Fraud Losses Continue to Rise

“Our ability to manufacture fraud now exceeds our abilities to detect it.” This observation was not made by a banker, but the actor Al Pacino. And it leads one to wonder, how pervasive is fraud and the unremitting threat of fraud in American life?

Certainly bank leadership recognizes the relentless growth of this criminal activity, even as they continue to juggle other responsibilities – like dealing with fluctuating interest rates, margin pressure, and deposit growth.

Yet fraud, in its many forms, remains a chronic threat.

Consider the following:

1. TransUnion: The cost of fraud increased every quarter from Q2 2020 to Q3 2021 ($248 million to $652 million).
2. Federal Trade Commission: Total losses to fraud continue to rise persistently.
3. LexisNexis Risk: The true cost of fraud increases over time – every $1 lost costs banks $4.10 (a 13% increase).

Another troubling aspect of fraud: even as paper check volumes decline with the increase in electronic payments, the cost of check fraud has continued to rise.

As reported by American Banker, check volumes are down 3%‒5%, yet the dollar volume of check fraud has tripled since 2000.

Types of common banking fraud

As bank leaders are aware, fraud comes in many forms and varies widely in scope and scale. Vigilant bankers know it’s imperative to stay alert to the increasingly wide range of fraudster schemes.

Some of the more commonly seen ruses include:

Check fraud can include forgery, check alteration, and counterfeiting. A bank’s liability for paying on a fraudulent check depends on the type of fraud involved. If the check was altered, the liability falls on the bank of first deposit. The same holds true if an endorsement is forged.

Identity theft losses totaled a combined $43 billion in 2022 according to Javelin research. This fraud happens when someone takes a customer’s name and personal

information (like a social security number) and uses it without permission to do things such as open new accounts or tap into an existing account.

Card fraud encompasses enumeration when criminals use brute force methods to submit fraudulent payment transactions hoping for valid approval. Banks must identify this activity as quickly as possible with the least amount of friction to cardholders as possible.

Account takeover is rising as one of the fastest growing fraud trends and can occur in several ways:

1. A fraudster accesses online banking using compromised credentials.
2. The fraudster updates the customer’s profile; account verify messages are directed to the fraudster’s phone or email address.
3. The fraudster uses a fraudulent or compromised debit card in a card-present transaction.

Financial institutions must continuously look for an unusual location for debit card activity and reach out to the account holder to confirm the transaction.

Taking actions to address fraud

Prudent bank executives will guide their organizations into taking a holistic, proactive approach to fighting these and other types of fraud. Constant vigilance of all bank staff who are trained for detection, monitoring, and red flag identification becomes a must.

Policies and procedures must reflect the evolving world of fraud, staying current with criminal trends and ambiguous activities.

New technology plays a vital role in detecting and combating bank fraud. Data analysis, Artificial Intelligence (AI), and digital forensics are now integral components of the fraud prevention process. These tools help detect patterns, anomalies, and fraudulent activities that might otherwise go unnoticed.

AI-based machine-learning technology enables banks to stay ahead of fraud trends and better manage fraud strategies. \Banks should also use advanced analytics to monitor and model data holistically to identify unique trends while taking a proactive stance to counter fraud schemes and crime rings.

Making use of AI, analytics and fraud counterstrategies can become more effective and easier to implement when relying on a true technology partner. Such a partner will offer automated fraud solutions that deeply integrate AI and analytics into your bank’s existing technology platforms.

The following provides two examples of fraud solutions:

Integrated fraud fighting automation

Real-time image capture and processing for customer-facing channels. Risks can be identified from transaction and account data, while signature and check stock verification can identify counterfeits and forgeries. This type of imaging automation should be fully integrated with your bank’s deposit platform.

Payment risk analysis solutions centralize raw data from a wide variety of sources then analyze the data to create entity resolution models. Once again, integration with an array of existing bank technology solutions drives the value of the payment risk analysis model. These integrated components include core systems, compliance automation, item processing, and account opening.

While no banking organization is invulnerable to fraud, the right mix of integrated fraud detection and prevention tools, integrated with existing banking platforms, will help bankers sleep a little more soundly at night.