Fraudsters operate with a for-profit mindset. They want to collect as many ill-gotten profits as possible without having to do much work. Their ultimate goal is to reap maximum gains while exerting minimal effort. Banks and other financial institutions (FIs) need to bear this in mind as they develop an effective fraud management strategy in order to stay a step ahead of fraudsters’ aggressive tactics.

The pandemic has only accelerated fraudsters’ ambitions. Lockdowns and social distancing requirements from the early days of the pandemic forced many branches to close or reduce hours and drove many banking customers to rapidly change their typical banking routines by embracing online, mobile, and other digital banking channels. Fraudsters, realizing how customers’ were increasingly going digital in their banking habits, were eager to take advantage of the recent digital banking shifts. COVID-19-related relief programs and loans were also targeted heavily by bad actors. After all, it pays to go where the action is.

The rapid digital banking adoption puts banks in a delicate balancing act. As important as it is for FIs to keep fraudsters out of their system, they can’t afford to take their eyes off of their real goals: scaling and growing their operations. Fraud prevention and management solutions will be the key for FIs to fight online fraud effectively. But before banks and FIs invest in fraud detection solutions, they must first understand the right and wrong way to approach it.

What is ‘online fraud’?

The term “online fraud” applies to any type of fraud that affects a transaction in the digital arena. This includes purchases made with online merchants like Amazon or eBay or payments made electronically to a credit card company or a utility provider. In addition to financial transactions, online fraud can also apply to other activities involving FIs. This could include a fraud that occurs during the application process using an online banking channel.

What makes online fraud so appealing for bad guys?

Fraudsters are drawn to online fraud activities for two key reasons: scale and opaqueness.

Once fraudsters find a weakness in a bank’s defenses, they will repeatedly try to exploit it as it is likely to consistently realize some type of gain. Online banking opens numerous possibilities for bad actors to pull off more schemes in less time. After stealing credentials and other sensitive information, fraudsters can execute thousands of online fraud attacks in minutes, repeating the attack multiple times before the target FI can stop them. In other words, they can attack banks and FIs at scale.

The opaqueness of online banking, meanwhile, also makes it easier for fraudsters to go undetected. The availability of online channels (including ATMs, phones, chatbots, and online portals) means banks will ultimately have fewer in-person interactions with their customers. This can make the task of finding the fraudsters in a pool of legitimate customers much harder for banks. Banks would need to look through layers of technology to determine where the fraud originated.

Put together, the scalability and opaqueness of online fraud give bad actors an opening to pull off several repeatable, anonymous attacks. They can commit a significant rate of fraud with minimal effort – all while remaining disguised among legitimate customers. Even if the fraud attack yielded just one successful outcome out of 1,000 attempts, the fraudster can consider the effort a success because of how little effort they invested in it.

Understanding fraud lifecycle for more effective fraud management

Given the appeal of online fraud, it’s important for FIs and retailers to invest in fraud management solutions to minimize the damage these bad actors might cause. For a fraud management solution to be effective, banks must first develop a deeper understanding of fraud itself.

Banks need to understand three key points for any fraud detection efforts to be successful. The first step is to ask, how did the fraudster access the banking system? Banks need to understand the point of compromise that fraudsters used to gain access to their products, system, or payment capabilities. This could be accessing a customer’s account using stolen information like passwords and logins, creating a new account with fake information, or using a stolen credit card to make a purchase.

Next, banks must look into what type of activity the fraudster got up to in the compromise. Did they move money to another account? Did they make a purchase using a stolen credit card? Fraudsters either commit fraud by pretending to be another person or by persuading or coercing another person to transact or transfer money on their behalf. Understanding whether the fraud was an act of inducement or impersonation is a key step in a bank’s fraud detection and prevention efforts. Finally, banks must understand how fraudsters ultimately attempted to monetize their efforts. This could include transferring money from a victim’s bank account to another account they control or by acquiring goods from a merchant using stolen credentials.

These three steps should be the cornerstone of any organization’s fraud management strategy. In order to address online fraud effectively requires banks to look both upstream at how the fraud was able to occur in the first place and downstream at what the benefit was to the fraudster.

3 tips for banks to prevent online fraud

Understanding the journey of the fraudster is an essential step for a bank to approach the important goal of tackling fraud management effectively. At the same time, banks and FIs should not take their eyes off an equally important goal of delivering seamless experiences for their customers.

Online fraud is an issue that no bank should ignore. However, this activity makes up a relatively small percentage of a bank’s overall transactions. Any fraud management solution that they choose to implement should not risk alienating legitimate customers as they go about their everyday business. Introducing friction to these users in the name of stopping fraud could result in lost business and ultimately hurt the bank’s bottom line.

Tip 1: Maximize the use of data

If there’s a silver lining to online fraud, it’s this: banks with digital banking channels will have plenty of data to understand what fraudsters were up to during an attack. Fraud detection can be strengthened by artificial intelligence (AI) and machine learning solutions that can automatically pull in large volumes of data that can be used to better understand and prevent fraud. Machine learning solutions can also help banks bring in data from disparate sources into a centralized location. Gathering data in this manner can provide banks with deeper insights into their overall operations and guide them in their online fraud prevention efforts.

Tip 2: Invest in the Right Technology

While customers do not want to encounter frictions in their own banking experiences, they will appreciate solutions that bolster their trust and confidence in their bank. Solutions like two-factor authentication (2FA) or three-factor authentication (3FA) are not only simple for consumers to use but they also provide customers with the reassurance that their bank is taking strong measures against fraud. Having multi-factor authentication safeguards in place can also help banks understand the risk behind a transaction.

It’s important for banks to note that multi-layer authentication needs to be executed the right way to avoid alienating customers. Whether implementing 2FA or 3FA solutions, the experience should feel both logical and natural to the bank customer’s journey. This can go a long way toward both reducing fraud and strengthening customers’ trust in their bank because the burdens of authentication aren’t particularly high for legitimate users.

Tip 3: Ask the experts

Fraud is constantly changing leaving many banks worldwide forced to catch up. That’s why it pays to consult with experts who are already studying the latest trends in fraud and who can advise banks on the most effective fraud detection and prevention strategies. Tapping into the expertise of a fraud partner and the broader fraud community can provide banks with a network of knowledge that can pinpoint any vulnerabilities in their system. It also spares banks the pressure of having to become experts in the fraud space.

Key Takeaways

Fraudsters will continue to look for weaknesses in any financial institution’s digital channels in order to make a quick gain. Customers can lose trust in their banks quickly which is why banks need to take a smart approach to bolster their online fraud prevention efforts.

As banks embrace fraud management solutions, they must fully understand the lifecycle of a fraud attack – from how the fraudster gained access to their systems, to the type of fraud they pursued, to how they profited from their efforts.

At the end of the day, a bank’s fraud management strategy is most effective when it embraces technology that enhances their customers’ journey with a painless authentication process. Insights developed from machine learning data can help FIs understand how to prevent future fraud attacks and rely on fraud experts to help them adjust their fraud management strategies as bad actors shift their tactics.

Banks should not let their fraud prevention efforts compromise their efforts to grow their business. Machine learning solutions, multi-layer authentication, and a network of experts can help banks remain committed to their key objective: building upon the trust they have with their customers.

Want to learn more about fraud prevention? Download our eBook Money on the Move: Understanding Traditional vs. Instant Transfers.