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How banks can stay ahead of the fraudsters

The only real solution is to build a system that allows for new monitoring technologies that can handle the volume and speed of these transactions.

May 10, 2023 / Fraud Prevention
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With more Americans relying on payments that are getting ever closer to real time, banks should be looking at how they can enhance their fraud detection and prevention activities now more than ever.

The introduction of new financial services and technologies, the risk of fraudulent activity always increases. This is primarily driven by new users adopting the system and fraudulent actors testing new tactics in the environment. Whenever a new payment mechanism is introduced, the volume of fraud proportional to overall activity tends to be higher than in traditional payment systems.

To up their fraud detection and prevention game, banking institutions need the technology and capacity to actually deal with real-time payments. The temptation might be to focus first on putting a system in place to handle real-time payments and then turn attention to fraud. But managing fraud risk shouldn’t be a secondary consideration when banks are looking to modernize their payment activity.

One reason is that there is a strong likelihood that regulators will increase the bank’s liability in cases involving authorized push-payment (APP) fraud in the future. Currently, the majority of such fraud isn’t being refunded. Regulators in Britain have recommended that APP fraud cases should be considered equally the fault of the sending bank and receiving bank, putting them both on the hook for reimbursing 50% of a customer’s loss. It’s not unthinkable that U.S. regulators might impose a similar mandate, so banks may be required to screen inbound and outbound transactions specifically for APP fraud in the near future.

The only real solution is to avoid the problem altogether by building a system that allows for the application of increasingly new technologies for the monitoring of fraud because the volumes and the speed at which these transactions are processed can only be handled by highly sophisticated technology and the application of artificial intelligence. You cannot do this if you’re still operating on a mainframe platform.

The question for banks then becomes how they build such a system. It would require an enormous amount of resources; few banks would be able to find the necessary investment even without a mid-2023 deadline looming for the introduction of the Federal Reserve’s new FedNow Service for real-time payments.

Banks are, of course, already spending a great deal on fraud detection and prevention. We have seen a massive increase in spend to try and head off the surge in activity, which has manifested in two ways. Firstly, banks are hiring information security experts. Right now, information security specialists are among the engineers in the highest demand.

Secondly, that spend is also manifesting in investment in new technologies and new technology partners that specialize in this space. More and more of the banks are coming to rely on third-party companies to provide this service. This is part of the reason why spending on fraud detection and prevention is forecast to grow at a staggering rate in coming years; the global Fraud Detection and Prevention market is projected to grow to $65.8 billion by 2026, well more than double its level in 2021.

For banks to operate effectively in a real-time world, they’re going to need to plug-and-play on the fly or they risk being left behind. This approach brings flexibility. It brings security at scale. It brings overarching market oversight.

The U.S. government is throwing its weight behind FedNow — it has pledged to use instant payment systems for its own transactions where appropriate, such as in the context of distribution of disaster, emergency or other government-to-consumer payments — and the White House has also mentioned plans to create a federal framework to regulate nonbank payment providers very recently.

Banks need to be aware just how closely the payments space is going to be watched in the coming months and years because any slip-ups could prove to have a massive impact on their reputation.

Dave Scola is U.S. CEO at Form3