Banking expert shares insight on preventing financial fraud

Banking fraud remains a big problem, especially in this modern turbulent environment. Between COVID-19, the war in Ukraine and political crises, fraudsters are taking advantage by targeting customers. While this takes its toll on normal consumers, it also costs banks as well, as they have to refund the money lost from fraud.

How do banks combat this fraudulent activity? That is the question SEON answers with its Global Banking Fraud Index study. SEON is a provider of fraud management software to help businesses prevent fraudulent activity. ATM Marketplace spoke with Gergo Varga, product evangelist at SEON, via email to learn more about banking fraud and how banks can handle the issue.

Q. How much is fraud costing banks overall?

A. Every $1 of fraud costs U.S. financial services $4 respectively. While we can't put an exact figure on the amount of money banks are losing to fraud, we know it has increased significantly after the pandemic and is costing tens of billions of dollars every year.

Q. What is causing this massive spike in fraud?

A. While we were already seeing a yearly increase in banking fraud every year as a result of banks moving online in the digital age, it can be said that the COVID-19 pandemic is fueling an explosive growth in fraudulent activity. The chaotic global crisis is being used by greedy fraudsters to engage in even more fraudulent behavior.

Q. What are some of the latest trends in fraud?

A. In terms of areas where fraud appears most commonly, online banking fraud accounted for the largest proportion of U.S. fraud in 2021 and 2020. Interestingly, the contribution of in-person fraud to total fraud also saw a dramatic increase, going from 21% to 29%.

Monthly fraud attacks on U.S. retail have increased in both volume and success, with the number of fraud attacks growing from 1,384 in 2019 to 1,740 in 2021. Fifty percent of 2021 attacks were successful, compared to 41% in 2019, which shows attacks are becoming harder to prevent as fraudsters become more sophisticated. For U.S. retail, mobile fraud now accounts for 27% of the total fraud cost, a 19% increase.

U.S. commerce has also seen an increase in the number of fraud attacks — but significantly reduced successful attacks in 2021 (42%) compared to 2020 (66%). For U.S. commerce, mobile fraud has risen even more significantly, going from 8% in 2020 to 39% in 2021 — a whopping 34% increase.

Q. How can banks combat this rise in fraud?

A. Banks can combat the rise in fraud by implementing risk-based authentication which will help prevent account takeover attacks (ATOs) without slowing down the customer journey. At SEON, we call this "dynamic friction" and it means provably good customers can enjoy the most frictionless journey possible while suspicious but not outright fraudulent users have a chance to demonstrate they aren't fraudsters — which effectively reduces false positives.

PSD2 and 3DS 2.0 compliance also helps ensure accepted transactions are legitimate. A growing trend accounting for 23% of all bank account fraud is fraudsters opening new bank accounts. They do this using a combination of synthetic IDs, user impersonation and configuration spoofing. Fraudulent account opening is particularly pervasive with neobanks and challenger banks. These companies often sacrifice security for the sake of offering a frictionless onboarding experience. The responsibility to stop new account fraud comes from the banks themselves. To combat new account fraud, banks can look at alternative data rather than just looking at ID documents but the user's digital footprint, such as social signals, online activity, and IP address analysis. Also, real-time transaction monitoring is a key feature of anti-money laundering, which can also help flag fraudsters as soon as they start depositing or withdrawing money into their freshly created accounts.

Behavior tracking: In the fraud prevention world, behavior tracking is done via velocity rules. Machine learning has the advantage of being able to analyze massive amounts of data and suggest risk rules based on identifiable patterns. It can be a great help for neobank risk managers who struggle to find behavioral links between fraudsters.

Q. What are some of the most significant details from the report?

A. A significant detail that is notable is the fact that the number of cyberattacks in general has almost doubled since 2021, rising from 878 in 2020 to 1,613 attacks in 2021. Another point to note is that there were over 24,000 fraud attacks last year on banks earning more than $10 million in annual revenue.