How Banks Navigate Evolving Threats in Banking Security and Fraud

The banking sector, once seen as a pillar of security, now faces unprecedented challenges. As fraud trends and tactics become more sophisticated, banks must adapt their strategies to safeguard not only their assets but also the trust of their customers. This blog dives into the latest trends impacting banking security and how commercial banks respond to the latest challenges to protect against financial fraud. 

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The Manipulation Behind Scams and Its Implications for Banking Security

Financial fraud is a persistent threat that we can’t ignore, and it’s clear that scams will never go away. However, thanks to recent fraud detection tools introduced by the Fed, people now have clearer definitions of what constitutes a scam. But that doesn’t mean we’re out of the woods. While this is a positive step towards banking security, scams like phishing and romance fraud still manipulate people, especially across our bookended generations.

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The social engineering tactics at play in scams highlight classic human manipulation. Many people are still susceptible to these fraud schemes, whether through investment scams or emotional exploitation in romance scams. It's crucial to recognize that this isn't just a technology problem; it’s about human behavior and psychology. The fraud detection tools may improve, but the vulnerabilities in banking security persist.

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How Larger and Smaller Banks Navigate Financial Fraud

When we look at the responses to fraud, it’s clear that there are distinct differences between larger banks and smaller institutions. As seen in the report, 85% of smaller banks reimburse customers who fall victim to scams, while only 50% of larger banks prioritize reimbursement. 

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This number doesn’t surprise me. For smaller banks, the emphasis often lies on building and maintaining customer loyalty and strong brand relationships. This shows that smaller banks are more willing to assist customers, aiming to keep them whole, even if it means absorbing some costs associated with financial fraud. 

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In contrast, larger banks, with their significant asset sizes, have the leverage to manage risks differently, which may lead to an approach that may not prioritize the same level of personalized customer service. It’s a balancing act. While larger banks may have the advantage of their asset size to manage and avoid losses, smaller banks prioritize maintaining customer trust and satisfaction, knowing that building loyalty is essential for their long-term success.

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How Check Fraud is a Persistent Issue in Banking Security

Check fraud remains a significant concern. Despite advances in digital payments, checks are a useful form of tender that people understand easily. Unfortunately, the ease of checks makes them a prime target for fraudsters. It’s disheartening to see the rise of platforms where checks can be sold or distributed fraudulently, such as Telegram or Craigslist. This kind of marketplace for bad actors is troubling, and we must view them as a continual fraud channel that needs monitoring.

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The Complexity of Account Takeovers in Banking Security

Account takeovers (ATO) are another troubling aspect of check fraud that we need to address. Based on the report, ATO investigations are far more time-consuming than simply analyzing a single transaction with check fraud. In ATO, we're not just discerning whether someone's been fished; we're examining the entire account relationship. This involves ensuring that the deposit history and customer identifications check out. 

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The complexity of ATO investigations can branch off into multiple issues that are difficult to unravel. Fraudsters involved in ATO schemes often use fake identities, creating a complex web of connections with other bad actors with different addresses and phone numbers. 

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Why Real-Time Monitoring is a Necessity in Banking Security

When it comes to financial fraud detection, real-time monitoring is non-negotiable. In a way, it’s like policing a small city with just a flashlight. You can’t monitor thousands of daily transactions without some form of fraud detection tool. Unfortunately, smaller financial institutions often struggle to justify investing in these fraud detection tools for their banking security and will only do so until they feel compelled.

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Smart organizations will invest early, but many only react after a fraud incident. You can’t effectively combat financial fraud if you only respond after it happens; you need to be proactive and monitor real-time transactions to make your banking security more robust.

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Integrate Preventative and Detective Controls in Transaction Management

When it comes to building any infrastructure and managing the transaction process from start to finish, there are various pain points where you can introduce controls and friction. You can take a preventative approach, a detective approach, or a combination of both. What I often see is that companies begin with detective monitoring, and later, as a future investment, they enhance those controls to be more preventative.

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If you want to avoid obstructing consumer value, you may hesitate to introduce too many barriers upfront, as this could create both positive and negative reputation risks. So, quite often, real-time monitoring tends to happen on the detective side. This makes sense because, with the sheer volume of transactions, with thousands or even millions a day, it's simply not feasible to monitor everything manually. I've talked to people who do it by hand, and  I weep for them when they tell me that. 

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Enhance Operational Efficiency Through Data-Driven Insights

When it comes to operational efficiency, I think about the different scenarios that financial institutions face and how operational efficiency can be improved through better data utilization. On one side, some institutions can make small tweaks to existing rules based on real-time observations. While this helps, it’s a more reactive approach. 

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On the other hand, there’s a more comprehensive, proactive route, where institutions collaborate with their providers to conduct in-depth analysis, even tapping into consortium data to strengthen their entire system. This holistic approach not only helps fine-tune operations but enables a deeper, long-term understanding of risks. With this broader assessment, institutions can move beyond just adjusting a few rules here and there—they can refine the entire framework to enhance their operations and banking security significantly.

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When institutions rely on real-time alert monitoring software, particularly for services like Remote Deposit Capture (RDC) checks, the process shouldn’t take long, and monitoring, in theory, should be swift. However, when an actual investigation is initiated, it can feel drawn out. Operational efficiency hinges on balancing this real-time monitoring with the capability to perform more thorough investigations when needed. This dual approach ensures that while quick responses are essential, deeper investigations are not rushed, enabling better risk management.

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Navigate the Complex Landscape of Banking Security

As financial fraud becomes more sophisticated, understanding its underlying manipulations and the implications for banking security is crucial for all institutions, whether large or small. The ongoing issues of check fraud, account takeovers, and the necessity for real-time monitoring underscore the challenges we face in safeguarding our financial systems.

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Register to watch Unit21’s exclusive webinar to dive deeper into these vital topics and learn more about the state of fraud and AML, with the current trends impacting banks. Gain insights from industry experts and explore strategies that can make a real difference in banking security.