Investment scams lure people into sending money to fraudsters by convincing them that they’re making lucrative investments. Traditionally, fraudsters reach out to victims using videos, emails, texts, phone calls, and even postcards, but a growing number of scammers create clone investment sites that unwitting victims find when they’re searching for legitimate investment opportunities.
Currently, banks aren’t liable for these losses. Financial institutions only have to reimburse customers for unauthorized transactions. However, the scope of liability may change. The Consumer Financial Protection Bureau (CFPB) is pushing banks to reimburse customers for money that they send to scam artists.
Right now, the conversation primarily revolves around whether or not banks should reimburse customers for payments they send to fraud artists over Zelle, but the CFPB wants to classify payments sent to fraudsters as unauthorized. If this change goes through, it could have implications related to refunding all kinds of financial fraud including investment fraud.
The truth is that even if your bank is not liable, victims often end up blaming their financial institutions for their losses. Customers expect their banks to protect them and their money, and when they suffer losses, they often close their accounts and go to the competitors. To protect yourself, you need to educate your customers about the risks. Consider the following
The average customer doesn’t understand risk vs. reward
As a financial professional, you understand the inherent relationship between risk and reward, but you have to keep in mind that your average customer may not understand this investment essential.
A survey of 3,000 U.S. residents indicates that the vast majority of banking customers don’t understand the relationship between risk and reward. As you know, risk and reward have a positive correlation — As risk increases, the potential for reward also increases. But despite this fact, the majority of respondents identified an inverse relationship between risk and reward.
In particular, when asked to describe the differences between investing in real estate versus stocks, 77% of respondents identified real estate as the safest investment but also as the investment with the highest reward. This belief directly contradicts the actual relationship between risk and reward. When looking at any two investments, the one with the highest risk must also be the one with the greatest potential for returns. The safest investment, in turn, also offers the lowest rewards.
If you find ways to educate your customers about these investment essentials, you’ll create a more savvy customer base, and you will reduce the risk of your customers falling prey to investment scams or similar types of fraud. If your customers understand that high returns always come with high risks, they’ll know that they should be leary about investment opportunities that promise the opposite — low risk and high rewards.
The least educated are often the most confident about their knowledge.
As you shape your educational outreach, keep in mind that the customers who need the education the most are often the least likely to realize that they need the education.
To that point, the above study found that respondents who claimed to have the most knowledge about investments actually scored lower than people who were less confident about their knowledge base.
You can use newsletters, ebooks, and webinars to reach customers who want to learn more about how to protect themselves against fraud, but to reach customers who think they know it all, you need to be a bit sneakier. Clever in-branch posters, short messages when people sign into your banking app, social media posts, or fun facts on the home page of your website can help to distribute information to these customers.
They may not take the time to dive into an ebook, and they probably don’t think they need to attend a webinar. However, when you put the most relevant knowledge right in front of them, they will absorb the information without even realizing it.
To educate your customers, you must educate yourself.
To protect and educate your customers, you need to educate yourself. Be proactive about staying on top of the scams that are happening. Consider signing up for alerts from the Office of Investor Education and Advocacy (OIEA), get on the email list for the Securities and Exchange Commission (SEC), or follow those types of organizations on social media.
As you learn about new scams, make sure to distribute warnings to your customers. Because scams are always changing, your educational outreach needs to be continuous and flexible.
Additionally, when you select your fraud prevention partner, look for a company that also collects cyber threat intelligence. This includes monitoring public and private data sources to learn about current trends in fraud. This information allows you to strike a proactive approach to fraud.
If your fraud processes just focus on detecting fraud, they’ll only find fraud once it’s underway. However, with a proactive approach, you know what to look for so that you can spot fraud before it occurs. Of course, you can also leverage this information to shape your educational outreach as well.
Immersive educational materials can be more effective.
Telling your customers to beware of scams and educating them about the red flags of fraud is a great first step. But to maximize the efficiency of your educational materials, you should try to create an immersive experience.
For instance, when emailing customers about the risks of investment scams, show them videos that showcase false testimonials about investment scams. When your customers see the fraud in action, they’ll learn how to spot investment fraud more effectively. The SEC has a lot of great videos related to investment scams that can help you get started.
Or consider creating a basic game where customers look at emails, and they must decide if they’re phishing emails or not. Your customers will learn more effectively if you make the process fun.
Your banking customers need to understand the following tips.
To minimize the risk of your customers falling prey to investment scams, you need to ensure that they understand the following essentials. If they work through these steps before making an investment, they will be much less likely to become a victim of investment fraud.
- Check license and registration for investment houses.
Before investing in any opportunity, your banking customers should verify the credentials of the person or business handling the investment. They can use Investor.gov to check license and registration information. SALI lets you look for judgments or orders in SEC court.
- Don’t fall for opportunities that are too good to be true.
To lure people into “investing” their money, scam artists often make promises that are too good to be true. This is both the lure and the tell. Unfortunately, people get so excited by the lure that they overlook this common red flag of investment scams.
In one multi-million dollar scam, fraudsters told victims that their deposits would double in a month, or they promised returns of 7 to 10% per month. Educate your customers so they understand that these types of promises are not likely to be true. In very rare cases where the potential for returns is that high, the risk is also extremely high.
- Beware of excessive urgency.
To get people to invest their money without thinking about it, scam artists leverage the idea of urgency. They tell victims that if they don’t act right now, they’ll miss out on the opportunity.
They often set very tight deadlines of less than 24 hours to ensure that the victim doesn’t have time to research the fraudulent opportunity. In some cases, they’ll even use an online counter that shows a diminishing number of spots left. Make sure your customers know that excessive urgency is a big red flag.
- Watch out for clone investment scams.
Clone investment scams are a particularly nefarious type of investment scam. These scams rely on fraudulent websites to lure customers in. This scam starts with the victim searching for investment opportunities online.
For instance, they may look for a well-known investment firm or a certain type of investment opportunity. Then, they find a website that appears to be from that firm — for example, past investment clone scams have mimicked the Vanguard website and tricked people into investing hundreds of thousands of dollars.
Clone investment scams are often harder to detect than most other types of investment scams. Generally, the fraudster reaches out to the victim, but with a clone scam, the victim finds the fraudster. This creates a false sense of security.
- Contact you with questions.
Even if you aren’t liable for their losses, your customers should know that they can rely on you to protect them. Encourage them to call and talk with a personal banker before making an investment. Let them know that you welcome their questions and you’ll help them spot the difference between investment scams and real opportunities.
Contact Us for Protection Against Bank Fraud
At SQN Banking Systems, we offer a range of anti-fraud services and solutions designed to help financial institutions minimize their risk of fraud. We provide real-time fraud detection, and we also gather cyber threat intelligence to ensure that we understand the current threat landscape.
Are you taking steps to minimize the risk of fraud? Are you educating your customers about how to reduce their risk? To get help now, contact us today. We can start with a fraud process review to help you identify weak spots and find the best way to improve security at your financial institution.