The 21st century has been marked so far by impressive technological innovations that have changed the way people interact with financial services. From the wide-scale adoption of cryptocurrencies to the advantages brought by blockchain, monetary services in the year 2024 are highlighted by their flexibility and adaptation to market trends and preferences. However, paradoxically, the technological advances of the last couple of years have also led to more sophisticated bank fraud attempts.

The last thing a private or national financial institution needs is to suffer a data breach resulting in the illegal access of funds or clients' confidential data. Monetary losses are one thing, and most times, they can be remedied without a significant impact on economic growth forecasts. However, the real issue is the reputational damage and potential fines from authorities. Banks operate under strict activity frameworks. Therefore, if third parties gain unauthorized access to financial data, your organization could face sanctions.

Have you failed to protect your customer's private information? Then, you could be in breach of the GLBA or SOX Acts. Moreover, if you fail to notify your clients about security compromises, you could violate data breach notification regulations. Bank fraud can tarnish the reputation of your private financial organization and destroy the confidence that users have in your services. Plus, a successful bank fraud attempt could raise your insurance premiums, disrupt operations, and affect the long-term stability of your venture. But what is bank fraud, more precisely?

A Varied Collection of Separate Techniques

In a nutshell, bank fraud is the collection of internal or external techniques and mechanisms used by bad actors to gain unauthorized access to the financial information of bank customers or steal assets from private financial institutions. What are the most common types of bank fraud? Historically, the most prevalent type of financial institution fraud involved the deposit of counterfeit checks. In this technique, fraudsters falsify the identification data of drafts or modify their amounts.

Another method that fraudsters may use is check-kitting, which is the practice of covering an invalid check from one financial institution to another with the scope of generating a false balance. Check fraud is less common than it used to be, simply because digital payments have replaced them. In fact, the number of checks collected by the United States Federal Reserve has decreased by no less than 30% in the last three decades.

Another method, more topical for private financial institutions, which leads to losses of hundreds of billions of dollars each year, is credit card fraud. Fraudsters can use card cloning and stolen confidential financial information to make illegal withdrawals or expensive purchases. At least in the United States, illegal card-present fraudulent transactions are often the liability of the cardholder's bank. So, concretely, what is bank fraud? In short, it is a nightmare for private financial institutions and a hassle for clients, who might think twice before turning to the services of your organization.

It Could Be the End of the Road

Credit card fraud is a problem, as an estimated 52 million Americans have dealt with fraudulent credit card transactions at least once in their life. On top of that, private financial institutions can be hit with loan fraud, phishing attempts, social engineering, and account takeover attempts. The reputational and monetary consequences for financial institutions can be significant, as regulatory fines for improper securitization of customer's data can reach hundreds of millions of dollars.

Have you been found guilty of not safeguarding your customers' confidential financial information? Then, you could experience the fate of Equifax, which was fined $575 million for its 2017 data breach, or Marriot International, which, although not a bank, was fined just shy of £18 million for failing to protect the personal information of guests. Fines, when administered by regulatory bodies, are no joke and could significantly impact your organization's expansion ambitions.

Successful fraud attempts could affect the operational efficiency of your financial services and potentially make your institutions a prime target for fraudsters, who now might see you as an ideal candidate for their schemes. However, the impact of these fraud attempts can be mitigated with the aid of AI-based fraud detection software. What is bank fraud? It's a nightmare for private financial institutions. However, it’s something that can be stopped with the help of modern technology.

Why Should Banks Use AI-Based Fraud Detection Programs?

It's all about efficiency. AI programs can analyze financial transactions in real-time and generate automated reports for suspicious activities based on a rule-based system. AI fraud detection programs utilize advanced algorithms to find and interpret behavioral patterns in user transactions and constantly improve their accuracy based on the analytical data they have at their disposal.

AI-based fraud detection applications are far more accurate at detecting fraudulent transactions than traditional tools. Plus, they can utilize a vast array of gathered historical data to understand the context behind each transaction. Additionally, since the real-time detection process is automated and only rarely involves human intervention, AI detection programs are, in the long run, more cost-effective than traditional detection applications and are better suited for managing multiple data sources simultaneously.

Do you want to reduce the number of false alarms? To detect data breaches and fix vulnerabilities before they can test the rest of your financial institution's security measures? Do you want to utilize a detection program that can improve its performance depending on the volume of data it has access to? Then, you will need to use AI-based software. What is bank fraud is a good question. However, what is more important is how it can be stopped.

How Will Such an Application Work?

AI-based systems that employ deep learning algorithms and access extensive data sets can achieve accuracy rates exceeding 98%. On the other hand, a traditional fraud detection application, even in the best-case scenario, will not reach a detection rate of more than 90%. The difference between conventional detection methods and AI applications is in the way the latter operate. High-quality AI-based bank fraud detection applications start by aggregating data from various sources, including information about the user's previous transactional patterns.

The program will normalize the data to a consistent range, leverage sophisticated algorithms to identify outliers in the recorded informational sets, and then outline the variables that can be extracted from the raw figures. The application will check the transaction location, perform device fingerprinting, identify the frequency of the previously requested transactions, and block them if something is suspicious.

All in all, AI-based fraud detection apps are significantly more accurate than traditional detection methods. So, they are preferred by most financial institutions operating at a national level. What is bank fraud? It's the worst nightmare for private financial organizations. What are AI-based detection programs? They are an ever-expanding solution to the growing complexity of fraud attempt techniques. Do you need them? In this day and age, the answer is a resounding yes.

Publication: 13 August 11:28