The $100 Billion Hidden Fraud Crisis

Jim Marous (00:11):

30 to 50% of your fraud losses don't come from hackers or organized crime rings, they come from your own customers who are disputing legitimate transactions under their own names. This is what they call first-party fraud as a hundred-billion-dollar program that many financial institutions don't even track as a separate category.

Jim Marous (00:32):

So, while banks use advanced tools to detect external fraudsters, their own account holders are taking advantage of longstanding dispute processes meant to protect customers, turning chargebacks into weapons against the very institutions that serve them.

Jim Marous (00:49):

The math is actually quite staggering, it's very surprising to me. This single category now accounts for up to half of all fraud losses and keeps accelerating while most executives stay focused on the threats from the outside, as they obviously should do as well.

Jim Marous (01:05):

Joining me today is Shanthi Shanmugam, the CEO of Casap who delivered products at Robinhood and Chime before founding a company to address this specific crisis. We're going to examine why first-party fraud has surged, how manual process dispute processes enable it, and what essential changes are needed to transform this hidden vulnerability into a competitive edge.

Jim Marous (01:30):

So, before we start Shanthi, can you introduce yourself and tell us a little bit about your background?

Shanthi Shanmugam (01:36):

Absolutely, Jim. Thanks for having me here. I'm Shanthi, CEO, Co-founder of Casap. Before starting Casap three years ago, you're right, I did spend a lot of time building products at Robinhood and my co-founder spent time building products at Chime.

Shanthi Shanmugam (01:51):

And what we came to realize over a combined decade of building products at these two very large growing fintechs is that we weren't really that different from a lot of other financial institutions. We realized that every financial institution, whether it be a bank or a fintech, wants the same thing; we all want to be that one primary financial relationship for that end consumer.

Shanthi Shanmugam (02:18):

And when it came to the things that got in the way of that, what got in the way of building loyalty, what got in the way of when someone goes to buy a coffee at Starbucks, them picking my card and not that other fintech’s card or not that other bank's card — the things that got in the way were precisely these experiences of friction.

Shanthi Shanmugam (02:36):

Experiences of fraud, experiences of disputes, experiences of alerts or blocks when you're trying to just do something and your bank gets in the way. And what we came to realize is how these moments are handled is what makes or breaks that journey or that goal of becoming that primary financial relationship.

Shanthi Shanmugam (02:57):

So, that is a lot of the experiences that we saw in our day-to-day and often people feel like you can either have a great consumer experience or you can have no fraud losses, but you can have both. And we felt like that is no longer true, not with technology being the way it is today, not with us as people being excited to actually question the status quo and rethink how we've been doing things for decades, if not centuries, and that's really what gave birth to the idea of Casap.

Shanthi Shanmugam (03:27):

So, Casap stands for “get your case done ASAP” and it's really all about how do you instantly resolve issues for honest consumers without losing money to the less honest ones, and how do we really just become the way that banks should operate in this new era. So, yeah, that's a little bit about me.

Jim Marous (03:46):

So, can you give me a couple examples of what first-party fraud actually feels like? Give me a couple examples of how that happens and what it means. Because I think I know because I actually had a interview with Kevin O'Leary, and he mentioned around how people will buy fake watches then claim fraud where they've lost a real watch, real name brand. But that's probably just one example. But what are some other examples that are maybe very easy to identify?

Shanthi Shanmugam (04:17):

So, a great question, and I love talking about first-party fraud because it really kind of makes you think from the psychology of all of us being humans, like, "Oh, I guess that could make sense, or I see how that's a great area, or wow, people actually do that. Are you kidding me, Shanthi?" Are usually the reactions that I get.

Shanthi Shanmugam (04:35):

But taking a step back, there's kind of two types of disputes. So, when you think about someone disputing something, it's them saying, "Hey, something has happened that I'm not okay with." And it could either be the first category is money has moved, and I didn't want it to move.

Shanthi Shanmugam (04:54):

It could be, "Hey, I’m looking at my account statement on a Sunday evening just reviewing my finances like the average person, and I see a charge for a $3,000 TV at BestBuy, and I sure as heck know there was no new TV in my living room, so where the heck did that come from because I needed that money to pay rent at the end of the month.”

Shanthi Shanmugam (05:12):

So, that is a real dispute, that is someone looking for financial peace of mind, does my bank have my back? So, that's someone saying money is moved and I didn't want it to, but unfortunately, for every real person in that sticky situation, there's at least three people that buy the TV at BestBuy and sure the heck pretend that they don't. So, that's one type of first-party fraud. Someone saying, “I didn't do this thing” when they totally did, when they totally bought the thing.

Jim Marous (05:37):

So, the fraud's not committed by the customer, it's committed to the customer.

Shanthi Shanmugam (05:41):

Well, they claim that it's committed to the customer, and one in four, it will be true, but three out of four, they'll be like, they would've bought the TV, then they'll have a little buyer's remorse, and then they'll say, "Huh, I didn't get that TV, I'd like a little bit of free money back this month." So, that's what that first-party fraud looks like, you're absolutely right.

