Online Scam Complexity Is Paradoxically Keeping Banks’ Fraud Controls Offline

Why Banks Are Holding Back on New Fraud Controls

As long as banks have been around, they’ve been tremendously attractive targets for “robbers.”

The tit-for-tat between bad actors chasing after bank deposits has evolved each century — and increasingly each decade. While banks have long won the war, fraudsters and scammers are increasingly winning the side skirmishes, as today’s online world offers more hyperconnected vulnerabilities to exploit.

This, as the new report, “The State of Fraud and Financial Crime in the U.S.,” a PYMNTS and Featurespace collaboration, found that 62% of large banks are dealing with increases in financial crimes.

The frequency and intensity of attacks has gotten to the point that large financial institutions (FIs) with over $5 billion in assets collectively bore nearly $120 million in average fraud costs for 2022.

The issue is affecting customers as well. Earlier this week, the fastest man in the world and legendary gold medal winning Olympian Usain Bolt reportedly lost $12 million due to a bank scam.

Under Siege and Overwhelmed

With criminals constantly probing for vulnerabilities and looking to exploit any weaknesses, what can FIs do to protect themselves and their customers?

In an unfortunate twist, some executives report finding themselves succumbing to a pervasive sense of helplessness, overwhelmed by the scale of fraud prevention demands and complexity of the challenge in today’s interoperable global world, where bad actors can strike from anywhere and at any time.

The complexity of implementation in particular, with certain regulatory compliance standards being highlighted specifically, can impede adoption.

Sixty-six percent of executives at FIs cited complex regulatory requirements as a challenge preventing them from piloting new technical options to protect their organizations, PYMNTS’ research found.

Additionally, four in 10 executives cited concerns over the potential complexity involved in the day-to-day use of new technologies, and the same 40% also cited a presumed integration complexity of marrying new fraud prevention controls with existing systems as a factor holding them back from investing in further innovative solutions to combat banking fraud.

And PYMNTS data showed that, correspondingly, businesses’ accounts receivable (AR) operations have been underfunded for fraud prevention.

The Overlooked Importance of Securing Incoming Payments,” a PYMNTS and nsKnox collaboration, revealed that 85% of chief financial officers are investing or plan to invest in digital solutions for fraud prevention and risk management.

Ninety-five percent of executives said they consider using innovative solutions to improve fraud detection and anti-money laundering (AML) compliance a high priority.

Artificial Intelligence Offers a Smart Solution

FIs tapping next-generation artificial intelligence (AI) and machine learning (ML) solutions to protect their organizations from scammers and fraudulent actors reported the lowest levels of all financial crimes, including fraud.

The report “Risk and Resilience: A Business Fraud and ID Theft Report,” a PYMNTS and TreviPay collaboration, found that organizations that had implemented automated solutions to protect their businesses from fraud were much more satisfied with their protection compared to companies using legacy or manual solutions.

Organizations considering but not yet deploying these next-gen prevention approaches to block fraud and identify suspected money laundering all cited the same implementation hurdles, namely complexity.

This hesitance to adopt modern tools due to a concern over possible difficulties in making them work leaves many FIs vulnerable at a time when fraud is rampant.

Fraudsters especially targeted credit cards, with 64% of banks reporting an increase in fraud attacks surrounding their use and reconciliation.

The same study found that the need for identity verification is one of the top three challenges facing companies.

Because incoming payments fraud, the most common fraud relating to AR, often stems from inadequate internal controls, companies must modernize the systems that govern incoming payments. The average loss associated with internal fraud was nearly $1.8 million per case.

The most important challenge however, according to 25% of the largest FIs by asset size, is the increasing sophistication of the financial fraud methods leveraged by bad actors to target their organizations.

As criminals and bad actors continue to ramp up the scale and ingenuity of their digital attacks, in some cases targeting bank customers directly, many leading financial actors may find themselves continually and repeatedly hit by avoidable, pervasive losses if they do not update their security processes with modern technology solutions.