In spite of a far greater number of financial institutions, government agencies and even entire jurisdictions being placed on notice regarding the perils of financial crime, gross domestic and international fraud rates have continued to reach unprecedented levels in 2022. In previous weeks, Global RADAR chronicled the effects that economic downswings and dreaded “recession” talks can have on the prevalence of fraudulent activity across a variety of sectors both in the United States and overseas, while also diving into various forms of fraud exploited by financial criminals with great success since the onset of the Covid-19 pandemic. A recent study published by PYMNTS, in collaboration with Featurespace, titled “The State of Fraud And Financial Crime In the U.S” analyzed the various challenges facing many American financial staples today, with the majority of firms surveyed reportedly working tirelessly to thwart the threats associated with a growing number of fraud attacks on their businesses over this time period. The findings of the study also provide new insights on which institutions face the highest risks and what exactly compliance personnel should be searching for when seeking to identify and subsequently eliminate threats of this nature.
The survey, which was conducted by PYMNTS between late April and early June of 2022, sought feedback from 200 executives from American financial institutions of various sizes, most of which with assets of $5 billion or greater.1 The goal of this feature was to examine how fraud and similar crimes impact banks and other financial service providers, as well as to gain insight into how firms of this size have been able to react to increasingly sophisticated attacks. Unfortunately, for compliance personnel, approximately 59% of the financial institutions surveyed reported that they have been experiencing higher rates of financial crime altogether since 2021, while 64% reported an increase in fraud related to the misuse of credit cards. Going further, the report found that 77% of sampled firms that had fraud losses between $2.5 and $5 million experienced an increase in overall fraud rates from just the year prior.1 Smaller FI’s fared no better, as 71% claimed an increase in fraud volume with an average loss of 1.75 basis points per transaction.1 Analysts have speculated that criminals may see smaller banks as easier targets given that many do not boast powerful compliance teams nor have enough financial resources allocated to risk management processes. Others have argued the root cause of these findings might be found in subpar employee training programs, and/or these firms failing to adopt and approximately maintain any of the more sophisticated anti-money laundering (AML) systems available today to counter these threats.
It is undeniable that the growth of technology for personal use has propelled today’s society via optimization of daily activities and workflow – this fact made paramount by the mass shift to remote operations brought on by the pandemic. However, PYMNTS report also highlights the fact that many of the countless peer-to-peer (P2P) and rapid, online payment methods that have gained prominence over the last decade (Venmo, CashApp, and Apple Pay to name a few) have too been targeted by fraudsters, while creating new headaches for the financial institutions behind them with respect to reclaiming lost funds. These findings do not discredit traditional methods of fraud that research shows continue to plague big banks however. The report highlighted that among the largest FI’s surveyed, 63% reported increased fraud attacks via wire, 44% cited increases among buy now, pay later (BNPL) options and 38% saw increases in cash-based fraud.1 All told however, digital payments misuse accounted for 21% of the total number of fraudulent transactions reported in 2021.1
Altogether, what this research exposes is the fact that there is still a relative disconnect between the financial institutions attempting to work around increasingly-complex regulatory requirements and the very solutions available to simplify this process. The report notes that many financial executives view the “triple threat” of compliance complexity, sophisticated financial crime, and new technology integration as key factors in the development of what is arguably the most intense regulatory compliance landscape in history. PYMNTS data revealed that while 95% of AML executives view the use of innovative solutions to fight money laundering risk and improving fraud detection as a high priority, many are concerned over the complexity of the solutions themselves, which limits their overall effectiveness. This then lends to financial service providers resting on their laurels in this regard and utilizing familiar solutions and/or inefficient manpower-backed processes to manage risks and fend off attacks that have too become increasingly sophisticated. Unfortunately for financial firms, research supports the fact that the more time an AML/counter-fraud system remains in place, no matter how secure or efficient at the time of implementation, the less effective they ultimately become when fending off potential attacks. In fact, the report by PYMNTS found that fraudsters are now counting on the use of legacy technologies and targeting firms with known commitments to the same AML safeguards. The unfortunate part of this is that although these institutions do have a plethora of other regulatory compliance technology options available at their fingertips, many counter that the kind of upgrade required in this regard would be too great of an ordeal to make the transition worthwhile. Others argue that augmenting their protocols would also prove too costly, yet later succumb to regulatory fines for compliance-related shortcomings. The PYMNTS report also backs the fact that the institutions that are implementing modern AML protection generally avoid higher financial loss than those using legacy methods.
The good news is that this novel research supports the fact that banks that are putting appropriate effort into updating their technology and strategies are having success in fighting back against this onslaught of fraud activity. The survey ultimately found that financial institutions that are using AML, AI, and/or cloud-based platforms had the least instances of transactions that tied back to fraud. Given these proven results, especially in contrast to the continued use of antiquated systems, it has become evident that the time is now for financial institutions to explore new and developing AML and AI-based anti-fraud solutions in order to protect themselves and their customers for decades to come.
PYMNTS eye-opening report can be read in its entirety through the following link: https://www.pymnts.com/acquisitions/2022/truist-acquires-arena-platform-to-boost-data-management/
1. “The State of Fraud and Financial Crime in the U.S.” PYMNTS.com, September 2022.