Fraud Prevention: Resources and Strategies for Bankers

Fraud is a constant in the financial services industry. But it’s never static and is always changing. Bad actors are always finding new ways to take over bank accounts and exploit payment

methods. Financial institutions must exercise constant vigilance to detect fraud, and they must be aware of both current and emerging threats.

However, if you’re only focused on detection, you’re unnecessarily losing money and damaging your institution’s reputation. Effective fraud reduction requires a focus on prevention as well as detection. As you shift to a proactive stance against fraud, here are strategies and resources to help you.

What Is Fraud Prevention?

Fraud prevention refers to processes and tools designed to deter fraud and detect early warning signs of impending fraud. Fraud prevention strategies aim to reduce both internal and external fraud at banks and other financial institutions. The main goal of fraud prevention is to detect and stop fraud before money leaves the bank account.

The Importance of Fraud Prevention

Preventing fraud is easier, less expensive, and more effective than dealing with losses. Once fraud losses occur, you have to spend time and money communicating with customers, dealing with law enforcement or forensic experts, and mitigating the source of the fraud. Loss recovery costs tend to be significantly more than the losses themselves, and in addition to financial considerations, you also have to account for reputational damage.

 

When you examine fraud prevention vs. loss recovery, there are clear operational, financial, and reputational benefits of prioritizing fraud prevention.

How to Shift From Detection to Prevention

You must disrupt the bank fraud lifecycle to shift from fraud detection to prevention. In a detection-centered environment, you detect fraud once it’s underway. You stop the fraud. You remediate the losses. Then, you continue to look for more signs of fraud, and when fraud occurs, this cycle starts over again.

 

To break the cycle, you need to identify what is causing the fraud and the actions that lead up to the fraud. Then, you need to embrace strategies that help you spot the signs of fraud before it occurs. You also must be proactive about educating your customers and employees about the risks of social engineering or phishing attacks.

 

In most cases, a financial transaction is not the first sign of fraud, and if it’s the first sign your fraud tools are ready to detect, you are losing money. Instead, if your tools spot signs of unathorized access, account takeover, or unusual spending attempts, you will be able to prevent the fraud.

 

That said, many attacks prey on the human element. Bad actors don’t need to steal someone’s identity or hack into their accounts to access their funds. Instead, they just need to trick the target into sharing sensitive information such as account numbers, PINs, or passwords, or they can even bypass that and trick the target into wiring them money or sending a ACH transfer.

 

Fraud prevention requires a creative approach that leverages data, technology, education, and learning from other cases of fraud.

Critical Aspects of Fraud Prevention

To prevent fraud, financial institutions must implement controls and solutions that help to reduce the risk of fraud both internally and externally. A dedicated fraud prevention team should drive your approach, and if you don’t have a team exclusively focused on prevention, you should have strategy sessions that look at prevention in particular.

 

Fraud prevention requires monitoring of multiple data points of customer interactions and financial transactions across all payment and communication channels. To prevent fraud as effectively as possible, your solutions must incorporate the following:

• Real-time analysis – Your fraud prevention tools must analyze actions in real time, including both financial transactions and interactions that lead up to the money changing hands.
• Artificial intelligence – AI-powered tools look at a variety of data points to assess the likelihood of fraud. While traditional fraud detection tools often look for transactions over a certain value or outside of the account holder’s usual geographic area, fraud prevention tools look for anomolies in patterns of behavior.
• Machine learning – Machine learning allows fraud prevention tools to improve their accuracy over time. When you manual review team provides feedback on flagged transactions, your software learns more about the patterns of legitimate and fraudulent transactions.
• Managed fraud prevention services – With managed services, you get access to experts who can develop, guide, and adjust your fraud prevention strategies. You don’t have to worry about building an internal team and can instead rely on the depth and breadth of knowledge of your managed services provider.
• Hosted fraud prevention – Preventing fraud requires the right technology, but if you opt for hosted services, you get a predictable technology spend and you can avoid making a large upfront technology investment.
• Cyber threat intelligence – To prevent fraud, you must understand the risks, and cyber threat intelligence monitors the dark web, hacker forums, and other sources to learn about novel and emerging threats.

 

In addition to having the right software, you need effective fraud reporting channels. Your customers need to be able to easily report fraud, and your team needs to be ready to react promptly to fraud claims. You also need the ability to contact your customers quickly if you suspect fraud on their account, which requires regular updates and verifications of customer contact methods.

Fraud Prevention Across All Payment Channels

Preventing fraud requires omnichannel monitoring of all transactions including checks, debit card payments, ATM withdrawals, ACH transfers, and loan disbursements.

 

In addition to focusong on traditional payment methods, your prevention strategies must extend to your digital banking environment. Some of the most prominent fraud prevention challenges include meeting regulatory requirements, overlooking vulnerability gaps, and building trust with customers. Your tools need to prevent fraud without putting unnecessary friction into the customer experience.

Fraud Prevention and the Customer Experience

The role of fraud prevention is to protect your customer’s money, but if you do so at the expense of their experience, you risk losing customers. Your approach to fraud must balance prevention and allowing customers legitimate access to their accounts. Flagging legitimate transactions as fraudulent puts friction into the customer experience, and the effects of false positives can be nearly as damaging to your relationship as fraud incidents.

• Fraud automation – Automating fraud detection preserves resources that you can use to improve the customer experience. Automation also improves accuracy rates which is tantamount to the customer experience.
• Customer acquisition and retention – Low fraud rates can help you draw in new clients and boost your customer retention rates. Customers will leave their banks if they become the victim of fraud.
• Services to reduce the risk of fraud – Technology on its own cannot stop fraud at your financial institution. You also must offer education as well as services such as identity theft protection services for your customers. By reducing customer vulnerability, you improve the security of your entire organization.

 

Preventing fraud preserves customer relationships, reduces losses, and bolsters your Envrionmental Social Governace (ESG) but getting started can be challenging. If you’re locked in a defensive strategy against fraud, let’s work together on developing a more proactive approach.

 

At SQN Banking Systems, we offer fraud prevention and detection services and solutions designed for the banking industry. Let us help you protect your financial institution from all types of fraud. To schedule a free fraud process review to help you spot your vulnerabilities, contact us today.