Beyond fraud detection: Why small and mid-market banks need real-time interdiction

Mid-market and small financial institutions (FIs) face an onslaught of unprecedented challenges amid technological, regulatory and payment disruption, including:

»­Existing attack vectors are increasingly enhanced alongside the democratization of large language models (LLMs) that can further ease the pathway to faster payouts via sophisticated social engineering, authorized push payment (APP) scams, synthetic identity fraud and new account fraud.

»­Evolving regulatory activity and more stringent reporting requirements are reshaping imperatives for continuous modernization across risk management and compliance programs.

»­Surging real-time payment (RTP) volumes, spurred by the recent introduction of the FedNow service, accelerate the urgency to adapt infrastructures to accommodate real-time fraud detection and interdiction.

Credit unions, community banks and regional banks must establish greater resilience and agility to survive sweeping industry transformation and proactively safeguard their customers from accelerated, ubiquitous risk.

While real-time fraud detection is a significant advantage against complex fraud in the burgeoning global instant payments environment, it’s useless without real-time interdiction.

Real-time fraud detection is essential to identify potential threats as they occur. However, without real-time interdiction, smaller banks lack a strategic defensive pillar in their fraud management framework. To effectively safeguard customers and organizations against faster payment fraud, small and mid-market FIs must implement a risk management solution that enables them to interdict suspicious transactions before they exit the institution.

Why real-time interdiction?

Globally, fraud and financial crime are anticipated to impose a financial burden of nearly $41 billion on FIs by 2027. The FedNow launch in the U.S. is also projected to contribute to a 32.6% increase in real-time payment volume within the same time frame.

The global economy is increasingly oriented toward expeditious product and service delivery, and payment ecosystems are transforming to accommodate these accelerated transactions. As RTP system adoption escalates among FIs of all sizes to strengthen competitive advantage and sustain customer loyalty, organizations must implement advanced protection against real-time fraud.

Additionally, FedNow mandates require all participating FIs to undergo a certification process establishing their readiness to combat instant payment fraud with the appropriate communications and operational tools.

Yet, small and mid-market FIs may struggle to join the real-time payments ecosystem given the operational and resource limitations that impede infrastructure modernization efforts and intensify risk exposure. Compared to their larger peers, smaller FIs tend to lag in leveraging artificial intelligence (AI) and machine learning capabilities at just 44% in 2023 versus 66% of FIs with over $5 billion in assets.

AI- and machine learning–powered, real-time fraud prevention solutions are becoming synonymous with seamless banking experiences that can efficiently protect consumers and institutions against diverse fraud and scam typologies. However, not all real-time fraud detection capabilities are created equal. Mitigating real-time payment fraud and associated fraud losses demands real-time fraud detection and interdiction capabilities. The ability to instantly interdict via a holistic fraud prevention solution enables small and mid-market FIs to:

»­Instantly block potentially anomalous or fraudulent transactions as they occur without disrupting legitimate transactions.

»­Dynamically adapt to new fraud tactics and enable a proactive defense against constantly evolving threats.

»­Automate responses to fraud incidents, reducing operational costs and reliance on extensive manual intervention.

»­Meet customer expectations for swift protection against complex scams and fraud, fostering customer trust and demonstrating a commitment to security leadership.

»­Prevent interruptions to customer accounts and transactions to enable a slick, convenient and real-time banking experience.

»­Bolster regulatory readiness via real-time detection and prevention of fraudulent activities, mitigating the risk of possible regulatory breaches.

The real-time interdiction difference

Deploying real-time fraud detection without the ability to interdict is like having a warning system that can swiftly identify suspicious activity—but the action stops at raising the alarm.

When real-time interdiction is enabled, identified threats can be immediately intercepted and thwarted before losses are incurred. In modern risk management, the true differentiator lies in interdiction. Without this capability, the chasm between identifying and preventing risk widens, leaving customers and FIs vulnerable.

Fraud can have a disproportionate financial impact on smaller banks. Unlike larger institutions, small and mid-market banks might not have the financial capacity to absorb substantial losses, making it increasingly critical to interdict in real time to minimize losses by stopping suspicious transactions before they’re completed. RTP systems like FedNow can open the door for small and mid-market FIs, granting access to opportunities that were previously beyond their reach. However, a multi-layered approach to fraud detection is crucial to facilitating a robust response against the social engineering–based scam and fraud typologies that exploit RTP systems’ immediate and irrevocable nature. Key components of an advanced fraud detection solution that enables FIs to interdict in real time include:

»­Copious quantities of transactional and contextual data from diverse sources, including customer behavior, transaction history and device information.

»­Intelligent pattern recognition to discern between legitimate transactions and deviations that may indicate fraudulent activity ­Real-time monitoring to evaluate each event against learned patterns and enable instantaneous identification of anomalies as they occur.

»­Early attack stage detection that facilitates real-time intervention before any money movement happens, improving loss prevention »­Behavioral analytics to assess both individual transactions and broader user and entity behaviors based on factors such as transaction frequency and interaction patterns.

»­Continuous self-learning capabilities that automatically adapt in real time to new attacks and evolving customer behaviors, enabling the system to remain effective over time.

Like moths to a flame, fraudsters are drawn to the quick rewards of faster transactions. Small and mid-market FIs must instantly extinguish these threats and secure their financial ecosystems with real-time fraud detection and interdiction.

When safeguarding customer trust and financial integrity, it’s the decisive action in real time that defines the true modernity of a bank’s defenses.

Eric Tran-Le is Vice President, Head of Actimize Premier at NICE Actimize.

A version of this article appeared in the January BAI Executive Report “Safeguarding Against Fraud.” Read more on fraud-prevention best practices there.