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Today’s fraud prevention is more than just automation

Efforts by banking institutions will continue to rely on cutting-edge capabilities, but human brainpower and intuition are more important than ever.

Feb 1, 2023 / Fraud Prevention
Fraud Prevention & Cybersecurity

The full extent of banking losses from fraud have yet to be tallied for 2022, but I don’t feel like I’m out on much of a limb in speculating that the trend line will continue moving as it has for years: Up and to the right.

And those losses on their own don’t reflect the total cost to banks and credit unions. A November 2022 report from LexisNexis Risk Solutions estimates that every dollar lost to bad actors actually cost financial services firms $4.23 – this 4X+ multiplier is up roughly 16% from 2020.

In the first BAI Executive Report of 2023, we examine where things stand with fraud protection and how it can be done more efficiently and effectively.

Our lead article from contributing writer Ed Lawler explores the evolving role of the living and breathing in what has largely become a technology-forward fight against fraud.

He speaks with several thought leaders in the field who agree that, while anti-fraud efforts will continue to be largely reliant on automation and other cutting-edge capabilities, human brainpower and intuition are more important assets than ever. As one points out, “Technology tools can only get you so far … We need people with the right mindset and the right art to connect the dots.”

Strong data science skill sets supplement the curiosity and creative thinking by fraud-risk managers working to get into the heads of fraudster and figure out ahead of time how they would try to beat the system.

A growing number of headlines about scams involving peer-to-peer payments fraud has directed more regulatory focus toward that corner of the fintech world. Contributing writer Dawn Wotapka offers insights on P2P fraud, along with other persistent forms of criminal behavior occurring at the consumer level.

One of the key takeaways from her reporting is that would-be fraud perpetrators no longer need that much technical skill to pull off their scams. “Social media is full of ‘how-to’ videos and tools on how to commit fraud,” one industry expert tells her, while another adds, “we should never underestimate today’s criminals.”

And as if fraud perpetrated by real people isn’t challenging enough, financial institutions also need to worry more about the growing proliferation of deep fakes as the technology is getting better in both audio and video formats.

For this month’s Q&A, I speak with Vijay Balasubramaniyan, CEO at the fintech firm Pindrop, about his observations in the deep fake space and what those being targeted can do about it. He says banks and credit unions currently face the greater threat from audio deep fakes, which are particularly close to the genuine article: In a test created by his company, barely more than half of participants were able to distinguish between a real person’s voice and a fake version of that voice.

Also in this month’s Executive Report:

Digital fraud is front and center in 2023: Greg Kanevski from ServiceNow examines online fraud, which he believes will take on even greater urgency this year. The goal for banks and credit unions, he says, is to detect fraud in real time while also predicting a fraudster’s next move to try to head it off.

Striking a balance between fraud and friction: Christina Luttrell from GBG Americas discusses some of the findings from a recent study done by her company on consumer experiences and expectations regarding digital identity fraud. A persistent issue is optimizing the tradeoffs between protecting customers and providing a satisfying user experience.

Managing the risks and rewards of faster payments: Eric Tran-Le from NICE Actimize tells us that the global pursuit of ever faster payment capabilities to meet consumer expectations is posing a range of fraud prevention challenges for regional banks, community banks and credit unions.

Mitigating the challenges of ‘piggybacking’: Jason Kratovil from SentiLink writes about the growing market for buying and selling legitimate tradelines as a way for individuals with low credit scores to improve their credit report. This action is often a form of first-party fraud that leads to higher charge-off losses.

Protection from check fraud in a digital world: Nathan Holstein from TROY Group reminds us that paper checks are still a relevant payment method for many businesses, and that the industry shift toward digital has led to more focus by fraudsters on this lower-tech channel.

Terry Badger, CFA, is the managing editor at BAI.

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”.