The Federal Trade Commission (FTC) reported that in 2023, consumers lost more than $10 billion to fraud. Additionally, a YouGov survey revealed that more than a quarter of American adults have been victims of bank or credit account fraud.
As daunting as these numbers are, we expect them to keep growing as we enter the digital age of banking. Financial institutions need to be prepared to handle the ever-changing fraud attacks while maintaining a seamless customer experience. The question is: How can you provide excellent customer service and improve security?
Learn how banking fraud investigation, detection, and prevention work below.
What exactly is banking fraud detection?
Banking fraud detection refers to a comprehensive set of techniques and technologies designed to help protect a bank’s most critical assets: customer information, financial resources, and secure systems. At its core, fraud detection aims to identify suspicious activities and potential fraud attempts in real-time, ensuring that any threat is promptly flagged for investigation.
This process involves analyzing vast amounts of transaction data, monitoring for unusual patterns, and leveraging advanced tools like artificial intelligence and machine learning to outsmart increasingly sophisticated bad actors. Fraud detection works with prevention strategies, forming a robust defense to help protect financial institutions from devastating breaches that would impact their customers.
Types of banking fraud
Banking fraud can be categorized into two main areas: account takeover methods and general banking fraud. Understanding both is essential for effectively detecting and helping prevent fraudulent activities in financial institutions.
Account takeover methods
Account takeover (ATO) refers to a fraudster gaining unauthorized access to a customer’s account, often by exploiting weak points in security systems. These methods include:
- Phishing attacks: Fraudsters send deceptive emails, texts, or calls pretending to be from legitimate sources, tricking customers into revealing sensitive information like passwords or account numbers.
- Credential stuffing: Cybercriminals use stolen login credentials from data breaches to gain access to multiple accounts where users have reused passwords.
- Session hijacking: Attackers intercept active banking sessions by stealing session tokens, allowing them to take over the user’s account while bypassing login processes.
- Social engineering: Fraudsters manipulate victims into providing sensitive information or performing actions that compromise account security, such as clicking on malicious links or transferring funds.
- Password spraying: Fraudsters attempt to access multiple accounts by trying commonly used passwords across a broad set of usernames, attempting to avoid detection by keeping the number of attempts per account low.
General banking fraud
While account takeover methods focus on compromising user accounts, general banking fraud involves broader tactics to exploit weaknesses in banking processes or systems. Some of the most prevalent types include:
- Fraudulent documents: Criminals use falsified documents, such as fake IDs or altered financial records, to open bank accounts, apply for loans, or execute unauthorized transactions.
- Check fraud: This type of fraud includes altering, forging, or counterfeiting checks to withdraw money from a victim’s account illicitly.
- Money laundering: Fraudsters attempt to “clean” illegally obtained funds by passing them through legitimate financial systems to disguise their origin, often using unwitting banks to facilitate the process.
- Authorized push payments: In this type of scam, fraudsters trick victims into willingly authorizing payments to fraudulent accounts, often through fake business requests or impersonating trusted contacts.
- Real-time payment fraud: Fraudsters exploit instant payment systems, making it difficult for banks to detect or reverse transactions before the funds are transferred and withdrawn.
- Wire fraud: Criminals use fraudulent information to convince individuals or businesses to wire money to fraudulent accounts, often by impersonating trusted contacts or institutions.
- Bill discounting fraud: Companies submit fake or inflated invoices to banks to receive financing, deceiving financial institutions into providing credit based on fraudulent claims.
By understanding both account takeover methods and general banking fraud, financial institutions can implement comprehensive strategies to combat these evolving threats.
What typically happens when a bank receives a fraudulent claim?
Banks often take several steps to resolve the issue when a customer reports fraudulent activity. First, they attempt to verify whether the transaction is legitimate by checking details like location, time, and spending patterns. The bank then investigates, typically resolving the claim within 10 business days, and may notify federal authorities if large-scale fraud is detected. Suspicious Activity Reports (SARs) are typically filed for more complex money laundering or organized crime cases.
How do banks detect fraud?
