently. Since the beginning of the year 2004, reports of fraud cases nearly explode and banks are looking for ways to protect their online banking channel. This paper discusses the pros and cons of the different fraud prevention approaches used throughout the world.

Online Banking Fraud Schemes

Most online banking fraud schemes involve two steps. First, the criminal obtains the customer's account access data, i.e. logon name and password. Second, the criminal uses this information to transfer money to other accounts and withdrawals the funds. For the first step, criminals have employed different schemes in the past:

The "over the shoulder looking" scheme occurs when a customer performs financial transactions while being observed by a criminal. A fair number of cases have been reported where customer's account access data was obtained by the criminal just by observing customers at a public Internet access point.

The "phishing" scheme involves using fake emails and/or fake websites. The word "phishing" stems from combining the words "password" and "fishing". Criminals send emails that appear to be from the customer's bank that direct customers to a fake website. This website impersonates the bank's website and prompts customers for their account access data. Over the past months, most banks have executed customer education programs, thereby reducing the effectiveness of this scheme. It will, however, take awhile before all customers are smart enough to extinct phishing.

The "Trojan horse" scheme is based on embedding a computer virus type software program onto the customer's PC. Trojans often tie themselves into the keyboard driver and record keystrokes. Once a Trojan detects that the customer opens an online banking website, it captures login name and password, and sends it to the criminal.

In the year 2003, phishing was the dominant fraud scheme. In the year 2004, banks experienced a sharp rise in Trojan fraud scheme attacks.

One Time Passwords

To improve security, some banks use "one time passwords", also called OTP. Upon activation of the customer's account for online banking, the bank mails a list of OTPs to the customer. Each time the customer perform a transaction, he enters one OTP for verification. Once used, the OTP becomes invalid. If the customer runs out of OTPs, he is sent a new list.

While this approach effectively prevents "over the shoulder looking", it generally fails to prevent other fraud schemes. Phishing emails also ask for OTPs, and a customer naive enough to give out his logon name and password will likely also provide OTPs.

Trojans simply also capture the OTP once entered. At the same time, they falsify the customer's input in the browser software (e.g. by adding an invisible character) or cause the browser software to crash. This causes the customer's transaction to be intercepted and the OTP to still be valid. The criminal can then use this valid OTP to perform a fraudulent transaction.

Hardware Tokens

The high-tech alternative to paper OTP lists are "hardware tokens". These devices have the form factor of a key chain attachment, featuring a crypto processor and a display. A hardware token displays a new OTP every 60 seconds. Because each OTP is only valid for a limited period of time, they provide significant protection against "over the shoulder looking" and phishing schemes.

Hardware tokens can, however, not protect the customer against Trojans. The fact that the OTP is only valid for a short time just reduces the amount of time the criminal has to exploit the data obtained by the Trojan. Because many criminals already use automated scripts on their servers to perform fraudulent transactions once the access data is received from the Trojan, the time limit proves no significant barrier to the criminal.

In addition, some banks have discovered Trojans that perform the fraudulent transaction right from the customer's PC. As this involves next to no delay, the hardware token approach fails to prevent Trojan fraud schemes.

Transaction Specific OTPs

The shortcoming of both paper OTP lists and hardware tokens lies in the fact that each OTP is not transaction specific. That is, the same OTP can be used to verify either a genuine or a fraudulent transaction. One possible way to come by this flaw is to use a "key generator" device that generates an OTP based on primary transaction parameters.

A key generator looks similar to a pocket calculator. It has a keypad that lets the customer enter the source account, target account, transaction amount, and a PIN. Based on these parameters, the key generator generates a transaction specific OTP. The customer now enters the transaction parameters into the online banking application including the generated OTP. When the online transaction is received by the bank's server, it performs the same calculations as the key generator and thus verifies the OTP.

If a criminal captures such an OTP, he cannot use it for a fraudulent transaction, since this OTP can only be used to verify a transaction with the same parameters as entered on the key generator. Because the key generator is a separate hardware device with no connection to the Internet, it is immune to getting attacked by malicious software.

For these reasons, key generators can be considered a highly effective fraud prevention measure for online banking capable of preventing all known fraud schemes. The disadvantages of key generators are, however, the cost of the device, the fact that the device must be physically present to perform online banking, and the fact that the customer basically has to enter each transaction two times.


Some of the disadvantages of using key generators are avoided by sending OTPs to the customer using SMS. With this approach, the customer first sends the complete transaction to the bank's server. The bank's server then creates a random number as OTP and sends it to the customer's mobile phone as text message. The customer now enters this transaction specific OTP into the online banking application, and sends it also to the bank's server. If the generated OTP matches the one transmitted by the customer, the transaction is verified.

Because the OTP transmitted can only be used to verify the transaction that is already received by the bank's server and cannot be altered from the outside, this OTP is of no use to a criminal. In theory, sending OTPs by SMS should hence be as effective a fraud prevention measure as a key generator. In reality, banks have experienced that the weak point is the mobile phone identification. Effective fraud prevention is only provided if any change of mobile phone number is performed only after thorough identity checking.

