ID and Document Verification

Fraud Prevention in the Banking Industry Explained

April 9, 2024
Fraud Prevention in the Banking Industry Explained

Digital banking has streamlined transactions and substantially improved customer satisfaction. Yet, the rise in online banking, coupled with technological advances, has also created fertile ground for one of the largest threats to financial institutions: fraud. 

From money laundering to account takeovers, the financial industry is susceptible to perpetually evolving forms of fraud—and has paid for it. According to the Federal Trade Commission (FTC), fraud losses reached $10 billion in 2023 alone.

Fraud, however, transcends devastating financial setbacks. Reputational harm and an erosion in customer trust and satisfaction can have an enduring, even fatal, impact on banks and other financial institutions. This doesn’t just call for enhanced fraud detection and prevention in the banking industry—it demands it. 

Types of fraud in the banking sector

Financial crime prevention strategists may have their fingers on the pulse of technology—but so do fraudsters. Fraud evolves in step with technological advances; today, a handful of the most prevalent forms of it in the banking industry are both familiar and innovative. 

These include:

  • Account takeover: Also known as ATO and account opening fraud, account takeovers happen when a bad actor assumes control of an online bank account through stolen credentials, which are often obtained through strategies and events such as:
    • Social engineering
    • Phishing scams
    • Credential stuffing 
    • Data breaches
  • Money laundering: Money laundering refers to illegally obtained (or “dirty”) money shuffled through a series of valid businesses and foreign banks to render it clean. 
  • Credit card fraud: Widely considered the most ubiquitous form of bank fraud, credit card fraud occurs when fraudulent transactions are made on a customer’s credit card, debit card, or prepaid card. Various methods are used to obtain these details, including card skimming and stealing a physical card.
  • New account fraud: New account fraud—or fake account fraud—involves opening a new account (typically with the sole intent of committing fraud) by an impersonator or through a fake or synthetic identity.

Other forms of fraud frequently seen in the banking sector include (but aren’t limited to) payment fraud, money mules, ACH fraud, check fraud, accounting fraud, and loan fraud. The sheer variety of these illegal activities underscores the necessity of implementing advanced banking security solutions to detect fraud.

Regulations and laws against fraud

Fraud detection and prevention in the banking industry isn’t just imperative to safeguarding customers’ finances and an institution’s reputation and assets: It’s a legal requirement.

The Bank Secrecy Act (BSA) was enacted in the 1970s to combat money laundering, financial terrorism, and other fraudulent activities. To meet this, anti-money laundering (AML) regulations were established, including know your customer (KYC) checks and identification verification policies. 

To remain compliant, financial institutions must report (among other tasks):

  • Cash transactions that exceed the daily aggregate amount of $10,000
  • High-value transactions
  • Suspicious activity that may be indicative of tax evasion, money laundering, and other criminal activities

Financial institutions must file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) if suspicious activity has been detected within thirty days.

Key global laws against bank fraud

BSA/AML regulations may be specific to the United States, but many countries have laws and regulations to deter and prevent fraud. 

One of the most important is the recommendations established by the Financial Action Task Force (FATF), an international “watchdog” that aims to combat money laundering, bank fraud, and financial terrorism. The FATF emphasizes a risk-based approach, including performing customer due diligence (CDD) procedures to prevent customers from opening accounts under false, stolen, and synthetic identities and reporting suspicious activity. 

Consequences of non-compliance with anti-fraud regulations

Non-compliance with anti-fraud regulations, such as failing to adhere to global KYC standards, can lead to steep penalties: in 2021 alone, financial institutions that failed to perform their due diligence and remain compliant were fined $2.7 billion.

Further, non-compliance with anti-fraud regulations like filing a SAR may result in:

  • Loss of banking charter
  • Regulatory restrictions
  • Imprisonment

The need for fraud awareness and education

Financial institutions must be vigilant and proactive to mitigate fraud, which requires internal and external education. 

By providing employees and customers with awareness and training, both will be better equipped to recognize the various forms of digital banking fraud and the best way to report suspicious activities. Internally, it can help financial institutions comply with anti-fraud rules and regulations and bolster the efficacy of anti-fraud systems. 