Banks typically use a range of tools and technologies to detect fraud. These methods include:
- Rule-based systems: Earlier fraud detection systems relied on fixed rules, such as transaction limits or location mismatches, but these can be easily bypassed by sophisticated fraudsters.
- Machine learning: Modern banks use machine learning to analyze vast amounts of data and recognize unusual patterns. This system can learn and adapt over time, often improving its ability to detect financial crimes.
- Telecommunications monitoring: Tools like multifactor authentication (MFA) and secure messaging help alert both banks and customers to suspicious activity.
- Predictive analytics: Banks can preemptively flag transactions that don’t fit typical customer behavior by predicting behavior patterns.
Together, these tools help equip banks with the ability to stay one step ahead of fraudsters, helping identify threats in real-time and minimize the impact of fraudulent activity on their customers.
What are the biggest challenges of banking fraud detection and prevention?
Though these challenges vary, they can be broken down into four main categories:
Money laundering
Stolen money needs to be “cleaned” through money laundering. This process occurs when bad actors pass the currency through legitimate channels to have it verified by trusted sources.
Laundered funds are often broken into smaller amounts or routed through multiple accounts to avoid detection, making it difficult for banks to track. Criminals might also exploit offshore accounts or digital currencies to further obscure the money’s origin. This makes money laundering a tough problem for financial institutions, as they must continually adapt their detection methods to stay ahead of increasingly sophisticated tactics.
Account protection
Bad actors can steal login information, card information, or the card itself of a customer, resulting in an account takeover (ATO). The fraudster then uses the account as their own, which can include card-not-present (CNP) fraud, lost/stolen fraud, counterfeit fraud, and digital funds transfers.
The Identity Theft Resource Center tracked 2,116 data compromises in the first three quarters of 2023, which broke the all-time high of 1,862 total compromises in 2021. Customer information is usually stolen by phishing or hacking. Multifactor authentication can help financial institutions defend against this.
Customer onboarding
Information can be lost, misunderstood (or, even worse), stolen during customer onboarding at banks. There are regulations in place to try and help with security, like KYC (Know Your Customer) or AML (Anti-Money Laundering) that are designed to ensure customer identity is properly confirmed.
Financial institutions have found millions of fake accounts in the past. This can be especially prevalent for institutions that offer potential customers a cash incentive to sign up.
Credential theft
It’s important for banks to identify suspicious activity when it occurs on customer accounts. Banks will review currency, amounts spent, categories, or merchant names to try and prevent fraudulent credit card activity.
Tips to detect banking fraud
Follow the tips below to help prevent bad actors from accessing digital banking information:
Brush up on your AI
Considering the volume of transactions flowing through banks today, it’s important to leverage artificial intelligence to monitor and flag concerning activities.
Invest in the best AI solutions you can afford to help catch fraud before it spirals out of control. This is particularly important in combating identity theft and bank fraud detection.
Keep an eye on internal fraud
Did you know that according to Clari5, a staggering 65% to 70% of fraud in the banking industry stems from internal sources?
Cultivating a culture of integrity and honesty within your organization is essential.
Review transactions regularly
Stay on top of your customers’ online account activities. For high-risk customers, conduct reviews at least weekly; for lower-risk customers, a monthly check may do the trick. This practice can help you catch suspicious transactions early.
Remember, AI can play a pivotal role in identifying patterns that might otherwise go unnoticed, helping to reduce financial losses and criminal activity.
Educate your customers
One of the best ways to prevent account takeovers is customer education. Tell customers what risks they’re facing, what they should be looking out for, and how to interact safely with their online banking system.
Make them aware of what kinds of phishing emails they may encounter. Alert them to what information a bank should or should not ask for over text message, and from whom the message should be sent. Another great tip is to instruct customers that, when in doubt, call your bank directly to clarify.
Invest in comprehensive security tools
How are you supposed to fight fraud rings who make this their full time job if you don’t have the best toolset? Are you contacting your customers with secure financial messaging services?
Consider using third-party tools to strengthen security. Technology has evolved beyond 2FA with tools. Device fingerprinting, voice authentication, multifactor analysis, and biometric security are becoming increasingly commonplace. Just ask NIST, the leading voice in security best practices.
