Investing time and money into fraud detection is critical for banks. Not only does fraud detection defend your assets — but it also protects your reputation and safeguards the customer experience. Banks need to choose their tools, processes, and fraud detection partners carefully.
Best practices are constantly evolving as the threat landscape changes, and constant refinement of your approach is critical for avoiding losses. The following resources provide an overview of fraud detection essentials for bankers.
Fraud happens when three elements come together: motive, rationalization, and opportunity. A lack of money or the drive for conquest creates the motivation for bad actors. Once motivated, they can easily rationalize their actions by convincing themselves that stealing from a bank is a victimless crime or that it’s okay to steal from someone in certain situations. Then, all they need is opportunity.
Financial institutions can’t do anything to stop a thief’s motivation and rationalization, but they can shut down their opportunities. Fraud detection is the process of ensuring that no one has the opportunity to steal from your bank or your customers. It’s critical if you want to prevent losses and protect your relationship with your customers.
Bank fraud takes many different forms. Thieves steal checks and debit cards to make fraudulent purchases. They take over existing accounts or steal identities to open new accounts in customers’ names. Fraudsters use blended identities to commit loan fraud or overdraw new accounts.
Bad actors attempt to get information from bank employees through phishing schemes, and many banking employees commit internal fraud. To thoroughly protect their financial institutions, bankers must find fraud detection solutions and processes that address all types of bank fraud including the following.
Thieves can steal your customer’s cards for in-person transactions, but they only need the card numbers for online or card-not-present transactions. Debit or credit card fraud can also occur when a thief takes over someone’s account and has a physical card mailed to them. In some cases, thieves steal or makeup identities to open new cards.
Although check use is on the decline, this type of fraud is still rampant. Thieves exploit the low security of checks to steal billions of dollars every year. To reduce their risk, banks need tools that look for forgeries and signs of altered or counterfeit checks. Check fraud is particularly a threat to business accounts.
Scam artists often trick consumers into depositing fake cashiers or money orders. Even if your financial institution isn’t liable for the losses, you may suffer losses if your customers overdraw their accounts and never get caught up. Additionally, when you have fraud detection tools in place that look for fake cashier checks or money orders, you help your customers avoid falling prey to these scams.
Thieves can find ATM instruction manuals online, and if you haven’t updated the default password, you are at severe risk of theft. They also can put skimmers on ATMs to steal card details from your clients. Your fraud detection solution needs to address this risk.
This is when thieves use stolen or synthetic identities to open new accounts. Typically, they use the accounts regularly for a certain amount of time to build up trust. Then, they overdraw the accounts so they can take the money and run. To detect this type of fraud, financial institutions must strengthen know your customer procedures. They also have to look at the entire customer interaction with the bank, rather than just focusing on financial transactions.
Thieves also use stolen or synthetic identities to commit loan fraud for both personal and business loans. However, it’s not just thieves that commit this type of fraud. Unwitting consumers often commit fraud on car loans, mortgages, and other types of loans by overstating their income or misrepresenting other types of information.
Unfortunately, fraud risks don’t always come from the outside. The people you work alongside every day may commit fraud against your financial institutions. You need to be aware of the risk and be proactive about detecting accounting fraud, rogue traders, and other types of fraud committed by bank employees.
Scam artists often prey on unsuspecting employees through phishing emails. These emails are cleverly designed to get your employees to share sensitive information, and if your employees aren’t trained to spot and resist these scams, they have a strong risk of falling for them.
Thieves don’t have to steal credit cards, forge checks, or hack into bank accounts to steal money. In a lot of cases, it’s much easier to just trick people into giving them the information they need. There are many different types of scams where thieves use bank customers to help carry out the scam. This can include wire transfer scams, mule accounts, and more.
In addition to the above type of fraud, your bank also needs to be vigilant about detecting demand draft fraud, money laundering, bill discounting fraud, and all other types of bank fraud. Again, fraud is always changing. It changes based on consumer trends — for instance, when traveling increases, travel-related fraud spikes. It can also vary seasonally such as tax identity theft from February to April. You need detection processes that keep up with the times.
Financial institutions employ a myriad of processes to help them detect fraud, and effective fraud detection efforts require a lot of creativity. You need processes that detect fraud across all your channels. However, you also need to ensure that your processes aren’t organized in silos that allow advanced fraud signals to slip through the cracks.
Ultimately, a modular solution lets you customize what you need based on your risk profile, but integration ensures your processes work together. The most successful fraud detection processes scan transactions in real time, and they use workflows that blend automation and human intelligence to decipher between fraudulent and legitimate transactions.
The most successful processes also leverage AI to improve detection and machine learning to create continuous improvement. Ideally, you should review your fraud detection processes to ensure they are providing the optimal level of protection to your bank. You may also want to use confidential computing so that you can work with other financial institutions to minimize the risk of money laundering and other threats throughout the industry.
Fraud Detection Automation
Automating fraud detection processes improves detection while saving time and money. Your automated fraud detection solution should utilize the following:
- Real-time analysis — By eliminating the gap between fraud occurrences and fraud detection, real-time solutions help to reduce losses.
- Artificial intelligence — AI-powered solutions use complex patterns to scan countless data points to look for signs of fraud.
- Machine learning — Machine learning incorporates feedback from employees and other learning methods to improve the solution’s ability to detect fraud over time.
- Cyber-threat intelligence — Gathering intelligence about cyber threats helps software designers learn about new and emerging threats so they can improve the detection process.
- Hosting — You don’t need to invest a lot of money into hardware and services when you opt for a hosted solution. When you opt for software as a service and hosted solutions, your provider handles the tech, and you typically pay an affordable subscription fee for everything that you need.
The right fraud detection software and solutions allow you to automate your processes. When choosing your software, you need to make sure that you look for intuitive dashboards, customizable rulesets, easy integration, and other critical features.
Fraud detection tends to be the phrase that financial professionals use when talking about fighting fraud. However, quality solutions don’t just detect fraud. Instead, they aim to prevent fraud. If you detect fraud once it’s started, you subject yourself to losses that would have been avoided if you prevented the fraud from happening in the first place.
The way your financial institution approaches fraud affects the customer experience. You need processes that protect your customers and your bank from risk, but you need to ensure these processes don’t impede your customers from making legitimate transactions. The right fraud detection tools can help you strike the optimal balance.
You can also reduce your risk by educating your customers — as explained above, thieves target bank customers to carry out a range of scams. You may also want to offer your customers tools to help them protect their identities. Remember, when you protect your customers, you protect your bank.
Your fraud detection processes help to safeguard existing customer relationships, but they can also help you draw in new clients. Consumers have a heightened awareness of fraud, and they want to work with financial institutions that are committed to reducing the risks. With a bit of creativity, you can evenadvertise your fraud prevention strategies without sharing information that gives scammers an upper hand.
The risk landscape is so complicated that you can’t navigate it on your own. Regardless of the size of your bank, you need to find a fraud detection and prevention partner that can help you minimize the risk of losses.
At SQN Banking Systems, we provide banks with custom services and solutions designed to address their unique needs. To learn more, contact us today. We can start with a review of your fraud processes. Then, we can help you identify vulnerabilities and build a solution around your needs.