Advanced fraud detection and prevention techniques

Advanced fraud detection and prevention techniques refer to contemporary, data-driven methodologies designed to identify red flags and preempt fraud—or diminish its perpetuation risk. 

This includes:

  • AI/ML-powered data analytics to determine deviations in customer behavior that may be indicative of fraud
  • Predictive analytics, in which artificial intelligence (AI) and machine learning (ML) can make predictions about potential fraud risks based on historical and real-time data
  • Biometric authentication in banking, or the act of analyzing unique biological characteristics and actions to confirm a customer’s identity and ensure only the right person has access to sensitive information

These techniques, as well as others, can be easily integrated into modern banking systems. AI can also manage several detection tools in what’s known as “fraud orchestration,” which streamlines the process, provides real time feedback, and enables financial institutions to act swiftly if fraud is detected.

Rigorous and accurate customer identity verification in banking is paramount in the fight against fraud. Financial institutions may reduce the risk of account takeovers and identity theft by ascertaining customers who they claim they are.

Microblink is at the forefront of this movement. 

As a leader in customer identity verification solutions, Microblink helps banking organizations safeguard their assets through BlinkID—an AI-first approach to validating customer’s identities through image capture and data-matching.

Building a comprehensive fraud prevention strategy in the banking industry

A comprehensive fraud prevention strategy involves several parts, from meticulous employee training to ongoing transaction monitoring. Then there’s identity proofing, which is just as integral to keeping fraud at bay—and Microblink serves as a speedy, secure, and user-friendly step-up solution. 

Contact us today to start cultivating a stronger culture of security.

Integrate ID document scanning into your existing application today

Continue reading

Find more thoughts on the industry insights, use cases, product features, trends in AI, and development processes.

What is identity documentation verification and how does it work in finance?
ID and Document Verification

What is identity documentation verification and how does it work in finance?

August 31, 2023

Identity document verification ensures the authenticity of presented documents, which helps to mitigate the risk of fraudulen…

Upgrade your UX with ID document scanning for web browsers
Technology

Upgrade your UX with ID document scanning for web browsers

February 23, 2023

How easy is it for your customer to start utilizing your product or service? In an age with no abundance of time, no shortage…

Microblink’s top 5 blogs of 2022

Microblink’s top 5 blogs of 2022

December 28, 2022

What a year it has been.  For both our Identity and Commerce business units, 2022 was highlighted by growth, innovation…

Identity Document Scanning product updates – November 2022
Product Updates

Identity Document Scanning product updates – November 2022

November 22, 2022

Find out what’s new in the v6 release of Identity Document Scanning, and how the updates empower your solution and delight yo…

Blue in the face: Twitter’s vexing verification raises identity issue on social media
Social Media

Blue in the face: Twitter’s vexing verification raises identity issue on social media

November 17, 2022

In the Twittersphere, the term “verified” has progressively taken on a meaning of its own. It was back in 2009 when the socia…

Document Verification product updates – August 2022
Product Updates

Document Verification product updates – August 2022

August 10, 2022

Here’s a quick overview of all new features and supported documents in the latest version of Document Verification. Our…

Identity Document Scanning product updates – July 2022
Product Updates

Identity Document Scanning product updates – July 2022

July 31, 2022

We’re super excited to announce a new-better-than-ever version of Identity Document Scanning with 50 new identity docum…

Security by Design Meetup Recap
Technology

Security by Design Meetup Recap

May 21, 2024

Discover insights from the panel session on security by design and best practices. This blog post is a recap of our highly su…

How to Enhance Your Fraud Detection in Banking Transactions
Fraud

How to Enhance Your Fraud Detection in Banking Transactions

May 13, 2024

Digital banking has completely revolutionized how we manage our transactions and accounts. However, with the ease and conveni…

Understanding Today’s US Online Gambling Laws
Online gambling

Understanding Today’s US Online Gambling Laws

April 26, 2024

Online gambling has been a popular pastime since its inception, but it soared to substantial new heights during the pandemic…