As fraud proliferates across the payments space, financial institutions confront unprecedented challenges. Staying ahead of fraudsters, complying with regulations, and maintaining customers’ satisfaction are paramount concerns. FIs can no longer afford to remain on the sideline and passively observe. Instead, they must adopt a proactive approach to safeguard themselves from external threats in this increasingly complex space.
In a recent PaymentsJournal webinar, Syed Badar, Senior Director of Product Management at Early Warning®, and Suzanne Sando, Senior Analyst of Fraud & Security at Javelin Strategy & Research, delved into the fraud landscape, the key challenges FIs are facing, and the best practices to detect fraudsters.
The Fraud Landscape
The fraud landscape resembles a landmine, with threats lurking in every corner of the payments domain. Fraudsters, leveraging new technologies and advancements, have become increasingly sophisticated. What’s surprising is that, amid the rapid pace of digital innovation, checks continue to be a primary target for fraudsters.
“Over 60% of organizations are facing fraud activities via checks,” Badar said. “Just last year, 30% of the organizations reported that they face fraud activities via ACH debit and credit1.
“And we see new types of emerging, various technologies that, while the improvement in innovation that we see for the consumers, like Same Day ACH, offer speed and convenience to consumers, but they also open the door to new types of fraud. The bad actors are evolving their techniques, and as a result the number of attacks is increasing.”
Cybercriminals are opportunistic, quick to capitalize on the latest trends in social media platforms and payment methods. Their endgame is to identify the weakest link and exploit it to maximize their profits.
“We’ve seen this ebb and flow in terms of the efficacy of certain fraud typologies because of this,” Sando said. “One year, account takeover and new-account fraud might be hot. The next thing you know, they’ve shifted their focus to something completely different, like an impostor scammer.”
Three Key Challenges FIs Face
Financial institutions are navigating a figurative tightrope, delicately walking a narrow path to advance amid the challenges of managing costs, ensuring customer satisfaction, and maintaining compliance. A single misstep can lead to a potentially catastrophic fall. This presents a challenging balancing act for Fis. Here are the issues they must address to succeed in this highly competitive sector.
In some cases, FIs are reimbursing consumers for certain payments scams. As FIs cover more scams, operational costs are being driven up. Their reputation may also be at stake if they fail to advocate for their customers.
The impact on the consumer experience. Another key challenge that FIs contend with is striking a delicate balance between implementing effective controls and other fraud mitigation tools while delivering an exceptional customer experience and minimizing friction.
Legal and non-compliance issues. Banks and credit unions are required to authenticate all their customers. They must be up to speed with the latest regulations related to know-your-customer and anti-money-laundering protocols.
The emergence of liability fraud cases, such as those observed in Britain, poses a growing concern for Fis. The rise of authorized push payment fraud highlights the need for similar protective measures for bank customers in other parts of the world.
“In Britain, they’re shifting liability for certain types of fraud, for authorized push payment fraud,” Sando said. “That shift is going from consumers to the FI. So they’re now going to split the liability between the sending and the receiving FI to cover for the consumer, for the victim—let’s call them what they are, they are the victim. And I think that this is a huge step forward for consumers.”
Although this would be a win for consumers who have fallen victim to this type of fraud, smaller banks and credit unions could bear a significant financial burden in their efforts to cover costs. Prioritizing fraud prevention and detection becomes imperative to mitigate the impact of these financial challenges.
Data Sharing to Detect and Block Fraudsters
The key to fighting fraud lies in harnessing the readily available resource for FIs—their historical data. By utilizing historical data, FIs can evaluate the differences between legitimate and fraudulent transactions, enabling them to better identify patterns indicative of suspicious activity.
“Everything we’re doing is so digitally centric that you’re relying on all these little pieces of data to create this perfect picture of who it is that you think you’re doing business with,” Sando said. “And the responsible use of that data is critical in preventing payments fraud.”
When FIs effectively communicate to their customers how data is being used to safeguard them, they establish a foundation of trust. This, in turn, fosters an enriched and more satisfying customer experience, ensuring the protection of the FI and its customers.
Leveraging Intelligence Insights to Detect High-Risk Transactions
Early Warning® has developed a suite of predictive intelligence tools that harness a vast amount of historical data. The creation of the National Shared DatabaseSM resource, fueled by contributions from more than 2,500 financial institutions, forms the bedrock of this repository. Within this framework, Early Warning® has introduced two solutions that help detect high-risk transactions in real time.
The first solution, Verify Deposit, uses bank deposit data to authenticate the legitimacy of the deposit swiftly, making sure customers get access to their funds while protecting the bank from potential fraud.
The second solution, Verify Payment, enables banks to detect risky payments in real time, protecting against losses stemming from fraudulent payments. This tool offers insights into account status, account type, and accountholder information. Verify Payment generates a risk score that empowers FIs to make a “risk-based decision” based on this outcome and accept or block the payment.
FIs are dealing with multifaceted challenges that can be difficult to navigate. Implementing a fraud solution may seem like an additional burden, but it doesn’t have to be.
“This is where Early Warning® shines, because not only do we just give you access to the tools, but we also have a team of solution managers and account managers who will closely partner with you to identify and understand what your pain point might be,” Badar said.
“What are your use cases? What is unique about your environment? Your business objectives? Your risk tolerance? We can help you craft a plan to build on top of your stack and integrate solutions that is best optimized for you to minimize the losses, reduce your operational costs while delivering a seamless customer experience that you expect.”
1 2023 AFP® Payments Fraud and Control Survey, AFP®