Shanthi Shanmugam (06:03):

And then the second type is kind of like what you mentioned that Kevin shared previously, which is kind of like a merchant issue. It'll be certain things where people are going to be like, "Oh, I ordered this thing so I made the transaction, but I never got the thing," or it'll be something like … what's very, very interesting is then sometimes people will get certain types of goods, and then they will have a subjective take on, I'll give you a great example.

Shanthi Shanmugam (06:35):

There was a case where a man, we'll call him Frank. Frank goes to Disneyland with his family and he comes back from this trip and files a dispute with three transactions. The first one was for his, I think premium economy flight because he's a tall guy, and premium economy told him he'd have a lot of leg room, but his knees were bumping up against the seat. So, he felt like that wasn't premium. So, he disputed that.

Shanthi Shanmugam (07:00):

Then the second one, I believe, was the Airbnb he got, because he was so excited to take his family to this Airbnb with the heated pool, but they could barely step in because it was tepid. It was lukewarm. And then I think the final one was they'd gone to a diner and the family all had a bunch of dry burgers. They ate them, but they were practically inedible.

Shanthi Shanmugam (07:21):

So, he comes home and he files a dispute with three transactions to his bank. He does not talk to United, he does not talk to Airbnb, he does not talk to the diner. He’s just easy enough, my bank needs my business, I'm just going to file a dispute.

Shanthi Shanmugam (07:33):

That's what we're talking about as first-party fraud. It's sometimes very explicit, like someone knowing they're doing something wrong, someone knowing that they're lying, and then sometimes it's really a little bit more subtle where they were like, "Hmm, did they hold up their end of the bargain? Is it worth it?" Is it reasonable to dispute your entire five nights stay because they said the pool would be heated, and to your perspective, it wasn't heated. This is like the kind of gray area that we see some of these disputes being into.

Jim Marous (08:02):

Well, I'll tell you what, that's a whole lot of time trying to get fraud about a burger, but you get a lot of burgers, it's real money. What's the biggest misconception that banks and credit unions may have about the dispute process, especially when their customers are the source of that dispute?

Shanthi Shanmugam (08:22):

What a great question. So, most banks, I will say, are making the problem a little worse. I actually think some banks are part of the problem, and hear me out on this Jim, hear me out on this. So, if you think about this, folks are coming in saying that they didn't buy things that they totally bought or they used a service and then they try to get a refund for the whole service because one small thing goes a little off plan.

Shanthi Shanmugam (08:48):

These folks, when they come to their bank filing these disputes, more often than not, they're getting rewarded. So, a lot of banks, because there are compliance rules here, the rules say, "Hey, if someone comes to you saying exactly X, Y, and Z, you got to give them money back in the first 10 business days or you're going to be out of compliance because we're going to assume every customer's telling the truth, you got to get them taken care of."

Shanthi Shanmugam (09:12):

They're nervous about meeting these compliance deadlines and because they have to use 10 different tools trying to make this stuff happen, what they end up doing Jim, is they end up creating what we call a write off rule, a write off threshold.

Shanthi Shanmugam (09:25):

They say, "Hey, it's not worth my team's time looking at anything more than 25 bucks, 50 bucks, 100 bucks, whatnot, so anything less than that, we're just going to give them the money back immediately." Sure, that's a good customer experience but what does that tell the folks that filed this dispute being like, "Oh, let me see if I get some money back." "Oh, I got money back."

Shanthi Shanmugam (09:44):

Cool, the next time something happens or the next time I need a little extra money, I can just keep doing this and I'm going to keep getting my money back. And what happens is there's this self-fulfilling cycle where they keep increasing the volume, and then they need to keep increasing the thresholds, and then before you know it, you get to having a $1,500 write off threshold believe it or not.

Shanthi Shanmugam (10:05):

I bet a bank that had a write off threshold that high and it was crazy. So, that's one misconception is sometimes the very tools or band-aids we're putting on this process is the thing that's actually making some of this worse.

Shanthi Shanmugam (10:17):

The second thing I'll share is 70% of banks are outsourcing a component of this to someone else. And I think that makes sense when you just think of it as it's just something that needs to get done, and it is not necessarily my bank's core competency or my strategic differentiator to do this differently than anyone else, so let me pay someone a flat fee to handle it for me.

Shanthi Shanmugam (10:38):

But what we're starting to see and actually we saw this at Chime — at Chime, my co-founder realized talking to folks that left Chime as their primary bank, the biggest reason next to a big life change, job change, something like that Casap − the biggest reason someone left Chime as their primary bank was a negative dispute experience, believe it or not.

Jim Marous (10:58):

So, really it all works for the same end result which is we don't like to doubt the customers that have been customers for a while, we don't want to dispute what we call small amounts but they become large over time. But also, from what you're describing, the dispute management process become quite fragmented and manual at a time when modernization of what I'm going to call the big fraud.

Jim Marous (11:25):

Now mind you, this is now a big fraud that I didn't know about, but the outside fraud had become so much easier to spot with modernization and digitalization. Why has the dispute management for first-party fraud stayed so manual and fragmented?

