In 2023, fraud risk management for financial institutions is more essential than ever before. Based on claims by Juniper Research, fraud loss will increase up to $48 billion in 2023, up from the $22 billion losses projected only five years earlier.
Just as in 2022, 2023 will continue to witness vulnerabilities around the banking and financial ecosystem. In the case of the legendary sprinter, Usain Bolt, losing $12.7 million off his account with a private investment firm, experts expect a serious case of money laundering or fraud. It is evident from the incident that if institutions are not providing financial security to their users, it costs them not only customer trust but also their long-earned organizational reputations.
The tough economic conditions are the breeding ground that encourages fraud. In order to facilitate reliable fraud risk management, we must first ask a couple of questions:
- How can you sustain and win over sophisticated methods of fraud?
- What is your best fraud risk management approach?
Taking a broader outlook toward fraud risk management can bolster your adaptability to threats and help leverage opportunities to grow your business. Below, we discuss the key fraud risk management insights to abide by this year.
1. Robust Regulatory Framework in Action
Money lost to fraud and scams is a direct threat to consumer expectations. New regulations across several sectors aim to provide greater security, stability, and liability protection.
The FTX meltdown put public and investor security in question. To protect consumer and investor rights and minimize financial risks, the Financial Stability Oversight Council implemented crypto-related enforcement regulations. Yet, more regulation is likely to arise to address loopholes in the crypto ecosystem. Simultaneously, Eurozone countries are also preparing to define new regulatory changes to help with crypto trading.
Traditional finance, banks and most unregulated sectors like BNPL continue to face strict regulatory procedures. Such institutions will need to cease the year-over-year increase in fraud and reinstate consumer trust in both traditional payment systems and the new wave of payment schemes.
As per the latest PwC Pulse Survey, risk executives are struggling to adjust to the changing regulatory environment and are hence unable to mitigate regulatory risks. Financial firms, including HSBC and Citi Group, suffered expensive penalties for compromised KYC due diligence monitoring activities.
As a leader with responsibilities to mitigate non-compliance risk, the first step is to choose a solution that continuously helps you maintain regulatory needs and prevent loss liability. An actuarial risk-based insurance model with the ability to continuously flag suspicious activity throughout the customer's lifetime journey and deliver loss liability indemnification is essential. Fortunately, Instnt's digital customer acceptance model shifts loss liability off your balance sheet and ensures you receive indemnification up to $100M as fraud loss protection.
2. Increased Adoption of Automation and Analytics
According to the fraud risk management insights by PwC Pulse Survey, investment in automation and data analytics will continue to increase in 2023. The survey further claimed that risk leaders seek to bring down compliance costs while effectively mitigating fraud risks using the power of automation and data analytics.
An analysis of Sarbanes-Oxley controls by PwC observed that an increase in automation investment by 15% can effectively help reduce compliance costs by 10%. The automation capabilities help your businesses streamline compliance activities during digital customer onboarding by automating repetitive KYC verification activities through digital workflows. This approach frees up your staff to monitor emerging threats more closely and prepare reports using data analytics to improve fraud risk management.
For example, due to a lack of sophistication in their customer sign-up flow, one Challenger bank rejected over 60% and suffered 20% of fraud rates. Their customer identification program rested upon the legacy KYC platform. As a result, their annual capex/opex spending grew by over $1M annually. Instnt enabled the bank to transform, helping the business shift fraud loss exposure off its balance sheet to Instnt AcceptTM while reducing fraud rates from 20% to 0.2%, increasing digital sign-ups by 300%, and growing revenue by $60M.
3. Blockchain Against Cyber Risks
As businesses continue to move to the cloud, cybersecurity threats increase. McKinsey reported that the sheer volume of fraud attempts has overwhelmed a staggering number of financial institutions. An expanding ecosystem with sophisticated cyber attacks from Fraud-as-a-Service, Hackers-as-a-Service, and Access-as-a-Service exposes risk to cybersecurity and consumer money. The good news is that businesses are increasingly growing their learning curve around cybersecurity and also are keen to implement the best practices around fraud risk management.
