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3 reasons why you need a fraud & risk management solution built specifically for the financial services industry
The digital shift that resulted from the pandemic is not new news. It is the new normal. This shift increased fraud across all industries, from healthcare to retail to online gaming. Financial institutions, unsurprisingly, have not been spared in this trend. After the economic shutdown, financial services saw a 58.1% increase in successful fraud attacks, with a 40.5% increase in lending specifically (according to a report by LexisNexis).
It might seem as if the challenges in mitigating fraud are similar across industries and that any fraud and risk management solution could be adapted to whichever type of fraud is relevant to your business, but the truth is it’s not that simple.
Top 3 reasons why you should partner with an expert in financial services fraud
1. Specialized knowledge of compliance and regulatory requirements
This reason is probably obvious, but it’s the most important. It’s hard to talk about fraud in the financial services industry without mentioning compliance. FIs are held to AML and KYC regulations that require more rigorous fraud solutions that carry significant legal, economic, and credibility consequences. In addition, these regulations can be complicated and change from time to time as new technology changes the way money launderers and fraudsters operate, and these changes need to be reflected in your fraud practices. Other industries do not have these regulatory standards. A fraud-fighting solution specifically built for financial services will be equipped to navigate the critical nature and evolving requirements of financial services fraud.
You need a solution that understands the types of data vendors relevant to KYC and AML checks, builds relationships with these data vendors, and integrates with a combination of data sources to help you efficiently meet compliance requirements. Traditional data sources like Customer Identification Records, Email, Phone, and ID Document Verification and newer data sources like Device Information and Two Factor Authentication (2FA) can all be leveraged together to perform KYC and AML checks. A generic or singular data source solution typically only looks at one data source at a time — leaving you with an unclear picture of your customer and making it difficult to add in new data sources when regulations change.
2. The consequences of getting fraud wrong are higher for financial institutions
Another huge difference between fraud in the financial services industry and other types of fraud is that the stakes tend to be much higher in financial services. In retail, for example, even for high-value items, the most a merchant will lose is the cost of that item. However, when financial institutions experience fraud, they typically deal with a much larger value and could even face significant fines and lawsuits for not complying with regulations.
For financial institutions, it’s not just money on the line, either. Their brand and reputation are also at stake. If an ecommerce merchant suffers from a few account takeovers or chargebacks, that won’t make major headlines. If a major bank is the victim of a fraud ring, that could be front-page news and cause a lot of people to rethink their relationship with the bank.
Just a few weeks ago, for example, an investment firm sued TD Bank for failing to respond to a fraud scheme where a hacker used fake email addresses to steal money from business accounts. Now the bank is facing a hefty lawsuit and negative press attention for its fraud prevention practices.
3. Fraud in the financial services industry requires looking at customers holistically
In other industries, fraud mitigation focuses mainly on the transaction, with KYC or onboarding being much less important. With fraud in financial services, it’s important to look at somebody holistically – from onboarding to ongoing financial activity – to get a complete picture of the person’s identity and risk profile and continuously evaluate their level of risk.
A financial services fraud solution typically also monitors for smaller, non-transactional events like account logins from new devices or geographic locations, changes in address, etc. Most industry-agnostic fraud solutions do not take such a granular approach since they are mostly monitoring transactions.
As a result, using a financial services fraud solution allows you to build an identity and risk profile for the person, making it easier to evaluate their ongoing risk moving forward. For example, if a client had no red flags at onboarding and has been in good standing with your company, but then all of a sudden starts making unusual purchases from unusual locations, this could indicate fraudulent activity. All of this information builds on itself to continuously update your customer’s identity and risk profile to help you catch fraud sooner.
Bonus tip: building an identity and risk profile doesn’t just help you fight fraud. It can help you provide a tailored experience for your customers’ unique behaviors and needs. I.e., collecting someone’s employment and salary information at onboarding could inform what new products or how much credit you offer them throughout their customer lifecycle.
Nothing beats expertise
There are plenty of nuances between fraud in the financial services industry, ecommerce fraud, and fraud across other industries. A generic fraud solution adapted to your financial institution’s needs can leave you with gaps in functionality and industry expertise. Implementing a fraud mitigation tool focused on financial services will bring a solution and tool that is built with an understanding of your industry’s pain points, products, and needs.