Shanthi Shanmugam (11:40):

I think number one is because like I mentioned, 70% of banks are outsourcing a component of this process to someone else. So, when you outsource it, there is an agency problem. A principle and agent problem where it's now you've outsourced it to someone, you give them a flat fee for just handling the case, they will take 90 days to do it, totally run out the time that you get to do it from a regulations perspective when you could maybe do it much faster.

Shanthi Shanmugam (12:06):

They might not care as much or might not have as much skin in the game to root out the first-party fraud because here's the thing; the rules don't care if you give a lot of money to fraudsters. The government isn't holding the bill at the end of the day, but they care if you decline one innocent customer.

Shanthi Shanmugam (12:25):

So, because of that fear and because at the end of the day, the person that's managing the dispute or trying to resolve the dispute isn't the one paying the bill at the end of that dinner, what ends up happening is the industry takes on a lot of fraud losses because it's being handled by people that don't have skin in the game or maybe even context to really figure out who's telling the truth and who's not.

Jim Marous (12:47):

So, has this become a steadily bigger problem now that the economy has been a little bit shaky to say the least, and more and more people are falling into the category being maybe topped out on their credit lines, maybe having a challenge with their credit lines, and maybe just having a hard time paying the next rent or mortgage bill?

Shanthi Shanmugam (13:06):

Yeah, Jim, you hit the nail on the head. Unfortunately, since COVID, it’s really when we saw that uptick in first-party fraud, it's also when we see an uptick in economic hardship. And when people are struggling to make ends meet, they will look for ways such as this to get a little bit of flex, to get a little bit of give in their day-to-day life.

Shanthi Shanmugam (13:26):

And it's really sad we live in a country where the average American can't handle more than a $400 shock to their system. So, in this situation, you're absolutely right, the increase of economic hardship is definitely directly correlated to an increase in first-party fraud.

Shanthi Shanmugam (13:42):

But I'll tell you one more thing, it has been exacerbated by, I would say the prevalence of the TikTok videos, the Reddit threads, the YouTube videos I see of people teaching each other how to get money back through disputes or essentially abusing disputes.

Shanthi Shanmugam (14:02):

And we see it to the point where it's not just people that are struggling to make ends meet that are committing first-party fraud. We see people that they have maybe a totally fine credit score, they have a steady paycheck that covers more than their expenses, maybe they get an expensive skin cream, and then they return it with Greek yogurt in it because why not, show it to the big boss.

Shanthi Shanmugam (14:25):

Or folks like Frank, like he is going on vacation with his family to Disneyland, he feels entitled to good experience and he feels entitled to a standard of care that he expects his bank to provide. And I think it's the combination of both economic hardship as well as an overall awareness of dispute abuse, and a lack of feeling bad about it, and I think the combination-

Jim Marous (14:49):

Well, and it's one of those things, birds of a feather. You mentioned about TikTok and Reddit and all these things. If it sounds like everybody's doing it except for you-

Shanthi Shanmugam (14:56):

You feel like a smirk.

Jim Marous (14:58):

You somehow feel in the back of your mind, "Well, I guess I deserve part of this pie as well." Is the whole psychology of thinking that because it's guaranteed, credit card transactions are processed and they're guaranteed, that there's no real harm.

Jim Marous (15:16):

Is there a behavioral thought process that says, you know what, either it's the big financial institution or maybe I know when I'm looking at my credit card bill and if there's a dispute or something that's challenging, even though I know where it falls, the reality, it almost feels like no, it's just part of this big bucket that's left for people to have this problem.

Shanthi Shanmugam (15:40):

Yeah, no, you're absolutely right, people feel like one of many where they feel like the folks that are paying up at the end of the day are the folks, the institutions that have to pay these losses can take it. And it can't be that bad, but it's a death by a thousand cuts. It's everyone thinking this way.

Shanthi Shanmugam (16:01):

I can't remember exactly who put the survey out (I want to say it was Mastercard) where they said last holiday season, 35% of Americans had submitted a dispute on legitimate charges. 35% of Americans, can you imagine that?

Shanthi Shanmugam (16:14):

Can you imagine that many people disputing something? And here's the thing; where people used to go to the merchant to get a return, to get a refund, to have a conversation, instead, they now know they can go to a single point. A one throat to choke philosophy, if you will.

Jim Marous (16:30):

And not have to meet a person in person.

Shanthi Shanmugam (16:32):

Yeah, exactly. And as someone that very much loves person in person, I'm almost always on the road meeting people because I love that. I love that part of being human, not being person to person, there's a level of anonymity, there's a level of lack of accountability, there's a level of I'm sure it's fine, whatever, this is just one of the many things I'm doing, I'm too busy to think about this. And in that, we're seeing this thing that has been so insidiously painful to our bottom line.

Shanthi Shanmugam (17:00):

And part of that, like you said, is that we're getting better at sensing third-party fraud. So, the denominator is getting smaller, which is good, but I do think for the things that you mentioned, the tailwinds of economic hardship, the tailwinds of TikTok and this sort of … I will literally say, I will go on the record saying this, I do think we do have a little bit more of an entitled community where sometimes, we're not thinking about the repercussions of some of our actions.

