The Secret Arms Race in Finance

September 12, 2023
Vladimir Lounegov

Financial Strategies and Economic Policy

In "The Secret Arms Race in Finance," Vladimir Lounegov explores the escalating battle against financial fraud, highlighting the integration of AI and human expertise to fortify defenses. With 91% of bankers reporting increased fraud in 2022, the financial industry faces a colossal challenge.

Advanced Tools to Outsmart Fraudsters

AI has revolutionized fraud prevention by processing vast amounts of data to detect suspicious patterns. Machine learning algorithms provide real-time monitoring and anomaly detection, empowering banks to swiftly identify and address fraudulent activities. However, AI alone is insufficient; human oversight remains crucial. Human judgment and empathy can identify nuanced patterns that AI might miss, ensuring a comprehensive defense against fraud.

The Human Element

Internal fraud involving employees poses a significant threat. Educating customers and enhancing employee screening and training are essential steps. Collaboration between AI systems and human insights creates a robust fraud protection framework. Staff must understand the importance of high-quality data in machine learning to achieve accurate risk assessments.

Challenges and Strategies

Implementing a seamless human-AI fraud prevention strategy presents challenges. Maintaining a balance between detecting fraud and providing a frictionless customer experience is critical. Real-time payments increase the complexity, necessitating advanced AI tools to evaluate transactions promptly. Educating customers about common fraud schemes and equipping them with knowledge is vital to prevent data breaches.

Investment Opportunities

Investors may consider companies like Fiserv, FICO, and SAS, which lead in AI-driven fraud detection. ETFs like VFH and IYG offer exposure to major banks investing in enhanced security, while cybersecurity firms like PayPal, FireEye, and Check Point provide specific fraud prevention solutions.

Conclusion

The fight against financial fraud requires a powerful human-AI alliance. Institutions must continually advance their fraud prevention strategies, combining technology with human expertise. Organizations like Mbanq and the Financial Policy Council lead the charge, fostering an ethical financial ecosystem rooted in transparency and security.

For more information, visit Mbanq and Financial Policy Council.

Latest developments see AI and the human element combine to safeguard the financial industry from fraud, writes Vlad Lounegov, CEO of global Banking-as-a-Service (BaaS) provider, Mbanq.

How big of a problem is fraud in the financial industry? It’s not a topic that executives are keen to talk about. However, I invite you into the inner circle to reveal a few eye-opening secrets.

Line up 100 bankers and ask those who lost money to fraud to step forward: 95 will take a step. Ask how many lost at least half a million dollars, and 70 will step forward. Losses over $1 million? At least 25 will take a sheepish shuffle. That’s life in the industry.

A recent report by Alloy, a fraud management platform, found that 91% of the 250+ bankers surveyed saw an increase in fraud year-over-year in 2022.¹ So, it’s a worsening trend. Faced with this menace, nearly two-thirds had to increase spending. In answer to the original question – it’s crystal clear that fraud is a colossal problem.

Advanced Tools to Outsmart Fraudsters

Over the past decade, technology has played a pivotal role in battling fraud. As criminals become savvier, bankers strengthen their arsenal of tools. Yet a vulnerable link will always remain – the human element. To overcome this, today’s thinking is that merging AI-powered innovation with human insight is an essential combination to build a comprehensive defense against fraud.

Enter Artificial Intelligence (AI) – with its unmatched capabilities to process, sort, and analyze massive amounts of financial data, AI is the new hero in town. Humans simply can’t authenticate every transaction manually – it’s just not viable. And the demand for prompt service further compounds the challenge.

To address this, banks are turning to AI-based automated systems that track patterns and swiftly identify fraudulent activities. These cutting-edge technologies bolster their ability to manage and safeguard the intricacies of financial infrastructure. Machine learning algorithms, equipped with pattern recognition and anomaly detection, empower banks to keep pace with customer demands, provide real-time monitoring, and preempt potential threats. Nevertheless, AI is not a panacea – it still needs human oversight.

The Human Touch in Fraud Prevention

Natalia Han, SVP Head of Banking Operations at Mbanq, explains: “On the detection front, human judgment and empathy play critical roles in identifying nuanced patterns that AI algorithms may overlook. Seasoned experts bring contextual knowledge and experience to the table, connecting seemingly disparate data points and spotting potential red flags.”

