FIs Reckon With Rising Fraud Rates in Run-Up to Real-Time Payments

Financial institutions are beset on all sides.

The PYMNTS Intelligence report “New Data: FIs Cooling on Open Banking but Still on Course for Real-Time Payments” found that more than a third of FIs think the benefits of open banking outweigh the risks. However, more than 45% stated that the risks outweigh the benefits.

There’s some wariness about data sharing and vulnerabilities. Speed is top of mind, and the old saying, “faster payments lead to faster fraud,” may be top of mind, too.

But there’s a growing recognition that a multi-pronged approach to battling the bad actors can be among the most effective strategies. The data showed that 40% of FIs that use three or more anti-fraud technologies said the benefits of open banking outweigh the risks, compared to 28% among those that use two or fewer anti-fraud lines of defense.

One-third of FIs using manual fraud prevention processes reported that the risks of open banking outweigh the benefits. Another one-third of FIs using manual fraud prevention processes are unsure they could safely provide faster payments without compromising security.

The Larger Picture

As for the larger picture surrounding fraud itself, and the trends that are making the FIs cautious about fully embracing open banking and instant payments, separate PYMNTS Intelligence found that 43% of FIs reported an increase in fraud in 2023 compared to the previous year.

The impact has been most keenly felt by FIs with assets of $5 billion or more, which saw the average cost of fraud rise by 65% between 2022 and 2023, from $2.3 million to $3.8 million.

Overall, over 40% of banks in the U.S. observed an increase in fraud during the same period, resulting in a surge in major fraudulent transactions and financial losses.

Digital payments fraud made up more than 26% of fraudulent transactions last year, and more than 45% of larger FIs experiencing higher fraud rates said they had seen a spike in same-day ACH fraud.

Rules-based algorithms are used by about 60% of FIs regardless of asset size. But 66% of FIs with assets of $5 billion or more are using artificial intelligence and machine learning technologies to combat fraud, an increase from 34% in 2022. Roughly half of all FIs surveyed said that they will develop new, in-house systems to fight fraud; about 70% of FIs with at least $100 billion in assets will initiate or increase their use of deep learning systems.