Shanthi Shanmugam (17:25):

We say, "Hey, I didn't have the perfect experience, I'm going to get all my money back and I was entitled to it yesterday, and I lose nothing by yelling at my institution to do it.” Because of these kind of behaviors, it's just becoming, like you said, a hundred billion dollars problem for our industry.

Jim Marous (17:40):

So, I know it's not one answer here, so I'm asking it anyway. It looks like the regulations and the compliance issues are behind the times. It looks like financial institutions are behind the times. It looks like the consumer really has no incentive to change bad behaviors, but it also looks like to some degree, the merchant’s even responsible.

Jim Marous (18:07):

What needs to change (and I know your company's doing part of this) in each of these categories to make it so this number goes down, or it's going to be difficult because the government always wants to look out for the little guy but doesn't really do it. But in this case, it's one of these things, if you don't change the regulations against the consumer, the consumer's not going to complain. What from your perspective needs to change to make it so this gets a little bit under control?

Shanthi Shanmugam (18:38):

And you're right, it is not one answer, but I think I can get close. I think I can get close to a complete answers. So, number one, you hit the nail on the head, which is some level of accountability. So, right now because we have at least three to five parties touching a single dispute, that data is everywhere, it's fragmented. The accountability can be fragmented until the very end.

Shanthi Shanmugam (19:05):

And I think also at the end of the day, think of it this way: if I don't pay off my credit card, my credit score gets messed up. My credit score gets messed up, I can't rent my house. Where's that level of accountability around first-party fraud?

Shanthi Shanmugam (19:22):

And when I think about that, like that's actually part of what my company is building, which is could we create this Casap first-party fraud score where institutions and merchants can see, "Oh, Shanthi's someone that tends to buy TVs, and then when it's convenient, turns around and pretends she doesn't."

Shanthi Shanmugam (19:38):

And if that's the case, one, I'm going to add a little bit more friction when buying that TV, where she's signing on the dotted line that it's her and she can't turn around and pretend she didn't, but also, the institution can understand that maybe when Shanthi says things, she might not always be telling the truth, and they will ask me a few more questions. So, maybe friction, selective friction at the right moments to really figure out what's going on, what is reality here? So, I think that's one thing.

Jim Marous (20:10):

So, it's almost like building a credit score in a traditional sense that if you haven't been paying three of the four institutions, the fourth institution's going to realize, you know what, there's something going on here and I just may not be the one that's hit right now, but your score actually helps people or helps organizations understand in the whole from merchant to finance institution going, "Do you really want to take this chance? There's been some questionable activity on this person's behalf."

Shanthi Shanmugam (20:40):

Exactly, exactly. And again, they can still give me an account, they can still give me a card, but when it comes to handling my stories about what's going on, I have to earn that trust, I have to earn that right back, and I think having a level of accountability will actually help prevent this holistically.

Shanthi Shanmugam (21:00):

For example, folks that leverage our platform for disputes and all of that, what we end up doing is we end up identifying some of these folks, and then I put them in what I call a rehab program where I say, "Hey Shanthi, it looks like every Sunday you pretend to lose your card because you left your tab open at the bar, and every Monday, you're disputing all these transactions, sensing a pattern here, feels like you might not be able to keep track of your card. You know your plastic's really a privilege, maybe we hold off on reissuing you another card for the fifth time this year, and you can show us you can handle your card."

Shanthi Shanmugam (21:36):

It's the way I would handle my 18-month-old daughter. You got to give them as much as they seem like they can handle. And I think all of this sounds really good, but this brings me to my second answer to your question, which is in addition to accountability, is how do you actually apply that consistently, and that's what really matters.

Shanthi Shanmugam (21:56):

You don't hear me saying we need to change the rules because you're right, aspects of the rules are a little bit behind the times. I think the rules right now say you need to communicate with customers and assume you're sending them snail mail, but we can send them email, it's all okay.

Shanthi Shanmugam (22:09):

But here's the thing, the rule right now says if Jim comes to you and says, "Hey, I did not buy this $3,000 TV at BestBuy on my debit card," you as a bank have 10 business days to either make a decision or at least make him whole while you figure it out. That's a great experience. In fact, customers these days don't want to wait 10 business days, they expect that same day. That's the experience that Amex provides.

Shanthi Shanmugam (22:33):

So, I actually think the rules are fine. I think the biggest thing is how do we actually (this is my second answer to your question, in addition to accountability) integrate the systems in the right way with the expertise we need to figure out the moment Jim comes to the bank, is Jim telling the truth or not? And if he is, instantly give him his money. Why even make him wait 10 business days?

Shanthi Shanmugam (22:58):

But when we're so confident that he's telling the truth, we can almost be equally confident that, hey, for the folks that don't seem like green flags, let's spend a little bit more time figuring out what's going on and help get them the help they need. And that might not always be saying yes to them and rewarding them for this behavior. Does that make sense, Jim?

Jim Marous (23:17):

Yeah. And I'm wondering when you're out there meeting X, Y, or Z financial institution, no matter what size, it's obviously a big proportion of what they have to deal with. You also have a data backed process that helps them at least identify those people or organizations that are actually causing this problem.

