HOW TO DETECT FRAUD IN BANKING

Banking fraud is on the rise. In fact, 35% of banking customers recently surveyed by J.D. Power reported experiencing at least one type of fraud in the past year. The percentage increased to 47% for customers younger than 40 and 50% for customers who are financially overextended. This increase has led many to consider how to detect fraud in banking more effectively.

There are many ways to commit banking fraud, and fraudsters are always coming up with new tactics. One common type of fraud is phishing, where fraudsters impersonate legitimate individuals or institutions, tricking people into giving them personal information. Another is identity theft, which involves stealing personal information to open fraudulent accounts or make unauthorized transactions. A new version is called synthetic identity fraud, where a real person’s information, such as social security number or date of birth, is stolen and combined with other falsified personal data to create a new identity.

Other banking fraud techniques include account takeover, where cybercriminals gain unauthorized access to online banking accounts; check fraud, which involves scammers creating counterfeit checks or altering legitimate ones for unauthorized withdrawals; and social engineering, in which individuals are tricked into transferring funds or disclosing sensitive information. See the top 10 banking fraud types and how to stop them in the chart below.

10 Banking Fraud Scenarios and Detection and Prevention Strategies
Type of Attack	Scenario	Detection and Prevention
1) Phishing Attack	Fraudsters send emails or text messages posing as legitimate individuals or institutions, asking employees or customers to provide personal and financial information.	Educate employees and customers about phishing threats, encourage them to verify the authenticity of emails and links, and use email filters to detect and block phishing attacks.
2) Account Takeover	Cybercriminals access a customer’s online banking account through phishing, malware, or stolen login credentials.	Implement multi-factor authentication (MFA), regularly update passwords, and use security software to detect malware.
3) Identity Theft	Criminals steal personal information to open fraudulent bank accounts, apply for loans, or make unauthorized transactions in the victim’s name.	Implement robust identity verification processes, monitor accounts regularly for suspicious activity, and use strong, unique passwords.
4) Check Fraud	Criminals create counterfeit checks or alter legitimate ones to withdraw funds from accounts.	Banks can use check verification services, and customers should reconcile their account statements and report any discrepancies to their bank promptly.
5) Card Skimming	Criminals install devices on ATMs or point-of-sale terminals to capture card information and PINs.	Inspect card readers for tampering, use EMV chip cards, and monitor account statements for unauthorized transactions.
6) Social Engineering	Scammers manipulate individuals into revealing sensitive information or transferring funds.	Train employees and customers to recognize social engineering attempts and institute verification procedures for fund transfers.
7) Insider Fraud	Employees or trusted individuals within a bank or financial institution misuse their positions to commit fraud.	Implement strong internal controls, conduct employee background checks, and employ transaction monitoring systems.
8) Unauthorized Wire Transfers	Criminals access a victim’s bank account and initiate unauthorized wire transfers.	Set up transaction alerts for large withdrawals, confirm wire transfer requests through a secondary channel, and use robust authentication methods.
9) Synthetic Identity Fraud	Cybercriminals use real personal information, such as a social security number and date of birth, to create a new identity to commit fraud.	Use automated identity verification, document authentication, and public records analysis tools.
10) Online Investment Scams	Fraudsters promote fake investment opportunities to trick victims into sending money.	Conduct due diligence before investing and verify the legitimacy of investment offers.

Technologies to Detect Fraud in Banking and Prevent It

Several technologies can help combat banking fraud by providing advanced security measures and detection capabilities. Here are some of the key technologies used in the fight against banking fraud:

• Artificial Intelligence and Machine Learning: Machine learning algorithms and artificial intelligence are used to analyze data and detect unusual patterns or anomalies in real-time transactions. They can identify potentially fraudulent activities and trigger alerts for further investigation.

• Biometric Authentication: Biometric technologies, such as fingerprint recognition, facial recognition, and voice recognition, enhance security by verifying the identity of customers during login and transactions, making it difficult for fraudsters to impersonate legitimate users.

• Fraud Detection Software: Specialized fraud detection software uses various algorithms to detect patterns that indicate fraud, including identity theft, payment fraud, and other types of fraud.

• Big Data Analytics: Big data analytics can analyze large volumes of data to identify suspicious patterns, detect anomalies, and assess risk in real time. This technology helps banks uncover potential fraudulent activities.

• Transaction Monitoring Systems: These systems monitor real-time transactions, looking for unusual or suspicious activity. They can block or delay potentially fraudulent transactions and send alerts to account holders.

• Secure Mobile Apps: Banking apps with strong security features, including biometrics and encryption, can help protect users’ data and transactions from mobile banking fraud.

• Tokenization: Tokenization replaces sensitive data like credit card numbers with unique tokens, reducing the risk of data breaches and unauthorized use of payment information.

• Cybersecurity Solutions: Banks and financial institutions invest in robust cybersecurity solutions, including firewalls, intrusion detection systems, and antivirus software, to protect their networks and customer data from cyberattacks.

To limit the damage from fraud, banks and other lenders need to have the latest technology at their disposal. Without innovations, lenders should expect their fraud losses to rise. Leveraging these technologies to detect fraud in banking and prevent it will provide both immediate and long-term benefits for a lender’s business.