Operating a financial institution is fraught with fraud risk as the industry grows increasingly more complex. F.I. clients demand the convenience of transacting through any of a multitude of transactional channels. At the same time, organized crime groups and hackers seek to constantly exploit these channels to their advantage. In a given day, a single client may login to a bank’s mobile app to make a payment, enter the branch to initiate a home equity loan, withdraw cash at an ATM, use a web-browser to transfer funds and speak with a call center to inquire about a transaction they don’t recognize. How can any institution know with certainty that this person is, in fact, the person who owns the accounts that are being accessed through such diverse interactions?
It is a challenge, to say the least.
The banking industry is further obliged to design a financial risk management operation that complies with mounting state and federal regulatory requirements.
Research conducted by Javelin in 2017 revealed that victims of identity fraud in the U.S. alone hit an all-time high of 16.7 million people, an 8% increase from the previous year. The study also revealed that the amount of money stolen increased to $16.8 billion, clear proof that criminals have adapted their attack methods.
Fraudsters use fake identification documents to open deposit accounts in order to launder illicit funds. They also access funds in other people’s accounts. In 2017 alone, Javelin and Associates reported that existing account fraud (also called Account Takeover Fraud, or “ATO”) totaled more than $5.1 billion and that figure is continuing to climb. Such losses make it hard for banks to increase their profits and have contributed to many bank closings
In addition to identity theft, banks are exposed to fraud from counterfeit money, fake money orders & cashiers checks, and fraudulent or stolen credit cards - all of which affect the bottom line in an industry that is already struggling to recover from a rough economy and multiple levels of bureaucracy.
The majority of bank revenues are generated by issuing credit. Many branch employees receive bonus compensation for meeting or exceeding quotas for the sale of new credit accounts. Credit cards, home loans, equity lines of credit, business loans, auto loans - this aspect of the retail banking operation is vital. It is also the leading area of fraud within the banking industry. Identity fraud and the rise of loan/mortgage fraud very strongly affects the profitability of the industry as a whole.
Banks are the largest issuers of credit; consequently, they must comply with an array of regulatory requirements designed to help validate who they conduct such credit transactions with. Examples include the Fair Credit Act, the “Red Flag Rule” mandates associated with the Free and Accurate Credit Trade Act, and the requirements under the Bank Secrecy Act (BSA) to create a Customer Identification Program. These combined legislative directives dictate that issuers of credit must proactively involve themselves in the fight against identity theft by creating and implementing procedures, documented with step–by–step instructions, for how to validate ID documents of any individual applying for and being issued credit, and to maintain records of such applications for as long as 5 years. The BSA and the FTC also require that such records be maintained securely.