Understanding the human element is crucial in the fight against fraud. Shockingly, a significant proportion of money lost to fraud involves assistance from an employee within the organization.²

Beyond that, consumers themselves are targeted because tricking someone into revealing valuable data is generally easier than breaking through complex technology security protocols.

Unleashing the Power of Human-AI Collaboration

To build a powerful human-AI alliance, banks are working to overhaul their policies and procedures, fostering a collaborative fraud protection framework that embraces both human and AI systems. Employee screening and training are also enhanced, with a keen focus on positions that pose the highest risk of fraud.

Educating customers about common schemes is another important facet of fraud prevention. By equipping users with knowledge, banks block criminals from extracting valuable financial information directly from customers.

Additionally, upskilling staff to effectively work alongside AI tools is paramount. For instance, staff must understand that in the realm of machine learning, the strength of insights hinges on high-quality data. Achieving real-time, precise risk assessments requires seamless access to internal and external data sources, allowing machine learning and the human team to effortlessly exchange and absorb risk signals.

Overcoming Challenges for a Secure Future

Implementing a real-time human-AI fraud prevention strategy isn’t without hurdles. One key challenge is delivering a seamless user experience.

Consumers crave convenience – with a significant proportion evoking it as the primary reason for switching to digital banks. Finding the delicate balance between detecting suspicious activity and maintaining a frictionless customer journey is paramount otherwise banks may find they shed customers.

The second challenge is keeping pace with new methods of fraud, especially as real-time payments become more common. Given that real-time payments are settled instantly – if they are not stopped in real time, the money is lost. This is where machine learning can be highly beneficial. AI-based fraud tools can evaluate money flows and permit valid transactions while denying the fraudulent ones using the most reliable information possible in real-time.

Investment Opportunities

As financial institutions ramp up their fraud prevention efforts, investors may want to consider companies providing related solutions. Fiserv (FISV) is a leader in financial services technology, including AI-driven fraud detection. FICO (FICO) develops predictive analytics software leveraged by banks to identify fraudulent activity. Though privately held, SAS is a prominent player in analytics and AI for security.

Investors could gain exposure to fraud prevention in finance through ETFs like VFH or IYG, which hold major banks investing in enhanced security. Cybersecurity firms like PayPal (PYPL), FireEye (FEYE) and Check Point (CHKP) offer specific fraud prevention for the finance sector. Financial technology ETFs like FINX or FTNT also provide access to innovative anti-fraud fintech’s.

Of course, readers should do their own research before investing. This is not investment advice, merely suggestions of publicly traded companies and potential investment strategies related to the topic. Consult a financial advisor to evaluate if any investments match your risk tolerance and goals.

Current Best Practices Include Personalization

Current best practices in fraud prevention combine a number of additional elements. The AI-human approach, merged with footprint analysis and established transaction monitoring software enhances a winning strategy.

Footprint analysis gives insights into user characteristics, behaviors, and risk factors – information that can be used to create highly tailored risk models that align with and help understand the platform’s user base.

Transaction monitoring software is the foundational tool that detects suspicious patterns or anomalies in real-time.³ Leveraging machine learning and artificial intelligence, this software helps proactively prevent fraud and provides a personalized approach that is only enhanced by modern technology.

It is important to note that a one-size-fits-all approach is not optimal because each platform and its users have unique needs and risk profiles. Risk models must be flexible and adaptable. Incorporating the platform’s own risk models into prevention strategies enables customization and maximizes the effectiveness of limit and control parameters.

Agility and Flexibility: Responding to Fraud Attacks

A recent attack we witnessed saw an organized fraudster ring try to test a bank’s vulnerabilities.

To address the attack, our 24/7 team promptly blocked transactions and identified accounts at risk. The immediate focus was to stop suspicious transactions and address any technology solutions.

A critical aspect is the flexibility of our in-house fraud prevention tools. We didn’t need to shut down the entire bank to fix the problem. Instead, we quarantined several accounts that were deemed at risk and resolved any potential issues without causing widespread disruption.

At Mbanq, we understand the importance of continuously refining our fraud prevention strategies. Agility and flexibility remain key tenets in our approach to ensure the security and trust of our customers.