For example, J.P. Morgan has driven innovation with decentralized technology on the blockchain, unleashing immense possibilities around cross-border payments and real-time movement of payments. The capability also helps them avoid cybersecurity compliance risks while protecting customer identity in a decentralized fashion. Surprisingly, the blockchain market is projected to grow to $17,583.4 million in 2026 at a rate of 53.9% in banking and financial services.
If your current approach is not up to the standard, it is time you modernize your infrastructure built on blockchain mechanisms. The decentralized technology that Instnt leverages helps businesses provide frictionless signup flexibility to their users. What’s more, with Instnt, customers only need to sign up once rather than over and over again.
Let’s break down how the process works.
- As soon as users supply their personal information for a signup, Instnt generates a QR code or a link.
- When scanned, it accepts customers for businesses instantly.
- Simultaneously, the QR Code stores customer information in the white-labeled wallet, easily accessible in the customer profile or account dashboard.
- Information stored in the wallet enables frictionless customer sign-ups for users if they want to transact with other brands powered by Instnt without the need to provide login information or personal details back and forth.
The above approach reduces friction during digital signups and also helps businesses protect customer information to further prevent account takeover risks. Instnt’s fully managed acceptance platform simplified and accelerated digital customer onboarding for Alchemy’s credit union partners. It was a growing challenge for credit unions to accept mobile-first and rather impatient GenZ millennials. By utilizing Instnt’s frictionless signup model, Alchemy increased digital signups by an additional 50% for its credit unions, while minimizing application rejection rates by over 75%.
4. Increasing Trust in Biometric Authentication
In fraud risk management, biometric authentication is gaining huge traction. 58% of customers believe biometric authentications are faster and more convenient and also offer more secure options to protect their identities, as per reports by PYMNTS. Not just customers, but also retailers and merchants look at the technology as a game changer for their mission to defend against fraud risk.
By utilizing advanced cognitive behavioral biometric models, you can easily detect and differentiate between fraudulent and real candidates. The technology best works as multi-factor authentication while removing extra steps of authentication for users. If you are eager to eliminate friction from the digital customer onboarding process and build a robust fraud risk management process, Instnt can assist you in transforming your sign-up process with biometric authentication.
Collaborate with Your Fraud Risk Management Partner 一 Instnt
Due to the alarming fraud risks to FIs, institutions must act more responsibly in the new year regarding fraud risk management. With Instnt, you can prioritize, innovate and launch in just a few minutes, efficiently securing and modernizing your digital customer acceptance model. You can easily integrate end-user sign-up flow by using a variety of SDK toolkits, including InstntJS, InstntAngular, InstntReact among others. By integrating a line of code into your existing signup flow, you are ready to go without impacting the look and feel of your existing sign-up UI. So, get going and start accepting more good customers with instnt without violating the fraud risk management regulations and compliance.
Instnt offers a state-of-the-art digital customer sign-up process built upon sophisticated NLP and machine learning algorithms with just one click. With total control over the Instnt dashboard, you can create your workflows, enable a variety of verification mechanisms, create rules for threat alerts, etc, helping you automate verification processes and remove frictions from the customer journey touch point. As a result, you can accept more good customers, enabling you to optimize your operating costs by preserving 7.2 million dollars on top-line revenue annually.
To learn more, book a demo today.
Deepa Majumder is a product-based technical writer and content strategist for brands excelling at AIML, IoT, and Machine Learning technologies in the space of smart home automation, IT incident management, Business Resiliency, and OTC automation. Exploring a diverse stream of DeFi, NFT, and Metaverse is her area of interest.
Sources
PAYMNTS.COM - Fraud Prevention Strategies on Retailers’ Radar as Attacks Increase
PwC - Risk management insights from the PwC Pulse Survey
McKinsey - A new approach to fighting fraud while enhancing customer experience
PaymentsJournal - 2023 Predictions: Authentication, Digital Identity, and In-Car PaymentsPublication Fintech Magazine - Fintech Magazine January 2023
Bloomberg Professional Services - USA regulatory outlook 2023
Investopedia - The Collapse of FTX: What Went Wrong With the Crypto Exchange?