Fending Off Fraud in Digital Banking

22.07.2024 11:00

PYMNTS.com

Fraud’s continued predation of digital banking has been nothing short of alarming. Financial institutions (FIs) are exhausting millions in a determined bid to stay one step ahead, with trust, money and reputations on the line. Moreover, navigating this crisis without undermining the digital convenience consumers have come to expect adds a daunting layer of complexity for the industry. The future demands the adoption of advanced fraud prevention technologies without delay, not only to rebuild trust but also to deliver on the promise of seamless customer experiences in a rapidly evolving digital banking landscape.

Digital Fraud: The Shape-Shifter of the Banking Ecosystem

Digital banking has become prime hunting ground for fraudsters who perpetrate schemes as diverse — and dynamic — as they are devastating.

Digital banking is prime real estate for fraudsters.

56%

of fraud and risk management leaders in the financial industry reported an increase in fraudulent activities in 2023.

The digital banking landscape has become a hotbed for sophisticated and ever-changing fraud. Phishing (73%), electronic banking (52%) and account takeover schemes (47%) rank among the most common types of third-party fraud currently targeting retail banking consumers, with synthetic identity and malware-driven fraud not far behind. Equally alarming is bust-out fraud, a scheme in which fraudsters max out credit lines before vanishing, and United States consumers are disproportionately impacted. Authorized fraud — in which an authorized party initiates a payment to a fraudulent account, often as a result of being deceived into doing so — is also on the rise, making up 46% of fraud cases at large FIs.

The sheer complexity and variety of these schemes not only underscore the acute need for multilayered security solutions but also highlight the critical value of better understanding the social engineering methodologies and psychologies that they exploit — a strategy that could shape more effective consumer-facing fraud prevention programs.

Fraud is causing significant financial losses — and creating substantial risks.

This surge in fraud has unleashed a devastating wave of financial losses and operational headaches for banks and FIs. In 2023 alone, 56% of key leaders in fraud and risk management reported an increase in fraudulent activities, with many institutions shelling out between $5 million and $25 million annually to tackle this menace. A problem with much broader implications for the industry is that the trustworthiness of even seemingly genuine retail banking consumers is now in question, as 42% of FIs report an uptick in first-party fraud, the kind in which fraudsters themselves open accounts. This is deeply troubling because an erosion of the foundational trust between FIs and their customers could potentially trigger a domino effect, jeopardizing customer acquisition, retention and overall market competitiveness.

The Elusive Sweet Spot of Secure Digital Banking and Customer Convenience

FIs seem caught in an unyielding vortex, simultaneously battling fraudsters, hemorrhaging money and risking customer trust.

Balancing robust security and seamless banking experiences is a complex task.

FIs must carefully balance beefing up security and fending off relentless fraud with preserving the sleek, digital experiences customers crave. This is a challenging feat, as evidenced by the 37% of retail banking consumers who have walked away from new bank account applications, with 47% of these prospective account holders citing a tedious process and concerns about security as their reasons for doing so. FIs need Generation Z and millennial customers, yet more than half of such customers have abandoned an application. In the United Kingdom, fear of fraud is so pervasive that half of adult consumers are more worried about online banking now than four years ago. This tension between upholding stringent security measures and ensuring user convenience is a critical challenge that FIs must navigate with precision. If they falter, they potentially risk losing digital-native consumers to the allure of Big Tech.

59%

of retail banking consumers are comfortable with their FIs using AI to combat fraud.

Transparency is key for building trust in modern fraud prevention methods.

How are institutions striking this balance? Many FIs are getting creative by leveraging cutting-edge technologies. Artificial intelligence (AI), for one, is gaining traction, but are retail banking consumers on board? FIs, take note: 59% of consumers are already comfortable with AI’s use in fraud detection. Transparency, however, is crucial for gaining customer trust, as 85% of consumers demand to know how AI is used by their FIs. This emphasizes the importance of open dialogue between FIs and their customers, highlighting the pivotal role transparency could play in building trust — which remains a nonnegotiable. Not surprisingly, 91% of banking customers regard an FI’s ability to safeguard sensitive personal information as its most mission-critical function. This data suggests that a significant ongoing challenge for many FIs is navigating the nuanced intersection of security and transparency. The sooner FIs develop strategies that link security with transparency, the faster they can demonstrate their commitment to fostering consumer trust.