Jim Marous (23:42):

But it sounds like when you go in and you're trying to partner with the financial institution on their behalf, it's more than just the system that you give them. You have to also work a little bit at least with the culture and with the way the people handle it.

Jim Marous (23:57):

In other words, it doesn't matter what kind of data you give the financial institution if the frontline people are given the authority to go up to a hundred dollars on a dispute without any ramifications. Do you work with the financial institution to deal with those behavioral issues that can get in the way with … your data can say anything it wants, but if the behavior doesn't change, it's really not going to change a whole lot.

Shanthi Shanmugam (24:20):

Oh, absolutely Jim. Absolutely. So, kind of bringing it back to my experience and why I have so many opinions and completely agree with what you just said, is at Robinhood, the experience I had that actually inspired me to start Casap was actually the experience that a lot of people think of when you hear Robinhood, which is sometimes a lot of people think of GameStop, the meme stocks, the Netflix movie made about that one company.

Shanthi Shanmugam (24:43):

That's the experience where what happened was overnight 25 million customers hated us, and I was tasked with figuring out how to build back that trust. I launched 24/7 phone and chat support. And when doing that, that's a big cultural change, and that's a big thing where it's like you need to figure out what is the right outcome that you want? How do you get to a first touch resolution? What is our team good at? What is our platform good at? And how do you get out of the way to make sure the system is running in the best way possible? A lot of those learnings that I got from that experience, I’ve applied to Casap.

Shanthi Shanmugam (25:18):

So, when I go to a new institution, like I said, 70% of institutions don't even handle this whole process in-house. So, the first thing I tell them is, "Hey, not only are you paying this flat $20, 30, 40 fee for someone else to do it, they might be taking longer and losing cases they should be winning, I am going to enable you and your team, a team that's never handled disputes and chargebacks before to do it way better partnered with the right tools."

Shanthi Shanmugam (25:46):

So, what's interesting is, Jim, they have a blank slate because most of them aren't doing it today. And when we come in, we come in as the experts, we come in at saying, "Hey, you are partnering with us for an outcome, you are partnering with us to cut your fraud in half, you are partnering with us to get instant resolution," so you're not losing people to the Chases of the world, that is why you're partnering with us.

Shanthi Shanmugam (26:07):

The platform is just one way we do that. There's cultural changes, it's someone on the front line. If you think about why they're so excited to give them that free money, it's because folks in the branch or the call center, they're incentivized to make you really happy on that call. They get bonuses based off of how happy is that customer at the end, that NPS, that survey, it's like, "If you have a moment, press five and I'll give you a survey." It's that.

Shanthi Shanmugam (26:32):

So, what we need to tell them is you need to be accountable to the entire satisfaction of the entire resolution of the issue. And if you tell them we're going to give them money, we give them money, and then we just claw it back 90 days later when our partner loses that case, that's a really pissed off customer, whereas if you could have actually managed expectations and tell them, "Hey, we're on it," but you don't make false commitments, at the end of the day, satisfaction’s a function of expectations in reality.

Shanthi Shanmugam (26:58):

So, if you set expectations that we meet 99% of the time, you're going to get way happier customers. So, I know that was a few different topics that I just touched on there, but does that make sense?

Jim Marous (27:08):

No, it's a great answer because it opens up other doors which is one of the things that you're saying then is going to third parties, there's inconsistent timelines, there's inconsistent communications processes, and the end result for the company in question is simply getting their payment per customer as opposed to service that's provided.

Jim Marous (27:31):

If you bring it in-house, number one, you can actually leverage the data and the tools that you provide. Maybe you still sublet some of these to go, you say, "Boy, these are just going to be a garbage thing to handle.” You let go of those, but overall, you keep control of the process. But I think one of the things you said early is you create the right amount of friction. We sometimes think the fastest is the best, and in many cases it is.

Jim Marous (27:59):

However, there's times when a customer may not think you're really taking care of them if it's fast, let's take a Chime for instance. The account opening process is seamless, but they've also realized that if we slow it up a little bit and put a little bit more into it, then the customer actually feels we're looking out for them on the front end as opposed to making it almost like Apple Card which was three questions when you have the card, and you go, "Geez, I think I feel good about that. I'm not sure if I would've made the exact same decision even though I benefited from it."

Jim Marous (28:27):

And I think it also makes it so the merchants are better served, the rules and the regulations, the compliance are better to track because somewhere out here, you have to make a determination as to why did we do certain things? And consistency, especially as organizations are put under the microscope with regard to, are you treating certain classes different than others, it takes care of that. There's a lot of, it sounds like exponential benefits beyond simply the first-party fraud.

Shanthi Shanmugam (29:00):

Absolutely. I think I have built a whole career on being focused on a single customer outcome. And any time, you can't do too many things, you can't boil the ocean. Our vision for Casap is to be the only way you do anything at a bank, back office, but I don't do everything. I'm focused on disputes and first-party fraud because I'm like if you can instantly resolve a dispute for an honest customer, they're with you for life. And if you don't instantly resolve disputes for dishonest people, you're not losing their shirts on your back to fraud.

