How to Detect and Prevent Fraud While Adopting Faster Payment Systems?

Efficiency and speed come at a cost. Strategic implementation of new technologies impacts the lives of several people. In the case of most financial institutions, a well-planned adoption helps both the consumers and internal employees get a better experience. However, it is not always rainbows and sunshine. Even the most helpful technology usually comes at a high cost. An organization undergoing a digital transformation usually pays this cost with money, additional person-hours, or security breaches (or a combination of all three). That said, most growing companies can afford to spend extra money and person-hours, but they cannot compromise their security.

A Federal Trade Commission (FTC) study launched earlier this year showed how fraud losses in 2021 increased by 70% over 2020, with a total loss of $5.8 billion. The study also stated that the FTC received nearly 2.8 million fraud reports in 2021 alone. These statistics prove that financial institutions need additional support for fraud detection and prevention. This blog discusses the different types of fraud and the latest prevention techniques that the top global financial institutions are adopting today.

Different Types of Fraudulent Activities

Non-Authorized Fraud

Non-authorized fraud usually involves the theft of money, information, or some means to obtain authorization for digital transfers. Some examples of such fraud risks include:

  • Friendly Fraud
  • Identity Theft
  • SIM Swap
  • Cybercrime
  • Skimming

Authorized Fraud

Authorized fraud is more complicated. In such fraudulent activities, the fraudster manages to directly gain authorization to bank details or funds from the victim. Here, the victim knowingly or unknowingly grants access to the critical information directly to the fraudster.

  • Advanced Fee Scam
  • Impersonation
  • SMS Text Scam
  • Redirection of Payment
  • Insurance Fraud


Most Popular Technology-Based Fraud Prevention Techniques

Modern-day financial institutions adopt several technologies to reduce fraud and safeguard their customers. They often use tools to check individual and account validity before transferring the funds to the right person. These banks also use several authentication stages to warn the customer of an impending payment. Adding such friction slows down the overall payment process but significantly increases security. So, is there a way to increase efficiency and speed without compromising security? The answer lies with technology.

The top financial institutions now adopt newer and faster payment systems without skipping necessary authentication steps by streamlining and clarifying the overall authentication process. They also adopt technologies that work in the background for automatic identity and account validation. Advanced machine learning and artificial intelligence-based neural networks power the latest verification technologies. These powerful tools start analyzing the fraudulent behavior with slow supervised learning and soon become self-sufficient enough to complete verification and background check processes in real-time.

Some of the most prevalent fraud prevention technologies include:

  • Confirmation of Payee (COP): This authentication process allows the payer to confirm the payee’s details. Advanced systems automatically verify the payee details in the background and report mistyped information. After verification, these systems activate the payee to start receiving the payments from your bank account. Some banks also have transfer rules that allow the payer to transfer only a small limited amount in the first 24 hours of activation. 
  • Cross-Industry Collaboration: A cross-industry collaboration allows the financial institution to collaborate with other industries (mainly related to the authentication process) to prevent fraud. Several institutions have tie-ups with major telecom providers to block sims and prevent misuse of mobile payment technologies quicklyIndividuals that have lost their phones should contact the bank immediately. The customer service of most banks is fast enough to block SMS services to the registered phone numbers and prevent fraud risks.
  • Digital ID Systems: Digital ID systems work in the background to verify the identity and prevent impersonation scams. Advanced check verification services can go the additional mile and verify funds and bad checks in real-time. Merchants that deal with high-volume transactions and fake check scams should verify checks and report faulty check writers immediately.
  • Fraud Monitoring Systems: The adoption of open banking systems is paving the way for next-generation fraud monitoring systems. These advanced systems help banks partner with the ACH network and credit card providers to update a negative data database and prevent fraud and money launderingLearn more about open banking systems.

No combination of systems is 100% effective in detecting and preventing fraud. Financial institutions have adopted a rule-based fraud prevention approach in addition to the latest technologies to minimize the potential for further loss. The top banks and credit unions across the globe use a combination of the following to reduce risk:

  • Limits on transaction volumes
  • Limits on the number of transactions per day per payee
  • Transaction hold capabilities
  • Data and QR-code security standards
  • PCI-compliance
  • Multi-factor authentication, and more.


How to Get Started with Fraud Detection and Prevention?

  • Partner with Cyber Security Experts: A experienced team of cybersecurity experts can identify the existing loopholes and breaches in banking systems to plug them. The top teams usually have ethical hackers who can go the extra step to implement measures that futureproof the overall security of the existing systems.
  • Document a Well-Defined Security Strategy: Financial institutions often deal with highly sensitive customer information and funds. They need a well-documented security strategy for all employees in the organization. 
  • Enforce Rules at all Levels: Information leakage is possible at all levels. Hence, even employees working at the lowest level in the corporate hierarchy need to follow the rules to prevent fraudulent activities. Train employees to use licensed and only company-issued applications on their work devices. They should ideally not browse any unsafe sites and always use a VPN to connect with online internal applications while working remotely. Also, periodic password changes, using a safe password manager, and closing applications after using them are some best practices that massively reduce the chances of a cybercrime attack. 
  • Minimize Access to Sensitive Information: Ideally, limiting the access to sensitive customer information only on a need-to-know basis is the best strategy. Moreover, no single individual should carry keys to the whole system. 
  • Choose Partners Carefully: Banks often partner with third-party vendors to access the latest technologies and analytical tools. A framework to identify and choose the safest partners helps these banks prevent fraud. 

Remember, compromising the security of your entire network to shave a few seconds off of the payment process is not worth it. Financial institutions are obligated to provide the best customer experience, but not at the cost of increased risks. While adopting faster payment technologies, they should deliberately check and recheck their systems for leakages and plug them before launching them to the masses. Schedule a call with one of the top financial experts in the industry to learn more about the security aspects of the latest payment technologies here.

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