Lloyds TSB is part of the Lloyds TSB Group - one of the leading UK-based financial services groups, whose businesses provide a comprehensive range of banking and financial services in the UK and overseas. At the end of 1999 total group assets were £176 (approx. $250) billion and the company had over 76,000 employees. Market capitalization was £42.4 (approx. $60) billion.
Due to the industry-wide increase in credit card fraud, Lloyds TSB, along with most other major issuers, recognized the need for improved proactive fraud detection to limit customer and shareholder impact. Lloyds TSB already had detection systems in place but recognized the need to fully exploit these systems in order to combat a fast-growing problem. To this end, the group established a dedicated section within the main fraud department with the sole purpose of using data analysis to reduce card fraud from the account recruitment stage through to card delivery methods and transaction profiling.
The main issue with fraud detection is trying to differentiate between genuine and fraudulent spend. Identifying fraud has been likened to finding a small, but very sharp, needle in a haystack. The base detection systems that are installed improve that analogy to a needle in a bale of hay. Data analysis has enabled Lloyds to improve the detection process. Fraud is a small percentage of Lloyds TSB's total business but it is costly to the bank, and inconvenient to customers whose confidence in the payment process is paramount.
It would be easy for Lloyds TSB to stop virtually all card fraud by simply speaking directly to the cardholder every time a transaction was made, but with several million credit cards in circulation, this is not possible. Lloyds TSB set a target of trying to identify at least 65 percent of fraud at a false/positive ratio of no worse than 5:1. In other words, for every six transactions that are intercepted real-time, at least one of them will be fraudulent. By doing this Lloyds TSB planned to identify and prevent at least 65 percent of the fraud that it suffers.
A member of the analysis team who used the same software at a previous card issuer chose an SPSS data mining solution. The ease with which decision trees can be built and then translated into "if…then…else" statements made it ideal for integration into Lloyds TSB's base fraud detection systems.
The main requirement of the software was that it was easy to use and supported dynamic interaction with the data. Only one member of the nine-person analyst team had any experience with the package and although there was some one-to-one coaching, analysts were very much encouraged to "play" with the software and data as part of the training module.
During the summer of 2000, various areas within the division piloted a small data warehouse with the sole objective of clearly demonstrating the benefits of data mining and analysis using their own data. The warehouse pilot allowed Lloyds to have full interaction with all of its transaction data and SPSS data mining products were the software of choice.
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Within the two week pilot period we had built 24 fully working predictive models with an estimated annual saving of over £2.5 (approx. $3.5) million.
David Cooper
Head of Fraud Strategy
Lloyd's TSB
Going into the warehouse pilot Lloyds TSB already had some success with SPSS solutions on small subsets of data. They knew, therefore, that they would get some benefit from the software. However, the warehouse provided Lloyds TSB with all the data on powerful machines and in a working environment that was conducive to analysis. Within the 2 week pilot period Lloyds analysts had built 24 fully working predictive models with an estimated annual saving of over £2.5 (approx. $3.5) million. In addition to the financial benefits, the time taken for an analyst to develop a complex rule has been reduced from a few days to a few hours. Furthermore, the software allows a level of interaction so that models can be simulated prior to being implemented and therefore the impacted data can be quantified in advance.
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“Within the 2 week
pilot period we had
built 24 fully
working predictive
models with an
estimated annual
saving of over
£2½m.”
- David Cooper, Head of Fraud
Strategy, Lloyds TSB
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