Shanthi Shanmugam (29:36):

I think folks that focus on that outcome, they will naturally see that outsourcing it to someone and having it be a black box for 90 days gets in the way of this. They'll naturally see behavior on the front line that's automatically issuing credit when they shouldn't is getting in the way of this. So, I think it's all about if you anchor yourself on what is the best outcome for your customer and your business at the end of the day, everything else will follow. Kind of like these knock-on effects that you're calling out here.

Jim Marous (30:04):

Let's take a short break here and recognize the sponsor of this podcast.

[Music Playing]

Jim Marous (30:12):

So, you're obviously a very good founder, and obviously, a very good leader of your company and you have a great solution that seems to answer some very big questions out there. But I'm sure just because I haven't found anybody yet who sells a hundred percent of the time, what's the pushback you see within an organization to even saying yes to your solution?

Shanthi Shanmugam (30:33):

That's a great question, Jim. So, I will call out a couple. One is, “Okay, Shanthi, you're telling me that …” and again, the folks I'm talking to, everyone is busy. There's not a single person in our industry that isn't busy-

Jim Marous (30:49):

Has free time, exactly.

Shanthi Shanmugam (30:53):

Payments is no exception. And folks that I'm talking to are head of fraud, head of payment operations, head of card services, they are busy, busy, busy. And you are coming to them saying, "Hey, this thing that you're outsourcing and that you still have to spend a lot of time thinking about but not as much if you were doing it, bringing it in house, partnering with a company like ours would mean less time and better outcomes."

Shanthi Shanmugam (31:20):

And literally, if you think about it, I'm owning more than I was before, something doesn't check out. So, that's the first hurdle. And most of the time we just have them talk to other customers that have gone through that same journey, and they're like, “No, I get it, I know it doesn't make sense, but I swear it doesn't hear the numbers.” But that's the first objection that I hear and the big thing is our platform wouldn't exist without agent AI. When I started Casap-

Jim Marous (31:46):

That was my next question. I was wondering how AI has impacted this whole thing, because it seems like the whole thing's built on the back of looking at data over time and seeing change in behaviors.

Shanthi Shanmugam (31:57):

And here's the big thing that ChatGPT made possible; you take a messy narrative, that's what a dispute is. That's what any of these issues are, it's a messy narrative. Someone yelling at you for 15 minutes talking about how they didn't like the temperature in their pool, and generative AI is really good at taking messy narratives and making some sense, and then taking all your data and going back with another narrative that's a little cleaner.

Shanthi Shanmugam (32:21):

So, we wouldn't exist as a platform without generative AI, without agentic AI. And I think starting the company, the same week ChatGPT came out gave me certain ways to do things that wouldn't have been possible before. So, what's really cool is that now (and here's what's so crazy about it) people sometimes think … and I never get this objection ever, I've never gotten an objection where someone's like, I'm worried about my job.

Shanthi Shanmugam (32:43):

Most of the time, the folks that I'm talking to on the front, front lines where they're spending most of their time babysitting an outsourced process being like it's a black box and we keep asking them, "What's going on, what's going on, what's going on?" They are excited because they get to elevate themselves and own more, and on top of that, right now, they feel like robots.

Shanthi Shanmugam (33:02):

They use 14 different tools and they're clicking buttons everywhere with the compliance deadline looming over their head. That makes it impossible to leave work at work to the point where one of our clients was literally like, “Shanthi and the ROI for Casap, I want to put in the therapy that I no longer have to go to because I can actually look forward to work and pay attention.”

Shanthi Shanmugam (33:21):

So, my point here is anyone that thinks agentic AI is removing humans and humanity from the equation, my take, at least the way we are doing it, is we're helping your humans go from being like robots, clicking 14 different buttons on a timeframe, not really thinking through what are they doing, who's telling the truth, who's not to actually getting to be human, to actually getting to have empathy, to helping the person that has rent due at the end of the month that needs that dispute resolved, and not losing money to that person that they have done their CSI investigative skills and have realized or just lying. So, these are the kind of things that I think make a really, really big difference at the end of the day.

Shanthi Shanmugam (33:58):

So, to your point around objections, it's usually how will in-house and owning more of something help me do less, and then the second thing is usually okay, well what is the biggest reason I'm using this? Is it to displace costs of outsourcing? They're really excited about that. Is it for a great customer experience and retaining customers that would've left otherwise, or is it to reduce fraud losses?

Shanthi Shanmugam (34:25):

And for me, I say it needs to be all three, and it's all three because of that one outcome we're focused on, which is instantly resolving disputes for honest people and not losing money to the dishonest ones. Those are the knock-on effects, but then once you implement, you have knobs. And that's the big thing with fraud, if you could set it and forget fraud, fraud would not even exist anymore.

Shanthi Shanmugam (34:45):

But here's the thing, when we push it one way, it's going another way. So, I think enabling these platforms that require these insane configurations, insane implementations, that's so archaic. It needs to be a platform that's as nimble as the very fraud that we're trying to attack. I think that's the other thing too. You need to be on your toes with this kind of stuff.

