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A Broad Understanding of the Prevalence of Fraud in the Banking Industry

    If you keep yourself updated with news from around the world, you’d probably hear about bank fraud or ongoing cases related to such crimes quite often. That’s because banking and finance fraud has been a persistent issue for both consumers and organisations. Every year billions of dollars are lost to fraudsters who find new ways to exploit the lack of strong defence against malicious activities.  

    With digital footprints replacing physical ones and changing consumer habits, the instances of fraud have been higher than ever. While banking facilities have become simpler, it’s also created more loopholes for crafty fraudsters to infiltrate the systems.  

    Hence, it’s important to have a thorough understanding of banking fraud and its challenges and types. This blog presents objective knowledge of this area.  

    Intriguing Statistics on Financial or Bank Fraud 

    With the way the incidents of bank fraud are increasing, consumers have never been more vulnerable as criminals exploit people’s personal details. The statistics outlined below will show a clear picture of the state bank fraud currently.  

    Increase in the Number of Fraud Cases in UK Court 

    According this report, In 2020, there were nearly 180 fraud cases brought to the UK court where over £100,000-120,000 was lost. In that number jumped to 298- a massive 66% increase.  

    Reports of Cheque, Card and Bank Account Shot Up 

    The same study states that cheque, card, bank account fraud made up the largest proportion of total police reports in the UK. This amounts to a total of 336,707 cases which is 38.45% of all reports.  

    Lost and Stolen Card Fraud 

    Another study revealed, the losses from this type of fraud increased by 35% in the first half of 2022 as opposed to the 28% increase in the second half of 2021.  


    Unauthorised Payment Card Fraud 

    The same study highlighted losses due to fraud reached £272.3 million in the first half of 2022, which is an increase of 4% as compared to the figures from 2021.  


    Digital Fraud Trends in the Banking Sector 

    There are a number of trends that emerge out of the rising cases of frauds. These trends include:  

    Number of Fraud is On the Rise 

    The digital landscape offers criminals an added layer of anonymity, drawing more people towards these illegal activities. Previously, fraudulent activities required extremely adept schemes. With the popularity of online and mobile banking, the barrier to such crimes is slowly loosening. To top it off, there are various tools that can be obtained online easily.  

    As fraudulent activities become easier to execute, more people are susceptible to them which maximizes the number of frauds.  

    Synthetic IDs are Serious Threats 

    The popularity and growth of fintech services have made it simple for criminals to falsify identities. Synthetic IDs are a seemingly covert way for criminals to transfer money through the legal system. In many cases, these users are quite tough to detect as they appear to be responsible users. They have regular transactions, with money going in and out of their account, but in reality, they’re simply moving funds through the system.  

    The rise of fintech and online banking has only maximised the use of synthetic IDs. And even if these accounts or users are identified correctly, it’s still difficult to determine if an ID is synthetic. It’s even harder to restrict or entirely ban services to users without concrete proof that an ID is fake.  

    Challenges Associated with Bank Fraud 

    Since the pandemic banks have witnessed a dramatic rise in fraudulent activities which is taking a greater toll on these institutions. However, financial institutions need to be ready to identify the following fraud prevention challenges in banking systems.  

    • Accelerated Digitalisation and Remote Interactions  

    Covid-19 has maximised digital adoption considerably, leaving consumers with no choice but to switch to online alternatives. For many consumers who weren’t digitally savvy, this meant a very steep learning curve. Without a significant experience that comes from migrating to digital, it’s tough for consumers to tell the difference between a genuine interaction with an organisation, and a potential scam.  

    Fraudsters quickly took advantage of the opportunity. They leveraged people’s digital inexperience and their anxiety to scam them into handing over money or their personal details. It was reported that during the first half of 2021, over £4 million a day was stolen by fraudsters, using methods such as texts and cold calling scams.  

    • Fulfilling the Regulatory Requirements  

    The regulatory requirements tend to be more complex every year, and financial institutions that operate internationally must have anti-fraud solutions that are aligned with the diverse regulations of multiple countries. To ensure you’re meeting regulatory requirements, you must find anti-fraud solutions that are constantly updated depending on these new regulations.  

    • Loopholes in Fraud Protection 

    There are multiple fraud prevention and detection tools available in the market today, but they don’t offer the same efficacy, quality and sophistication.  Financial institutions must ensure that their fraud protection solutions focus on new areas of security such as device intelligence and mobile app security.  

    Effective tools should also be able to manage large chunks of data associated with apps, devices, and accounts to eliminate the gaps in fraud detection. These solutions should connect risk capabilities and share data across the financial institution’s business lines and functions. Many financial institutions have loopholes in their fraud protection technology because they’re using multiple solutions at once that don’t align together.  

