A More Strategic Approach to Combating Fraud

Originally Published on BAI.org

By Canh Tran

November 21st, 2022

During the pandemic, bank executives saw how critical good risk management and crisis contingency plans are. Better prepared teams were more resilient, more innovative and better able to manage operations and find new ways to serve their customers.

Turbulent times continue with high inflation, persistent labor shortages and a looming threat of economic recession, leaving bank executives to assess how their banks can adopt a more proactive approach to risk management and preparing their bank for future disruption and for opportunities to thrive during uncertain times.

Banks have seen an explosion in fraud during the pandemic, including fraudulent loans, new account openings, compromised cards and BIN attacks. The volume and variety of fraud have strained the operations of banks’ fraud departments. At some processing partners, fraud analysts are individually responsible for monitoring fraud trends at up to 300 banks daily, which is simply unsustainable.

Some fraud teams have performed admirably under duress, innovated out of necessity and produced positive results for their institutions. As an example, one team successfully developed a way to automate the creation and updating of a “hot list” of compromised cards to support more effective, pinpointed decision rules. This innovation saved the team valuable time, minimized customer impact and significantly reduced fraud losses.

Strategic resilience is forward-looking and proactive by nature — it allows teams to move from reacting to anticipating to strategizing. Fraud prevention executives must review and evaluate the main areas of their operations to gauge what is working and what needs improving. This includes data availability, technology resources and fraud talent.

Data Availability

Fraud teams need access to data in real time. Even better is to have fraud data from the industry or from a consortium or network of financial institutions to better anticipate trends and better see what’s around the corner.  And best would be to enhance that data with external sources like dark web information and compromised/fraudulent merchant lists. Additionally, the data needs to be aggregated, automated, scored and delivered in a way that is actionable for the team.

Technology Resources

Machine learning and automation are two technologies that can generate an outsized impact on fraud operations and performance. A recent McKinsey & Company survey of anti-money laundering and financial crime leaders from 14 major North American banks found that more than 80% had already started implementing machine-learning solutions. In one firm’s case, machine learning helped improve suspicious activity identification by up to 40% and efficiency by as much as 30%.

Machine learning helps bankers analyze a tremendous amount of data and find more accurate patterns and trends than traditional statistical methods. Using machine learning to automate tedious and time-consuming tasks like fraud trend analysis, compromised card identification and rule performance monitoring gives fraud teams more time and information to take strategically appropriate actions.

Talent Cultivation

The reality is that “nobody went to college to get a fraud degree.”  For the most part, fraud prevention professionals have learned in the crucible of trial by fire and, as a result, have experienced firsthand what works and what doesn’t.

Competent teams armed with the right data, technology and support perform better, innovate more readily and adapt faster. But the reality is that most banks don’t put enough emphasis on cultivating talent in their fraud operations, even though developing a fraud training program would likely enhance employee skills, keep them updated on the latest trends and provide career advancement opportunities. Online training modules like “How to write better rules,” “How to identify compromised cards,” and “How to spot fraudulent merchants” are just a few examples that some bankers are using to improve fraud-fighting skills.

As Charles Darwin said, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

Evolving how bankers think about fraud operations from simply managing risks to becoming more strategically resilient is not an easy task to undertake. However, forward-thinking leaders have been able to leverage the experience of recent crises and challenging times to improve their operations and explore new opportunities – helping their banks not only survive but outperform for years to come.

Canh Tran is co-founder and CEO of Rippleshot.

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