Jim Marous (35:08):

So, even though it can be a number of different ways to do it and different products, things like that, it feels to me like ChatGPT and agentic AI can actually help in building the responses, the communication tools that need to address these things. Because there's probably, when you put them into categories, relatively few different categories of how this all happens just to it's just where you've done it and how it's happened or what the data speaks to. Do you see this being an outgrowth of your product going forward?

Shanthi Shanmugam (35:43):

Tell me more, Jim. What specifically?

Jim Marous (35:45):

Well, where the actual communication to the customer can be automated in such a way that the financial institution feels like I'm not going to get myself into trouble, but in the same way, we only have so many different ways this actually takes place. It looks like something could be replicated in certain ways.

Shanthi Shanmugam (36:03):

Exactly. In fact, that's one of the best parts of our solution or just thinking about this problem. When you look at the regulations here Jim, the regulations have regulations around how are you supposed to communicate. They say the moment someone files a dispute, you got to send them that dispute confirmation; the moment you show them a provisional credit, send them that; the moment you deny, send them this.

Shanthi Shanmugam (36:24):

And if they come back to you complaining to the better business bureau or someone else or you, you have to show them proof of the investigation you did and why you denied them. All of those communications are completely automated by our platform, the way I think about it is the humans need to make a decision.

Shanthi Shanmugam (36:39):

Humans are very good, I believe, at having great empathy and making judgment calls based on a lot of different data points. They will always be better, at least from my perspective than AI, even agentic AI at making those final judgment calls. And the idea is they make a decision, the communication happens, and that's the other cool part of agentic and I love this so much.

Shanthi Shanmugam (37:05):

One part of the chargeback process is, let's say we go to BestBuy saying, "Hey, Jim didn't spend 3000 bucks on a TV, give us money back, here's all the data." And then the merchant comes back saying, "I'm not going to give you back $3,000." And here's a document that's seven pages long of images and text and random things. Believe it or not, they're using agentic AI to just bury our humans and our teams and all of this paperwork so they can't even make sense of things. Well, here's the thing, we can attack that with agentic AI too.

Shanthi Shanmugam (37:33):

Our AI summarizes that, looks at all the data points and we're like, "Well, you sent a TV to somewhere in France and Jim does not live in France." There you go, case closed. We will automatically reply and have this new document that we generate, and all of that is done without a human in the loop, and the humans are working on the cases that are less clear cut. I think that's the big thing.

Shanthi Shanmugam (37:55):

Anything black and white, we can automate, but how do you enable humans to spend more of their time in the gray area? Because I will tell you Jim, the hundred billion dollars this industry is losing in first-party fraud, I would say maybe 30 to 40% of that anecdotally is black and white clear cut, the rest, it's in the gray area, and we really need to empower our teams to focus on that and not all of the other stuff that they're doing.

Jim Marous (38:20):

So, with that, in the same sense of using AI and agentic tools, how do you balance the relationship against the challenge? In other words, do we really want to spend the same amount of time on a $50 challenge that a customer who's been with us for 30 years, even though we know black and white, it was black and white, that it's not worth that. Is there ways to build that into the system to actually take the customer's relationship into account at least the first time through?

Shanthi Shanmugam (38:54):

Absolutely. And in fact, I think a lot of the rules, like I mentioned, the write off threshold is based on one transaction. It's based on is this or is this not less than $50? What we do, to your point, Jim, is we look at the holistic situation, we look at how long has this customer been a customer.

Shanthi Shanmugam (39:14):

Because sometimes when they've only been a customer for a short amount of time, they're filing a lot of disputes, it's a little fishy. That looks like someone that's trying to take advantage and get the heck out of there and find their next victim, so we'll look at that.

Shanthi Shanmugam (39:25):

We'll also look at, well, what's their dispute? Here's the thing, most of our clients, their write-off threshold goes from a $50 to a six bucks. But even then, even then, let's say it's your first time disputing a thousand dollars charge, let's say your story checks out and we feel really confident we're going to win this money back for you, we're going to automatically give you that money.

Shanthi Shanmugam (39:50):

But let's say you come back again, Jim, the next week and you come in with something that's even maybe less than a $50 thread, let's say $25, maybe two or three $25 transactions, and you're like, "Ha-ha-ha, I can make some 75 bucks. That's going to be really great." We will notice that pattern and we'll say, “No more for you, Jim, we're not going to keep our eyes close to what you're doing. We're going to …”

Jim Marous (40:15):

Fool me once, shame on me, yap.

Shanthi Shanmugam (40:17):

Exactly, exactly right, Jim. So, that's how we think it should be done. The way I think about this stuff, Jim, is sometimes a cart is before the horse when we think about scaling as an institution. And we think, hey, anything less than 50 bucks, not worth us looking at, but what's that led to is billions of dollars in losses for the industry. And not just the financial institutions, but the merchants as well.

Shanthi Shanmugam (40:40):

So, the way I think about it is think about if the only thing you had time to do was to think about this case, how would you actually want it done? And don't jump all the way to the solution that you know that would've worked 20 years ago.

Shanthi Shanmugam (40:55):

Technology is different now. Question that status quo and think, hey, this thing that I want to do, which is look at their history and figure out how often they've been filing disputes and then figure out who needs to work on this, could AI do that? Could my platform do that?

