Consumer trust and institutional stability is under attack. Why? In a simple word: Fraud.
Fraud is reshaping the global financial sector, introducing risks that extend beyond monetary losses. Sophisticated schemes such as authorized push payment (APP) scams, synthetic identity fraud and vast mule networks means that financial institutions need to advance digital fraud protections and fast.
One good thing that came out of the pandemic is that it forced companies and consumers to embrace an expedited digital evolution, but with the emergence of new, more convenient payment types comes more risk and complex threats.
Fraud in banking and payments not only imperils revenues but threatens the foundational trust that financial institutions rely upon. With fraudsters exploiting every place where a transaction occurs, institutions must adopt innovative strategies and collaboration to ensure security without sacrificing convenience.
To address the growing challenge, financial institutions (FIs) need access to risk insights and a layering of protective tools to mitigate them effectively. They can also pool their knowledge with other organizations and leverage shared collaborative networks. This not only allows FIs to see risk signals within their own environment, but it also gives them risk intelligence related to devices, IP addresses, email addresses and other indicators outside of their environment from participating peer organizations. This helps all members improve their fraud risk assessments.
Fraud has become widespread in the financial sector, as criminals take advantage of rapid technological change and expanding digital footprints. Losses from APP fraud, where criminals manipulate people into making payments to fraudulent accounts, are expected to exceed $5.25 billion in the US, UK and India by 2026. The rise of real-time payment systems has further complicated fraud defenses, providing fraudsters with quicker tools to move illicit funds while institutions scramble to slow down attacks.
Synthetic identities represent another growing issue for FIs. Global losses tied to synthetic identity fraud now approach $40 billion, as criminals combine fake identities from both fictitious and stolen personal data. With global data breaches on the rise, fraudsters are gaining access to an increasing reservoir of valuable data points to craft convincing but fraudulent applications for credit or accounts.
Compounding these issues is the operational complexity of detecting fraud early along the customer journey. The global nature of financial crime makes it particularly challenging for institutions to distinguish between legitimate and suspicious behavior. An attack on one bank often links to larger networks that span industries and countries.
Collaboration as the financial sector’s best defense
Collaboration within an industry and across industries and borders helps solve for simple to the most complex fraud. Criminal organizations are highly networked, able to deploy scams at scale with precision. To fight back, financial institutions are able to work together to create similarly robust defense ecosystems. Collaborative intelligence networks are proving to be indispensable for addressing this challenge.
These networks enable financial institutions to share anonymized insights on risk signals across customers, devices and transactions in real time. For example, insights into mule activity from one institution can flag signs of fraudulent activity at another, preventing scams from escalating, demonstrating how collaborative networks enable knowledge from one institution to protect other members of the community.
Layering technology is the recommended approach to combating fraud within the financial sector. Advancements in artificial intelligence (AI) and behavioral intelligence are reshaping fraud detection and prevention capabilities to empower organizations to spot patterns, behaviors and anomalies that may otherwise slip through conventional risk checks.
AI-driven analysis has shown remarkable promise in detecting synthetic identities. By examining hundreds of attributes tied to an identity, such as behavior, device usage and relationships with other accounts, financial institutions can distinguish genuine users from malicious actors. This is especially valuable in changing financial ecosystems where emerging identities, such as young or migrant users, mirror the characteristics of synthetic identities.
Digital intelligence, behavioral intelligence and device binding, which links a user’s mobile device to their account, are particularly impactful in securing mobile banking interactions. These tools allow institutions to authenticate user identities passively, using factors such as the way someone holds, types on or interacts with their device. These measures enhance security without introducing friction, enabling a smooth customer experience in mobile transactions which are fast becoming dominant in the financial sector.
Combining these defenses with collaborative real-time intelligence on fraudulent beneficiaries magnifies anti-fraud workflows effectiveness and is critical in limiting mule activity within the ecosystem.
Safer, secure payments
Securing the payments process is central to fraud mitigation. With the global volume of instant payments expected to reach $58 trillion by 2028, financial institutions are under mounting pressure to defend real-time payments systems against fraud.
Organizations that adopt a broad range of fraud solutions experience up to an 18.5% reduction in fraud losses, according to the LexisNexis® Risk Solutions Global State of Fraud and Identity Report. By layering threat intelligence, alternate authentication strategies and in-depth transactional analysis, these institutions can achieve safer, faster and more secure payments.
An FI’s ability to compete relies heavily on its proficiency in combating fraud , adapting swiftly to emerging risks and providing a convenient and low friction user experience. Financial institutions can integrate advanced technology with collaborative frameworks to counter the increasingly resourceful fraud networks. Real-time fraud monitoring at both inbound and outbound steps of the transaction life cycle will remain essential.
Additionally, the sector must work towards clearer regulatory standards beyond borders. Fraud is a global problem and the lack of cross-border cooperation limits the effectiveness of even the most robust local systems. Harmonizing international frameworks will be key to addressing the interconnected nature of financial fraud.
The road forward isn’t without challenges, but there are opportunities to not only mitigate risks but drive innovation. A financial sector that embodies collaboration, leverages advanced technology and invests in consumer education can transform fraud prevention into a competitive advantage, safeguarding both businesses and the consumers they serve.
Rob Woods is Director, Fraud and Identity at LexisNexis Risk Solutions.