Arm your customers with a fraud prevention checklist
Equipping your customers with the knowledge and tools to detect fraud is a proactive way to reduce risks. Use this checklist to help guide them:
Step 1: Update customer contact information often
Remind your customers of the importance of keeping their contact information up-to-date. Encourage them to review and update their phone numbers, email addresses, and mailing addresses at least once a year or whenever they change their information. Let them know that accurate contact details help ensure they receive important alerts regarding their accounts, especially in case of suspicious activity. Offer easy online forms or in-app features so they can make updates quickly.
Step 2: Make sure your customers always use strong passwords
Customers should make unique versions of their passwords that they haven’t used in the past. Advise them against replacing “O”s with “0”s or “I”s with “1”s or other common substitutions. Tell them to make the password longer when possible, too, as this makes it more difficult for hackers to bypass. Finally, consider recommending a password manager to keep security locked down.
Make sure customers know that hackers can access their accounts faster if they use the same password or similar variations.
Step 3: Encourage mobile alerts
Advise your customers to opt into mobile alerts for transactions. Explain that these alerts can notify them immediately of any account activity, allowing them to quickly recognize unauthorized transactions. Suggest that they set up alerts for large transactions, changes to account settings, and new device logins. Encourage them to respond promptly to any alerts they receive to mitigate potential fraud.
Step 4: Remind customers to update their devices
Stress the importance of keeping devices secure. Remind customers to use strong passwords or biometric security features to lock their devices. Encourage them to regularly update their operating systems and applications, as these updates often include important security patches. Additionally, suggest they install reputable antivirus software to help protect against malware and viruses that can compromise their banking information.
Step 5: Familiarize customers with red flags
Customers should never click on suspicious links from unknown email addresses. Confirm the email address isn’t a slight variation of someone they know or an institution they trust.
Help your customers become more vigilant by educating them about common signs of fraud. Encourage them to be cautious of unsolicited emails, texts, or phone calls requesting personal information.
Advise them to double-check the sender’s email address and look for any discrepancies. Emphasize the importance of never clicking on suspicious links or downloading attachments from unknown sources. Remind them that they should never share personal information, such as passwords or account numbers.
Step 6: Advise customers on knowing what third-party accounts have their login information
Instruct your customers to regularly review which third-party apps and services have access to their banking information. They should be aware of what data these apps can access and understand the potential risks involved. Advise them to revoke access to any applications they no longer use or that seem untrustworthy. Remind them that sharing banking login information can increase their risk of falling victim to fraud, so they should be discerning about what information they share and with whom.
Banking fraud in the future
How will bad actors update their tactics in the coming years? The future of banking fraud is evolving rapidly. Here are a few bank fraud trends to watch out for:
AI-driven fraud: Fraudsters use AI to automate attacks and bypass security measures. Banks will need to counter this with even more advanced machine-learning algorithms.
Synthetic IDs + deepfakes: Fraudsters are getting better at creating realistic synthetic identities. Deepfake technology adds another layer of risk for identity verification.
Fraud-as-a-service: Bad actors are now available for service on the dark web. Criminals now offer fraud techniques for sale on the dark web, including step-by-step tutorials on executing complex fraud schemes.
Improved social engineering: CEO fraud and other advanced social engineering attacks are becoming more frequent. Fraudsters impersonate executives or trusted entities to extract sensitive information.
To stay ahead, banks must constantly upgrade their defenses with cutting-edge fraud detection tools and strong partnerships with security-focused companies, including trusted telecommunications partners who prioritize security and offer advanced solutions like voice authentication.
Better protect your bank with fraud detection and multifactor authentication
In today’s fast-moving digital landscape, fraud detection tools are essential for any financial institution. Pindrop offers an industry-leading fraud detection solution for banks and financial institutions, using multifactor analysis and voice authentication to better protect your contact center and customer interactions. By leveraging Pindrop’s advanced technology, your bank can better reduce fraud losses, improve customer trust, and outsmart fraudsters.
