How to reduce banking industry costs with Fraud Risk Management

In an era of dynamic technological advances, the banking industry faces a pervasive and escalating challenge -fraud. This ever-evolving landscape demands a strategic and proactive approach to protect financial institutions and their clients from fraudsters. This article delves into the key role of Fraud Risk Management (FRM) in reshaping the banking industry's approach to fraud, with a focus on reducing costs and enhancing overall profitability.

Through an exploration of effective FRM models, key components, global standards, and the transformative impact of technology, we unravel the imperative for financial institutions to integrate FRM into the core of their operations. As we navigate the complex landscape of fraud prevention, this guide highlights the path toward a resilient, secure, and competitive future for the banking and finance sector.

What is Fraud Risk Management (FRM)

Fraud Risk Management (FRM) within the banking industry can be defined as a strategic framework and set of processes designed to identify, assess, mitigate, monitor, and report fraudulent activities. In the world of banking, FRM acts as a safeguard, providing a structured approach to understanding, preventing, and responding to potential threats of fraud.

It encompasses a comprehensive set of practices and controls aimed at protecting financial institutions from illicit activities that could compromise assets, integrity, and overall financial stability. In essence, FRM serves as the vigilant guardian, ensuring that banks proactively navigate the complexities of the modern financial landscape, minimizing the impact of fraud and optimizing operational resilience.

Understanding the impact of Fraud Risk Management

Fraud Risk Management (FRM) serves as a pivotal framework for identifying, assessing, mitigating, monitoring, and reporting fraud in the banking industry. KPMG's 2019 Global Banking Fraud Survey highlights the global perspective on how banks address fraud threats, emphasizing the need for an efficient FRM approach to positively impact overall costs.

Moreover, an effective FRM model instils risk awareness, accountability, and transparency within banking operations. According to Deloitte, it prevents fraud, detects incidents promptly, and responds effectively, offering an enterprise-wide view into suspicious activities in real time.

Components of a robust Fraud Risk Management Model

The ACFE stresses the importance of a proactive FRM approach, citing that in 2019, only 23% of organizations described their risk management as "mature" or "robust." COSO emphasizes the need for a focused framework grounded in strategic planning, outlining the following five interrelated components crucial for aligning strategy and performance across all organizational functions"

1. Governance and Culture, based on principles of Mission, Vision & Core Values
2. Strategy & Objective Setting, based on principles of Strategy Development
3. Performance, based on principles of Business Objectives Formulations
4. Review and Revision, based on principles of Implementation & Performance
5. Information, Communication, and Reporting, based on principles of Enhanced Value

The International Organization for Standardization (ISO) focuses on developing and publishing international standards. These standards are based on effectively managing risk to help organisations on a global scale perform to a certain good standard in an environment which is full of uncertainty, as ISO states. ISO develops standards that can help avoid consequences on an enterprise level which can negatively affect results related to economic performance, reputation, environment, social factors, and safety. ISO focuses on eight principles of effective risk management. There are:

1. Integrated into organization
2. Structured and comprehensive
3. Based on the best available information
4. Customized and proportionate
5. Takes human and cultural factors into account
6. Inclusive
7. Dynamic
8. Facilitates continuous improvement

Furthermore, exploring deeper into risk management concerning fraud practices, according to KPMG, a FRM operating model must possess the following four key areas to effectively manage internal and external fraud threats:

1. Strategic framework and governance: Governance rules define responsibilities for fraud risk, impacting strategic decision-making. KPMG notes variations in internal parties responsible for setting fraud risk appetite, emphasizing the need for a well-structured model.
2. Process and control strategy: Specific objectives are crucial to achieving the FRM model's goals, enhancing the prediction, detection, prevention, and response to fraud risk.
3. People and organization: Creating the right culture and developing staff skills are essential for successful FRM. Regular analysis ensures a capable team actively addressing financial fraud.
4. Technology and analytics: In a digitally evolving banking landscape, technology plays a crucial role. Implementing advanced resources, such as fraud orchestration, ensures real-time tracking and prevention of fraud across all channels.

The Chartered Global Management Accountant (CGMA) emphasizes a 16-step fraud prevention plan, integrating fraud risk into corporate strategies and establishing ownership structures. The primary steps are to first consider fraud risk as an integral part of the overall corporate risk management strategy. Secondly, to develop an integrated strategy for fraud prevention and control, and thirdly to establish an ownership structure from the top to the bottom of the organisation. These three initial steps outline the key standards for promoting an efficient FRM Model.

Leveraging technology for Fraud Prevention

In today's digital banking era, a strong, risk-aware culture is complemented by technological tools. Technologies like fraud orchestration, incorporating AI and machine learning, provide a 360-degree view, reducing overheads and increasing the detection and prevention rate.

Conclusion: Embracing Fraud Risk Management for sustainable banking

As fraud continues to threaten the banking industry's profitability, adopting robust Fraud Risk Management models becomes imperative. Integrated strategies, accountability, and transparency create a competitive advantage, safeguarding customer assets from digital intruders. The financial industry must prioritize the integration of fraud risk management to ensure a sustainable and secure future.