How to Shift From Detection to Prevention
Bank fraud is increasing, and bad actors are constantly refining their techniques so they can steal more money with less effort. Modern criminals don’t need to learn coding. They don’t need to get a gun and hold up a bank. They can easily buy an identity online and use it to access an account, or they can lean on phishing attacks to trick someone into giving up their sensitive information.
Financial institutions are in a tough spot. They need to offer online account access and virtual services, but doing so also increases their risk. Ironically, the increased risk of fraud doesn’t just apply to e-banking services. Check fraud is also on the rise—with some estimates speculating that annual losses have doubled to $24 billion over the last five years alone.
The key to righting fraud in this environment? You must disrupt the fraud cycle, and this requires you to shift from fraud detection to fraud prevention.
What Is the Bank Fraud Lifecycle?
When bank fraud occurs, a cycle starts. First, the theft happens. Then, the bank detects the fraud, takes action to stop the fraud, contacts law enforcement if applicable, and attempts to recover the losses. Then, the cycle repeats. Fraud is followed by action, law enforcement, recovery, and then back to fraud.
Legacy anti-fraud tools perpetuate this cycle. They detect fraud so that the rest of the pattern can play out, but they don’t do anything to break the cycle. If you’re still taking this approach to fraud, you are losing money and risking your reputation. To disrupt the bank fraud lifecycle, financial institutions must focus on preventing fraud rather than merely detecting it.
Breaking the fraud lifecycle allows you to shift more of your resources to prevention rather than detection. By preventing fraud, you reduce remediation costs and safeguard your reputation. Keep in mind that remediation costs are more than four times fraud losses, on average.
But how do you prevent fraud? How do you spot a crime before it occurs? To pivot from fraud detection to fraud prevention, financial institutions must understand the precursors of fraud, and they must have safeguards in place that prevent potentially fraudulent transactions from going through. At the same time, however, they need to ensure that their fraud-fighting efforts don’t put unnecessary friction into the customer experience.
Two Stages of Fraud: Account Access and Transaction
Bank fraud typically consists of two stages: accessing the account and initiating the transaction. To prevent fraud effectively, your financial institution needs to monitor both of these stages and ensure that the thief is not able to monetize their efforts.
To access the account, bad actors often use phishing or social engineering. They contact account holders and convince them to share sensitive information. These attacks generally occur over phone, text, or email, and thieves are always coming up with new ways to trick customers into sharing their account log-ins, debit card PINs, or other sensitive data. In other cases, thieves may hack into accounts, steal checks out of the mail, buy details online, or use other tactics to access the account.
Once a thief has accessed an account, the next step is to initiate a transaction. This stage takes various forms depending on the type of fraud and how the thief accessed the account. For example, if someone steals checks, they may wash off the original info, write the check to themselves or a stolen identity, and cash it. If the thief has taken over a dormant account, they may write checks, use the debit card, or initiate other transactions.
Monitoring Transactions for Patterns of Fraud
Fraud detection software must look at all transactions to detect illegitimate ones. The most effective anti-fraud software scans transactions in real time and prevents them from being completed if they appear to be fraudulent. However, if this step is not handled carefully, it can hurt your relationship with your customers. False positives put friction in the customer experience, and they frustrate your customers by preventing them from completing legitimate transactions.
Arguably, this occurs the most with rule-based fraud detection tools. These tools flag all transactions outside of certain parameters as potentially fraudulent. For example, rule-based fraud detection strategies may flag all checks over a certain amount or all transactions outside of your customer’s usual geographic area.
To preserve customer relationships while also effectively detecting fraud, financial institutions need to use tools that look for patterns of fraud. These tools get to know the signs of legitimate transactions compared to fraudulent transactions, and they also learn accountholders’ unique habits. That improves detection, while also reducing friction.
Detecting Account Takeover and Unauthorized Access
Unfortunately, monitoring transactions is simply not enough. Your fraud prevention strategy also needs to consider what happens before the transaction. If you can spot fraud when the thief attempts to access the account, you will reduce fraud incidents and save time and money.
Realistically, financial institutions cannot do much to stop phishing attacks. The customer is the weak link in these cases, and the most effective approach is customer education. Also, keep in mind that bad actors will also attempt to phish information from your employees, and to protect your assets, you also need to educate your employees about the risks.
However, you can monitor accounts for signs of account takeover. When a thief fraudulently accesses a bank account, they often leave a trail of clues in their wake. Individually each element may not mean much, but together they signal fraud.
To give you an example, imagine an account holder signs into their account from a new device. That alone doesn’t signify fraud – legitimate account holders buy new phones, tablets, and laptops all the time. But let’s say the sign-in is also on a different IP address – again, this isn’t necessarily a problem. However, after signing in, the account holder changes their address and orders a new card to the new address.
When compiled, these actions likely indicate fraud. If you want to disrupt the fraud cycle, you need to consider this stage of the fraud process, and you need tools that alert you about potential issues.
To ensure that you’re always up to date with the most recent and emerging threats, you also need to leverage cyber threat intelligence. The most effective anti-fraud partners monitor the dark web, hacker forums, and social media apps to learn about new types of fraud. Then, they use this information to refine the tools that detect fraud.
Fraud Management Lifecycle
Even with the most robust efforts, some fraud will inevitably slip through the cracks, and you need to ensure that you manage it in a way that reduces your future risk of fraud. Like fraud, fraud management also takes a cyclic form, and it consists of eight stages: deterrence, prevention, detection, mitigation, analysis, policy, investigation, and prosecution.
While you need to disrupt the fraud cycle, you need to ensure the fraud management cycle keeps moving forward. Once you detect fraud, you need to mitigate it as effectively as possible. Of course, this entails stopping the fraud to prevent future losses, but it also includes communicating with accountholders, refunding losses as required, and taking steps to minimize reputational damages. If you stop here, fraud will continue to plague your financial institution.
Once you’ve mitigated the fraud, analyze what happened during your investigation, and use that information to drive your policies. Whenever possible, move forward with prosecution to reduce the chance of the criminal carrying out the same crime in the future.
Then, the next time someone attempts to commit fraud against your financial institution, you have policies and procedures in place that allow you to prevent the fraud from happening. If fraud occurs, however, you will investigate and make new policies, thus improving the cycle for the next round.
The Right Partners
Disrupting fraud isn’t something you can do on your own. You need the right partners, and that’s where we come in. At SQN Banking Systems, we focus on fraud prevention with tools and services that scan transactions in real time to look for indicators of fraud.
Ready to disrupt the fraud cycle at your financial institution? Then, contact us today. We will do a fraud process review so that we can assess your vulnerabilities. Then, we’ll help you customize the most effective suite of tools and services for your financial institution.