Mitigating fraud through leveraging technology and data

Rising fraud and challenges

A major driver of such an increase is attributed to changes in customer preferences. Lockdowns and restrictions during the pandemic restricted access to physical channels, leading to consumers taking to digital channels for their banking needs. This is reflected in the fact that 2021 saw a 57% decline in cash usage and a 7%, 10%, and 14% increase in usage of credit cards, debit cards, and online payments. This opened a plethora of new techniques and routes for fraudsters to use, and financial institutions (FI) weren’t manage the sudden change.

Another key challenge was the use of dynamic social engineering, where hackers use ingenious methods such as phishing and telecoms to dupe customers. This externality is difficult to detect and prevent. FIs find fraud prevention solutions difficult to implement, with most organizations struggling between teaching their customers how to avoid fraud and delivering a seamless customer experience.

FIs also struggle to implement advanced technological solutions due to governance, validation, and reporting issues, while regulatory expectations to detect and report suspicious activity related to the pandemic, as well as file subject access requests (SAR) related to cybercrime and online attacks continue to increase.

The impact on financial institutions

FIs suffer the impact of fraud on four fronts. At the macro level, there is a reputational loss to banks if an incidence of comes to light. This leads to loss of trust from customers, stockholders, and partners. According to a report by Themis, a sample of seven banks involved in anti-money laundering (AML) scandals since 2019 shows that they suffered an average share price loss of 5.2% the day after regulatory action was announced and a drop of 20.7% over the following six months.

Secondly, FIs struggle between managing fraud prevention and customer experience. A greater focus on fraud prevention leads to increased false positives, increased operational costs, and low innovation. While a focus on CX leads to significant chargebacks, loss of customer trust, and low retention. It is difficult to find a balance between these two parameters.

Thirdly, FIs see an increase in their operational costs. LexisNexis’s True Cost of Fraud Study 2021 reports that every $1 of fraud cost US banks $4.1 in 2021 compared to $3.63 in 2020 – a 9% increase. For comparison, this figure was only $3.34 in 2019. 

Finally, FIs must stay compliant or pay the price. Regulatory fines for non-compliance of guidelines further leads to major reputational and economic damage. This is evident from FinCEN’s hefty penalty of $390 million on a major US FI for AML violations under the Bank Secrecy Act (BSA). Another major European bank was fined $130 million by the US Securities and Exchange Commission for violation of the Foreign Corrupt Practices Act (FCPA). And the list goes on and on.

Mitigating the risk of fraud

What can you do to mitigate or eliminate fraud across your financial institution?

• Increase operational efficiency to deliver a holistic view – gone are the days of siloed implementations to prevent fraud detection and prevention. Combining the data from across your business units to generate insights provides a holistic view of every transaction and customer profile. This holistic view can be supported by new technology and focused automation. For instance, Envista upgraded its core banking system to drive operational efficiencies in areas such as member services, mobile banking, accounting, and fraud detection.

• Automation and AI work together – automation or artificial intelligence (AI) alone cannot lead to sufficient fraud prevention. Automation relies heavily on rule-based patterns that cannot track every fraudulent attack, while AI is too opaque and attracts regulatory intervention. But when complemented by rule-based machine learning (ML) algorithms, AI can flag transactions based on suspicious patterns to find new patterns that can then be fed into robotic process automation (RPA) to structure solutions. Data can be collected from different verticals of your business to produce insights that are holistic and comprehensive. For instance, Danske Bank reduced false positives by 50% and increased fraud detection by 60% using Teradata’s AI solution.

• The evolution of behavioural biometrics – the increasing availability of vast amounts of data is driving biometrics beyond touch and facial recognition to voice and even keyboard and mouse strokes. You can leverage this data with machine learning to detect and extract suspicious activity and patterns. For instance, HSBC UK credits its use of VoiceID security measure in preventing nearly $550 million of fraud in 2019.

It’s clear that while even a single data breach or violation can have an immense impact both on the business externally and internally, your financial institution can mitigate or prevent fraud by proactively investing in technology and people.

To learn more about how Capgemini can implement AI and intelligent automation at scale to mitigate and prevent fraud across your business : bhaskar.amit@capgemini.com