Financial institutions face a broad range of risks including compliance, operational, resilience, and ESG, but arguably, fraud tops the list. Banks are often stuck trying to mitigate these risks using aging infrastructures and outdated manual processes. This approach increases their risk exposure.
The world is changing at a faster pace than ever before — particularly in the technology sphere, but social changes are also reshaping consumer demands and expectations.
To manage risk in a constantly changing reality, financial institutions need to embrace innovative and resilient techniques. They need to find ways to accelerate profits while also protecting themselves against risk. This requires a heavy dose of creativity.
Creativity fuels business strategy and growth, but it can also help your financial institution reduce its exposure to fraud and other risks. Use these strategies to put more creativity into your fraud fighting processes.
Identify root causes
Before addressing a problem, you need to take a step back and identify the root of the problem. Often, one problem upstream creates 10 or 20 problems downstream.
If you’re just addressing the problems you see, you’re developing 10 or 20 projects to fix these problems. But if you’re taking the time to identify the root cause, you only have to fix one problem. This requires a sense of curiosity.
Take a forward look at risks
Traditional risk reduction strategies often look backward. After fraud or operational failure has occurred, leadership teams sit down in a meeting, and they talk about what happened and what needs to be changed next time.
This form of risk management can’t make dynamic predictions about future risks. It can’t help risk teams extrapolate risk factors for a broad range of other scenarios. Instead, this backward look at risk typically only identifies and addresses risks that are identical or very similar to the occurrence under discussion.
Rather than taking a backward look at what happens once you’ve fallen prey to a certain risk, you need to look forward — this requires you to leverage the right technology and analyze as many data points as possible.
Rather than just analyzing the broad strokes of an event, effective risk mitigation looks at metadata. Depending on the event, this includes handoff points, currencies, the flow of the process, type of controls, or systems in place. All of these rich details go into a risk mitigationor fraud prevention system and allow it to learn more about the adverse event.
When combined with internal and external data, metadata can help identify not only risk scenarios but processes and controls that have a high-risk factor. To analyze metadata, you need machine learning.
Utilize machine learning
The human brain can look at certain elements of a negative event. It can analyze a handful of events and find their similarities. From this process, it can learn a few risk indicators. But to truly obtain an accurate sense of fraud risks, you need machine learning.
You need tools that can leverage artificial intelligence to analyze terabytes of data and metadata to identify risk factors. Machine learning tools can take intense amounts of data from fraud incidents or other negative events and interpret them in a way that improves not only detection but prevention.
These tools use this knowledge to detect fraud more accurately, but they can also identify the risk factors of fraud before it occurs. When machine learning tools see red flags of fraud, they can alert your fraud team or your clients that they may be facing a higher incidence of risk. This process prevents risks from turning into damaging events.
Test and modify controls
You create controls to reduce your risk exposure, but you need to be diligent about ensuring that they work. Ideally, you should test your controls regularly. Automated software can check your controls and alert you if they’re not working as expected, but you can’t just rely on software.
Balance human and machine efforts
While automated tools can check controls, you need creative people to develop new controls or change existing controls. Similarly, anti-fraud tools can scan countless transactions for signs of fraud, but you often need your team to make the final call.
To preserve resources and improve performance, you need the right balance between digital tools and human efforts. Striking this balance can also require creativity.
Align multiple aspects of risk management
Risk management has multiple components. You have a governance committee, policies and procedures, and execution. The three sides of this process need to work together. Again, you need to be able to step back, take apart what you’re doing, and restructure it so that it works together.
Effective risk mitigation is critical for financial institutions, but it requires creativity. That’s where we come in. At SQN Banking Systems, we offer fraud detection and prevention tools and solutions that take a creative approach to fraud management.
Wondering if you have the right dose of creativity in your anti-fraud processes? We can help you look at your current processes and take a step back to figure out where they can be improved.
We don’t offer a one-size-fits-all approach to our anti-fraud measures. Instead, we work closely with you to craft and execute a fraud prevention strategy that aligns with your financial institution’s priorities. To learn more, contact us today.