Solving the Multi-billion Dollar Fraud Prevention Problem

David Vergara,

The banking industry is grappling with a multi-billion-dollar fraud prevention problem.

At the core of the problem, financial institutions (FIs) continue to increase spending on fraud prevention technology year over year. But rather than seeing a decrease in fraud, it’s the opposite. As fraud goes up, spending goes up with it, and the catch-22 continues in a seemingly never-ending cycle.

According to Aite Group’s Digital Channel Fraud Mitigation: Evolving to Mobile-first, “Compared to two years ago, digital channel fraud losses are up at 74% of large North American FIs, despite all the technology investments made in recent years.”

Technology and Fraud Prevention

A bank’s first line of defense in fraud prevention is often technology. A Juniper Research report on online payment fraud said merchants and FIs will spend $9.3 billion annually on fraud detection and prevention tools by 2022. But a big part of the problem is that FIs and other financial firms have complex computing environments that are only growing more complex as they incorporate new technologies. As a result, these environments are becoming harder to defend.

FIs also face the challenge of solutions overload. More than a thousand vendors sell security solutions to financial institutions, with a bewildering variety of claims and undifferentiated value propositions. For FIs, selection is a daunting task, vendor approval can take more than a year, implementations typically take six months or longer, and the solutions are not designed to work together.

Adaptive Authentication

Adaptive Authentication: Superior User Experience and Growth through Intelligent Security

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Intelligent Authentication: An Innovative Approach to Fraud Prevention

To address the challenges and stop the loss of billions of dollars to fraud each year, FIs need a profoundly innovative approach, one that enables the extraction of vast cross-channel data and detects fraud in real-time. Additionally, today’s FIs must expand the use of AI/machine learning, risk analytics, behavioral analysis, and biometrics to reduce fraud, ensure regulatory compliance, and increase growth of online financial services by building more consumer trust across digital channels. FIs must also look to open platforms that leverage simple APIs to connect to third-party data sources in real-time, improve real-time decisions, better protect consumers against fraud, boost the bottom line, and protect brand integrity.

Intelligent authentication is one of the latest tech innovations that make it easy for FIs to achieve these goals. Intelligent authentication works through a comprehensive risk score based on the consumer’s behavior, the integrity of their devices and mobile apps, and other contextual data points. So, for example, it can recognize that bank customer, Paul, regularly transfers $200 to the same account each month from the same mobile phone in Chicago. The score and related level of risk for this transaction is based on Paul’s unique behavior and context.

Why is this information important? Because, if it now appears that Paul is trying to send $1,000 to a new account from an untrusted different device in Paris, this falls outside his usual scope and contextual pattern. As a result, this transaction is more likely to be an attempt at fraud, but people don’t live in boxes. It’s entirely possible that Paul traveled to another city.

Therefore, instead of denying the transaction, intelligent authentication challenges the consumer accordingly. Paul gets conditional access to particular account features, such as larger funds transfers. If Paul can pass the security hurdle and authenticate, he can proceed with his transfer. As Paul’s particular contextual patterns and circumstances evolve, the technology is intelligent enough to recognize these changes and adapt.

As noted in a September 2017 report, Digital Authentication: New Opportunities to Enhance the Customer Journey, by Aite Group, “the key to successfully deploying these technologies without disrupting the user experience is to ensure that solutions are well-integrated, not additive. Any friction should be appropriate for the risk of the transaction.”

Fortunately, the report says, a variety of technologies are now available that can bring both greater security and a superior user experience. This is great news, but FIs need to put the new technology and best practices into motion now.

Preventing Fraud to Stay Ahead of the Competition

Fraud prevention ultimately requires keeping up with the latest technologies that will enable financial institutions to better assess and mitigate existing and quickly emerging fraud schemes. By delivering a strong, consistent and friction-appropriate user experience across digital channels, today’s FIs will continue to grow revenue, bring new solutions to market fast, and quickly exceed customer expectations which drives higher services utilization and precious loyalty.

All of this has to be done while banks push to stay ahead of competition, through new and differentiated solutions. Much is at stake for FIs beyond the hard cost of fraud. A bank’s reputation is critical to its success. Implementing risk-based security to protect against fraud is one of the best ways to maintain a good reputation among customers, drive down fraud, and meet strict regulatory requirements.

This article, authored by David Vergara, Director of Security Product Marketing at OneSpan, first appeared on BAI Banking Strategies on January 16, 2019.  

David Vergara is Senior Director of Security Product Marketing at OneSpan and has over 15 years of experience in cloud platforms/SaaS, predictive analytics, and advanced MFA technologies. His current role is focused on GTM strategy and execution across all authentication and risk analytics product lines. Prior to OneSpan, he led product and GTM strategy for tech companies, including roles as VP Marketing for Accertify (An American Express Company) and Sr. Director Product Marketing at IBM.