AI Takes the Fight Against Fraud Beyond Human Limits

As the financial industry reels from fraud overload, next-generation technologies are taking center stage, promising to rewrite the anti-fraud playbook and flip the script on fraudsters.

FIs have new allies — ones that will reshape the contours of trust and security.

52%

of FIs plan to use AI or ML to supercharge fraud prevention.

The planned increase in use or adoption of AI and machine learning (ML) by 52% of FIs marks a significant milestone for fraud prevention efforts. Even more transformative are emerging technologies such as federated learning and confidential computing. Federated learning in particular represents a breakout innovation because it enables the collaborative training of privacy-preserving deep learning models across a network of decentralized devices without the need for FIs to exchange underlying data. Consequently, this method safeguards sensitive data directly at its source.

Similarly, confidential computing secures data in use by isolating it from other system layers, ensuring better protection against both external attacks and insider threats. Together, these technologies foreshadow structural changes to the means of combating fraud, steering the industry toward a more comprehensive AI-driven security framework that could radically alter the financial security landscape.

AI takes charge and achieves early successes.

AI and ML are already proving their worth in the fight against fraud, highlighted by the early successes of tools such as the Visa Account Attack Intelligence (VAAI) Score, which uses generative AI to help identify and mitigate fraudulent transactions, and the NVIDIA-bunq partnership, which boosts bunq’s fraud prevention capabilities, also through the use of generative AI. As these technologies mature and become more established, their influence on the industry’s security posture and the banking threat landscape is likely to expand. Indeed, this fast-emerging reality suggests a near-future transition from human-led fraud prevention efforts to a digital arena in which AI systems do battle in real time. Thus, the future of digital banking will not be merely about who has the best technologies but about how effectively they wield them for strategic advantage.

Cultivating Trust in the Age of Digital Fraud: A Tactical Guide

For many consumers, digital services and experiences are more than conveniences — they are extensions of their identities. This visceral connection makes the sting of digital fraud particularly severe and helps explain why consumers are profoundly unsettled when digital fraud strikes: It occurs through the very media that is so central to their everyday lives, leaving them feeling vulnerable, powerless and potentially financially harmed.

Understandably, FIs are in a difficult position. The need to deliver convenient, seamless and empathic digital banking experiences while maintaining bullet-proof security presents a challenge with no historical precedent in the industry. How, then, can FIs leverage next-generation technologies to secure the future of digital banking and win back customer trust?

PYMNTS Intelligence prescribes the following actionable roadmap for banks and financial institutions:

Start small, scale smart. Implement validated AI solutions for real-time transaction monitoring and adaptive fraud detection. Pilot advanced technologies, such as federated learning, in controlled sandbox environments to ensure scalability and data protection without risking core operations. Track success metrics such as fraud detection accuracy and reduction in false positives to assess the value proposition of broader implementation.
Utilize behavioral biometrics. Employ behavioral biometrics to analyze real-time user interactions, such as typing patterns and navigation habits, to offer a robust layer of security that is difficult for fraudsters to replicate. Evaluate efficacy by monitoring reductions in account takeover incidents and improvements in user experience.
Adopt zero-trust architecture. Transition to a zero-trust security model in which every transaction, request and user interaction is continuously verified in real time. Begin with critical systems and gradually expand the zero-trust framework across the organization. This approach ensures that only authenticated and authorized interactions occur, substantially minimizing the risk of breaches and enhancing overall security.
Gamify consumer-facing fraud prevention education and transparency. Transform security awareness with interactive and engaging educational modules on digital fraud prevention. Deliver this content through mobile apps and online platforms, incentivizing the learning process with rewards for completing educational activities. Prioritize transparency by clearly communicating how customer data is utilized to enhance security measures, and do so through regular updates and open, easily accessible communication channels that encourage feedback.
Partner to accelerate modernization. Build strategic relationships with FinTechs that specialize in fraud detection and prevention. These collaborations unlock access to the latest technology, expertise and bespoke customer service, facilitating a more comprehensive and agile fraud prevention posture.

Ensuring the future of digital banking is secure, convenient and customer-centric is challenging but critical. By adopting these strategies, FIs not only can mitigate fraud but also can engender trust — turning vulnerability into victory.

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