Shanthi Shanmugam (41:08):

And what's cool is now more so than ever, the answer is often yes. And I think that's my big message, that's my big takeaway, is don't assume that the tools that you have in your toolkit are as blunt as they've been so far.

Jim Marous (41:23):

So, we've talked about a huge issue in the fraud category, and one that honestly, I kind of knew maybe in the back of my head, but I didn't see it as fraud, I saw it as cost to doing business, which it's the wrong way to think about it, but that just the way I looked at it then.

Jim Marous (41:39):

You know you are relatively new to the marketplace, you've made a big impact, you've gotten great funding, you obviously have a very good message that you're very passionate about which is always great to talk to a founder because they should always be the most passionate person about their company they founded. Where do you see first-party fraud going the next three years?

Shanthi Shanmugam (41:59):

I love that question, Jim. If you haven't noticed, I'm a very outcome-oriented person. Everything that I do and spend my time doing is anchored on this future that I see that doesn't exist yet that I'm trying to manifest.

Shanthi Shanmugam (42:17):

So, the future that I'm trying to manifest with Casap is a future where first-party fraud is rare because trust is a given. Trust between an institution and their consumer, customer; the trust between a consumer and a merchant, and trust between a merchant and a financial institution. There are some tools that help with parts of those relationships and some tools that don't, or some ways of operating that don't.

Shanthi Shanmugam (42:46):

The way I see first-party fraud evolving over the next three to five years, should I achieve this vision and realize all of this, is it is rarer and it's rarer because there's more accountability with the platform and a scoring system like ours. It's rarer because people are no longer outsourcing this to people that don't have skin in the game and are managing it more themselves, and there's a brighter light on first-party fraud.

Shanthi Shanmugam (43:13):

And it's also rarer because I believe when I think about someone's relationship with their financial institution, there's a world where we can create so much more loyalty. The loyalty we used to have to our community grocery store, our community bank can really change when we give these institutions the tools to really uplevel how they're servicing clients today.

Shanthi Shanmugam (43:40):

It's not like people don't want to serve clients amazingly, it's more that they don't have skills to do so, and they're losing folks to the larger banks because there's a standard of care that those banks guarantee. I don't think that needs to be true anymore. And I think when we come back to the community, there will be more trust as well. It's less anonymous, it's less there's that big guy.

Shanthi Shanmugam (43:59):

So, that's not the message I necessarily meant to share coming on the podcast today, but my point is really that I believe first-party fraud is the symptom of the solutions and some of the lack of accountability and visibility that we have today, and I hope that when I'm talking to you again on this podcast, in five years, I can be talking about something very different.

Jim Marous (44:22):

Well, we won't be waiting that long, I can tell you that right now. And for those who are listening, we've touched base on fraud quite a bit in the last year on the podcast. It's not an area that we used to do because it was considered more of a back-office situation, but the reality is, every front office banker, every person that's in contact with the customer gets touched by the fraud issue in one way or the other.

Jim Marous (44:45):

Be it first-party fraud, the criminal fraud, the fraud that runs around us every day, the digital fraud — the good news is the digitalization of banking has made it much easier to deal with it, but everything's moving at a faster pace than ever.

Jim Marous (45:01):

And as Shanthi mentioned, I don't want to underscore (or I want to underscore this) is that there's never enough time to do what needs to be done because we have so many fighting priorities. It's a matter of saying which ones are most important, which ones are going to affect the customers the most, and I think what's interesting is we kind of think that saying yes to whoever comes in and says something happened to me is a good customer service response and it really isn't; it’s the worst for the financial institution.

Jim Marous (45:30):

It may be good for the customer in the long run, but somewhere this person's going to fall, and it's going to be a lot further than just first-party fraud. So, listen to the other podcasts we have on the fraud issue overall. Certainly, dig deeper into Casap and what they're doing if you're interested in learning more about first-party fraud, and keep an eye out because I think we're going to talk about this more going forward.

[Music Playing]

Jim Marous (45:53):

One question I didn't ask which I will next time, is those institutions that may be getting their own way, that they buy the service, but the deployment isn't done according to plan, therefore, we don't get to the solution.

Jim Marous (46:07):

Shanthi, thank you so much for your time today. We will be speaking again. I really appreciate you being on the show. And also, I really appreciate using your background, your past experiences to build something that's unique, but not it has been asked for in the marketplace; it's that when you can offload everything you kind of put it out of vision, out of mind, you don't worry about it, but it's a big issue. So, thank you very much.

Shanthi Shanmugam (46:35):

Thank you for having me, Jim. This is so fun. Really, a pleasure.

Jim Marous (46:40):

Thanks for listening to Banking Transformed, the winner of three international awards for podcast excellence. If you enjoy what we're doing, we would really enjoy a positive review. Also, check out my recent articles in The Financial Brand, and the research we're doing for the Digital Banking Report.

Jim Marous (46:56):

This has been a production of Evergreen Podcasts, a special thank you to our senior producer, Leah Haslage; audio engineer, Chris Fafalios, and video producer, Will Pritts.