    • Enhancing the Customer Experience  

    Financial institutions need to deal with fraud detection in a manner that doesn’t restrict customers from accessing their accounts and carrying out transactions. Previously, rules-based systems used to be the standard practice for fraud prevention. However, this approach is detrimental to a great customer experience as these rules-based tools often perceive legitimate transactions as fraudulent.  

    To enhance the customer experience and maintain a secure environment, banks and financial institutions need to evolve from rules-based systems. These institutions must leverage analytics to conduct real-time fraud analysis. They require tools that make swift decisions by monitoring multiple elements of each transaction. 

    • Having a Narrow Understanding of Fraud 

    Many fraud prevention systems emphasise almost exclusively the log-in and the transactions. Although these are critical areas to focus on, they’re certainly not the only indicators of fraud. Focusing on these two areas may allow fraud to slip through the cracks. Most criminals perform several actions before engaging in fraudulent activities. If banks wish to identify fraud effectively, their tools need to analyse as much data as possible related to users, behaviour and devices.  

    Some fraudulent activities may slip past many traditional anti-fraud systems. If the bank only monitors the log-ins and transactions. It’ll fail to detect an issue when fraudsters log in posing as a genuine customers.  

    Diverse Types of Banking Fraud 

    Bank fraud is a serious crime which leads to losses for both customers and banks. There are multiple ways that fraudsters carry out malpractices, from small-scale scams to large-scale operations that involve millions of dollars. Presented below are some of the most prevalent types of bank fraud.  

    Card Fraud 

    This is possibly the most common type of bank fraud that exists. It’s a broad term that encompasses fraud committed using any kind of payment card. This may include debit, credit, gift card, and prepaid ones. It’s hardly difficult for fraudsters to obtain information by stealing a physical card or finding a lost card or card details.  

    These kinds of fraudulent activities can be divided into card-present (CP) and card-not-present (CNP) fraud. Irrespective of how it’s carried out, the outcome remains the same – financial loss for the cardholder.  

    Authorised Push Payment (APP) Fraud  

    This specific scam allows fraudsters to trick their victims into willingly making authorised bank transfers to them. Studies have indicated that APP fraud has increased by a staggering 30% in 2022. With the sharp rise in the cost of living, such activities are expected to increase soon. 

    In 2023, new legislation from UK’s Payment Systems Regulator plans to hold both the receiving and paying banks accountable for related losses. Banks and financial institutions are making significant investments in solutions that identify and prevent potentially fraudulent transactions based on rich data and real-time analytics.  

    Peer-to-Peer (P2P) Payment Fraud  

    Billions of people today use digital payment apps such as Paypal, Venmo and Apple Pay. Payment apps are common targets for fraudsters who know that companies often lack the data and insights to detect new fraud patterns related to them.  

    Such scams occur rather frequently – a fraudster might sell goods to consumers over an eCommerce website which requires payment from digital apps and never deliver the goods. Fraudsters may also use the details from stolen credit cards to create P2P accounts and buy products and services for themselves.  

    Unfortunately, most P2P apps don’t have stringent policies for protecting users incurred against losses due to these scams. Worse still, P2P fraud may often lead to account takeovers and other types of fraud.  

    Phishing or Internet Fraud  

    Internet or Phishing fraud is a type that involves the use of deceptive means, such as sending emails, texts, or pop-up messages, to procure sensitive personal or financial details from unsuspecting victims. The objective behind phishing is typically to steal money or data or access bank accounts.  

    Criminals use fake websites, emails, or text messages into sharing personal details, such as credit card numbers, bank account numbers, and passwords. Once these details are procured, the criminals then use these details to steal money from the victims’ accounts or to commit other types of fraud.  

    New Account Fraud 

    This is also known as account creation fraud or fake account fraud. It occurs when a perpetrator opens an account with the intent of committing fraud, often using stolen or synthetic identities.  

    They may steal the identities of legitimate customers through data breaches or phishing. In some cases, these fraudsters may create accounts using their own identities, thereby committing first-party fraud.  

    Fraudsters often use legitimate details about a real person combined with random or stolen details from others. Once a new account is created fraudsters may rack up charges or white cheques against it in a victim’s name.  

    The Takeaway

    It’s no secret that banking and finance are one of the most vulnerable industries when it comes to fraud. With more and more banks and financial institutions pushing for a digital presence and consumer convenience, instances of fraud are on the rise. However, having a thorough awareness of the challenges, trends and types of fraud is a step in the right direction before we can consider fraud detection or prevention.