Digital fraud remains front and center

For generations, banks feared robberies that would put their tellers at risk, and then check fraud became the biggest threat. Now, a far larger concern is online fraud. Increasing activity in this area, which many industry watchers consider the new normal, is increasingly weighing on the bottom line, making detection and prevention an even stronger focus for the banking industry.

Online financial fraud exploded during the global pandemic, when consumers turned to digital banking and changed their transaction behavior. How big is the problem? Information giant LexisNexis Risk Solutions found that every dollar lost to fraud costs financial institutions four times that amount, and this multiplier has further increased since COVID-19 swept the globe.

The banking industry is working hard to stay ahead of these nefarious actors. The goal is not only to detect fraud in as close to real time as possible, but also to anticipate fraudsters’ next move with the goal of heading it off.

If you think this should be easy to fix, think again. Here’s what Accenture had to say: “Even as financial institutions and businesses adopt the latest strategies to make digital payments more secure, the nature of digital fraud continues to evolve. The new-age hacker is using more sophisticated, innovative ways to obtain valuable customer information and login credentials to hack into accounts.”

When working to detect fraud, banks have to combine an understanding of customer nuances with the utmost speed. Every second spent responding to a potential fraud alert costs money. And AI can’t do it alone. Humans have to review potential issues and decide whether to act. Unfortunately, many institutions have disconnected systems and staffers, hindering their ability to act quickly.

Consider a fraud prevention group that has its own system. After receiving an alert, the fraud preventers send the alert to another team for action. Whoever talks to the customer may use yet another tool. This back and forth takes valuable time, an inefficiency the industry is working to remedy. We’re seeing more examples of companies merging groups to speed up responses as customers get more savvy—and their expectations continually increase.

Smart institutions automate low-value tasks, such as detecting a potential problem based on prior activity, but have a human step in when needed. Each bank or credit union will set its own criteria for when to involve an employee—is it the value of the transaction itself? Or the value based on the customer’s risk or exposure?

An emerging question is how to balance this while protecting the bottom line and consumer data. What if fraud puts a customer’s account in the negative, incurring overdraft fees? Who pays for that? The regulators will expect the bank to reverse these fees. A real problem here is yet another group has to be engaged, and it costs more time and money.

Regulators are also pushing the industry to look at the customer holistically. They’re pushing for combined reporting and information on how these institutions are responding to all customer classes equally. This is difficult, given the way fraud and disputes are traditionally managed, with different teams, multiple tools and different processes.

Meanwhile, banks are finding new ways to uncover fraudulent activity. Spotting fraud on a customer’s account is important, but so is catching abnormalities in peer groups. For example, AI is being used to flag accounts with unusual credit/debit card activity at a broader level (i.e., by batches, customer groupings, merchants, etc.). In cases like this, detecting fraud benefits not only the customer but also the financial institutions, commercial markets and the larger ecosystem.

Banks of every size in every region need to tackle this issue. They recognize that customer behaviors have changed. They realize that many more transactions are digital. They also know this is not a one-and-done issue. They’re looking into the future because no one expects digital transformation to stop. And as long as consumers are banking online, bad actors will keep entangling financial institutions in a cat-and-mouse game.

Greg Kanevski is head of global banking at ServiceNow.

Find out where things stand with fraud protection and how it can be done more efficiently and effectively in the BAI Executive Report, “Finding an edge in fraud’s cat-and-mouse game”.