Looking ahead, it is clear that financial institutions must continually anticipate advancements in AI and their impact on fraud detection, while also refining traditional tools. By nurturing a continuous improvement and adaptation culture, they can set a vision for a more secure and resilient financial industry.

The Financial Policy Council

Mbanq proudly serves as a corporate sponsor of the Financial Policy Council (FPC), supporting the organization’s mission to nurture economic growth through sound fiscal and regulatory

policies. As a Banking-as-a-Service provider on the frontlines of financial fraud prevention, Mbanq intimately understands the dangers posed by criminal schemes and corruption. Robust protections against fraud align directly with the FPC’s goal of fostering an ethical economic system that facilitates wealth creation.

By sponsoring the FPC, Mbanq demonstrates its commitment to joining forces with policymakers and industry partners to cultivate financial integrity. Together, Mbanq and the FPC are working to root out fraud in the financial sector, so that innovation and free enterprise can continue to blossom. Mbanq’s support enables the FPC to further its noble pursuit of prosperity grounded in justice, transparency and integrity.

Join the Fight Against Financial Fraud

Financial fraud threatens prosperity, but together we can cultivate a secure future. Forward-thinking institutions like Mbanq and the Financial Policy Council are leading the charge – but they cannot do it alone.

Readers who are passionate about fraud prevention are encouraged to:

Contact elected representatives and advocate for policies that combat fraud. Regulatory efforts form a critical line of defense.
Volunteer with nonprofit groups providing fraud prevention education. Outreach and awareness can protect vulnerable communities.
Invest ethically by supporting companies developing innovative anti-fraud solutions. Capital enables progress.
Report scams and suspicious activities. Vigilance and monitoring deter fraudsters.
Spread awareness on social media using #fightfinancialfraud. Get the word out.
Attend upcoming events hosted by Mbanq and the FPC focused on fraud prevention strategies and innovations. Be part of the conversation.
Check out the educational blogs and podcasts from Mbanq and the FPC providing insights on detecting and combating fraud. Get informed.
Share content from Mbanq and the FPC on social media to spread awareness using #fightfinancialfraud. Get the word out.

By coming together, we can cultivate a financial system rooted in ethics, safety and transparency. Join Mbanq and the FPC today in growing fraud-free finance for the future.

The roots of fraud run deep, but so does human integrity. United, we can grow an ecosystem where ethics, safety and transparency are the norm. Join us today in this important cause – our economic future depends on it.

Conclusion

Financial fraud is an unrelenting menace, but the winds of change are upon us. Driven by an alliance of human ingenuity and AI capabilities, the financial industry is transforming its approach to fraud prevention. Companies like Mbanq, with the support of organizations like the Financial Policy Council, are charting the course. Their robust pursuit of financial integrity, insights and persistence fertilize the ground for ethical, secure finance to take root.

However, roots alone do not make a tree – the entire forest must grow strong. Consumers, regulators, law enforcement, financial institutions and technology providers must unite in this undertaking. Together, we will cultivate a financial ecosystem rooted in integrity, where innovation and prosperity can thrive for generations to come. The fruits of our efforts will nurture communities, nourish families and empower dreams. We have the tools, the vision and the will – now we must plant the seeds.

For more information contact www.Mbanq.com

Please sign up now and join the discussion https://financialpolicycouncil.org/blog/.

#fraudprevention #fintech #cybersecurity #ethicalfinance #financialeducation #fightfinancialfraud

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Disclaimer: This article discusses certain companies and their products or services as potential solutions. These mentions are for illustrative purposes only and should not be interpreted as endorsements or investment recommendations. All investment strategies carry inherent risks, and it is imperative that readers conduct their own independent research and seek advice from qualified investment professionals tailored to their specific financial circumstances before making any investment decisions.

The content provided here does not constitute personalized investment advice. Decisions to invest or engage with any securities or financial products mentioned in this article should only be made after consulting with a qualified financial advisor, considering your investment objectives and risk tolerance. The author assumes no responsibility for any financial losses or other consequences resulting directly or indirectly from the use of the content of this article.

As with any financial decision, thorough investigation and caution are advised before making investment decisions.