Solving the Banking Industry’s Multi-Billion Pound Problem

The banking industry has a multi-billion pound fraud problem.

Financial institutions (FIs) continue to spend more and more money on fraud tools, with seemingly no end in sight. Every time fraud increases, so does spending. But this, paired with the fact that fraud continues to rise, indicates the approach financial institutions are taking is flawed, says David Vergara, Director of Security Product Marketing at OneSpan. British banking customers lost £500m to fraud in the first half of 2018, and new figures from Action Fraud show that more than £190,000 a day is lost in the UK by victims of cyber-crime. We’re also seeing newer types of fraud gain momentum, such as contactless fraud, which doubled in just 10 months in 2018.

The Home Office estimates there is £14.4bn worth of economic crime within the UK’s financial sector each year. And a recent report by the Financial Conduct Authority estimates the financial services industry is spending over £650 million annually in dedicated staff time to combat fraud and other financial crimes. This excludes costs such as IT investments in fraud prevention and detection, so in reality, the number is likely far higher. Achieving the goal of driving down fraud, while ensuring the best user experience and meeting strict compliance regulations, continues to be a major challenge for the industry.

On the other hand, technology is often a bank’s first line of defence against fraud. A Juniper Research report on online payment fraud said merchants and FIs will spend £7.2 billion annually on fraud detection and prevention tools by 2022. There are several challenges that come with this. One big part of the problem is that banking environments are becoming harder to defend, and computing environments which are already inherently complex only become more complex with the integration of new technologies.

Another problem is solutions overload: there are over a thousand vendors competing to sell security solutions to financial institutions, with a seemingly limitless variety of claims and undifferentiated value propositions. Unsurprisingly, vendor procurement is a daunting task: approval can take more than a year, implementations typically take six months or longer, and often, various solutions are not designed to work in harmony with existing platforms and technologies.

A recent report by the Financial Conduct Authority estimates the financial services industry is spending over £650 million annually in dedicated staff time to combat fraud and other financial crimes.

Meanwhile, the nature and sophistication of attacks against FIs, especially in online and mobile channels have reached new heights, making it increasingly clear that fraud is not something that can be easily contained. For example, PwC’s 2018 Global Economic Crime & Fraud Survey reported a shift to technology-enabled crime, with cybercrime overtaking all other methods to secure its place as the most prevalent type of fraud.

To address the challenges and stop the loss of billions to fraud each year, banks and financial institutions need a profoundly innovative approach, one that leverages vast cross-channel data and mitigates fraud in real-time. This should make use of modern machine learning algorithms, behavioural analysis, and automated policy-driven workflows to reduce fraud, through more accurate detection of emerging fraud schemes and continuous monitoring to satisfy regulatory compliance. Also, open platforms that leverage APIs to connect to third-party data sources to further improve the accuracy of fraud detection, boosting the bottom line.

Intelligent authentication is one of the latest innovations that helps FIs to achieve these goals. Intelligent authentication works through a comprehensive risk score based on vast and disparate data, including transaction details, end-user behaviour, the integrity of their devices and mobile apps, and other contextual data points. So, for example, it can recognise that a customer regularly transfers £200 to the same account each month from the same mobile phone in Manchester. The score and related level of risk for this transaction are based on the customer’s unique behaviour and context.

To address the challenges and stop the loss of billions to fraud each year, banks and financial institutions need a profoundly innovative approach, one that leverages vast cross-channel data and mitigates fraud in real-time.

Why is this information important? Because, if it now appears that the same customer is trying to send £1,000 to a new account from an untrusted device in Paris, which falls outside his usual scope and contextual pattern, the transaction is more likely to be an attempt at fraud. However, people don’t live in boxes: it’s entirely possible that they travelled to another city.

Therefore, instead of denying the transaction, intelligent authentication challenges the consumer accordingly: they are granted conditional access to particular account features, such as larger funds transfers. If they can pass the security hurdle and authenticate, then they can proceed with the transfer. As customers’ contextual patterns and circumstances evolve, the technology is intelligent enough to recognise these changes and adapt. To achieve greater security and superior user experience, banks and FIs need to put these new technologies practices into motion now.

Ultimately, mitigating fraud requires keeping up with the latest technologies that will enable financial institutions to more effectively and efficiently mitigate both existing and quickly emerging fraud schemes. By delivering a strong, consistent user experience across digital channels, today’s FIs will continue to grow revenue, bring new solutions to market fast and quickly exceed customer expectations, all of which will drive higher services utilisation and loyalty.

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