Another disadvantage of this approach is that banks need to tie in their infrastructure with the infrastructure of a wireless operator. Wireless operators all over the world are investigating ways to leverage their existing infrastructure into new sources of profit. Most operators hence look into providing financial transaction services of various kinds. Banks hence may soon find themselves in a situation, where wireless operators offer their customers financial transactions using just the mobile phone and nothing else. The bank's offering would involve using first an Internet browser, than wait for an SMS, read it, go back to the Internet browser, type in the OTP and erase the SMS. For a customer, the bank's offering appeals to be a lot more complex than the wireless operator's offering.

Smart Cards and USB Tokens

Smart cards and USB tokens implement a different approach to authentication. Smart cards contain crypto processors without a display. They must be electrically connected to the customer's PC using a card reader device. USB tokens are essentially the same, only that they render card readers unnecessary by plugging directly into the customer PC's USB port.

By exchanging crypto keys with the bank's server, the bank's server can be sufficiently sure that the online transactions secured with this approach stem from the genuine customer. While smart cards have been hacked in the past, the latest generation smart cards will likely provide a high level of fraud protection for many years.

The disadvantages of the smart card approach lies in its need to by electrically connected to the customer's PC. This connection requires the installation and configuration of specific hardware drivers. In many pilot rollouts of smart cards, this turned out to be a frequent source of customer support needs.

The other disadvantage is that the need for the electrical connection limits the use of online banking. Many customers perform online banking from their office. Installing card reader hardware and drivers is often not possible for managed office PCs. Also, recent electronic organizers and smart phones provide Internet browsers that are well capable to perform online banking, but offer no capabilities to connect a smart card reader or an USB token.

Transaction Monitoring

A completely different approach to secure online banking comes from the adaptation of fraud prevention systems used with credit and debit card processing. In payment card processing, fraud is a known phenomenon since many years. Technical security measures introduced to payment cards, such as magnetic stripes or chips, have only provided temporary relief from fraud losses.

The only measure that has proved to limit fraud losses permanently was the deployment of transaction monitoring software. This has become the de-facto standard for fraud prevention with payment card processing worldwide.

Transaction monitoring occurs in the bank's data centre. For each transaction, the transaction monitoring software scrutinizes the current transaction's parameters, and compares it with the previous transaction of both the customer and the counterparty of the transaction histories. By comparing the current transaction pattern to stored known fraud patterns, the software can flag suspicious transactions "on the fly". Such transactions are then referred to a call centre for manual verification.

There are multiple advantages to this approach when compared to the others discussed before. There is no new device to be used by the customer, no dependency on mobile phones and no customer support problem with hardware driver installation. There are also no one-time costs per customer for a card reader or an USB token, and no per-transaction cost for sending SMS.


But what are the disadvantages of transaction monitoring? One problem arises when a new fraud pattern emerges, which is not stored in the transaction monitoring software. Another problem arises when by accident the current genuine transaction patterns resemble a known fraud pattern so much that the transaction monitoring system refers the genuine transaction to the call centre.

The first problem exists with any fraud prevention measure. Once criminals find a way to circumvent the measure, the door to fraud is open. The question becomes what can be done in this case. If the fraud prevention measure involves devices that are distributed to the customers, fixing the security problem becomes difficult. When the French credit card chip system was hacked, retrofitting point of sales terminals to patch up security was estimated to cost 5 billion U.S. dollars. Transaction monitoring provides a significant advantage in this case because it is centralized. By adding the new fraud pattern to the fraud detection logic in the bank's data centre, the entire system becomes instantly "immunized".

The second problem also occurs with any fraud prevention measure. Any measure will impose a certain customer disturbance. Smart cards and USB tokens may cause trouble when their hardware driver becomes incompatible with any change of the customer's PC. And like hardware tokens and key generators, all extra electronic devices have certain likelihood to fail or get lost. OTPs send by SMS may get lost or delayed, in particular with International roaming. Transaction monitoring software will inevitable generate a certain rate of false alarms. Banks must carefully determine which level of customer disturbance they consider acceptable for the security level needed.

RiskShield Fraud Prevention

One of the most commonly used transaction monitoring software product used for fraud prevention with card based payment systems is RiskShield® of Inform Software Corp. Since its introduction in the year 2001, RiskShield has won fraud prevention for 122 million cards in Europe, spread over 7 different portfolios. Banks have verified that RiskShield provides a total of US$ 223 million fraud savings each year.

Inform Software Corp has recently introduced a special version of RiskShield for online banking. This product is currently in rollout with online banking operations of 3 major European banks.

RiskShield is delivered with countermeasures against all known online banking fraud patterns. A fraud pattern for example can be an unusually high frequency of payments going into one target account from different source account. If none of the source accounts have ever transferred funds to this target account before, and the transactions have all been originated from IP address ranges belonging to certain Internet service providers never used before by the source account holders, RiskShield will conclude that this is part of a fraud scheme and will refer transactions to the call centre. At the moment, RiskShield's prevention logic contains about 80 different online banking fraud patterns plus variants.

In addition, RiskShield looks out for "unusual" transaction patterns because they could be emerging fraud patterns. Once RiskShield administrators are alerted, they use the RiskShield analysis and simulation environment to isolate potentially new fraud patterns, and simulate the effectiveness of the developed countermeasures.

RiskShield also uses transaction data from other payment channels to refine its detection of certain fraud patterns, if such data is available. The transaction sequences are automatically merged by RiskShield into "transaction fingerprints". Also, non-monetary transactions, such as password changes, address changes or claims of lost cards are used by RiskShield to detect specific fraud patterns.

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