As the market transforms its fraud capabilities, what factors should banks be taking into account?

Anticipating forthcoming regulatory changes regarding fraud, firms are investing in fraud prevention and detection capabilities, as well as attracting top talent to their organisation. In this blog, we explore some of the upcoming challenges related to fraud, and the crucial areas that firms should take into account to avoid lagging behind their competitors and exposing themselves and their customers to greater risk of fraud.

On 30 March 2023, the UK Government published their Economic Crime Plan (2) 2023 – 2026 setting out what the public and private sectors should do to continue to transform the UK’s response to economic crime. ??The plan focuses on 3 key areas, with an emphasis on driving clear and tangible outcomes.?The 3 areas being:

·??????Reduce money laundering and recover more criminal assets.

·??????Combat kleptocracy and drive down sanctions evasion.

·??????Cut fraud.

Following the rise of fraud over recent years across the UK, how banks are managing fraud has been a hot topic across the industry, with much attention on Authorised Push Payment (APP) fraud.?The UK government recently announced that economic crime poses a threat to UK’s national security. ?Add to this the regulatory changes being proposed by the Payments Services Regulator (PSR) to incentivise Banks to improve fraud preventative controls and splitting reimbursement liability across both the sending and receiving banks, it’s no surprise that Financial Services are transforming their fraud prevention and detection capabilities and investing in advanced fraud preventative technologies.

Challenges ahead

Financial Services across the UK need to ensure they are fully aware and preparing for the upcoming changes in regulatory requirements in relation to fraud.?These changes will create a number of challenges that organisations will need to proactively manage to ensure they don’t expose themselves to greater risk or fall behind their competitors.?These challenges include:

·??????Fraud Risk Assessments – Banks should look to conduct a risk assessment taking into account the upcoming regulatory changes. ?This assessment will highlight any gaps in controls, operating models and indicate current risk exposure against the required changes.

·??????Fraud Operational Review – With the proposed split liability there will automatically be an uplift in fraud cases for banks to manage.?Banks need to ensure they have the operational capabilities to manage this uplift.

·??????Recruiting and retaining the right talent – A challenge in the market today is gaining the right talent into organisations that have specific fraud skills and experience.?This will only become more challenging with the best talent at risk of being lost.?Firms should consider reviewing their recruitment strategy and assess how they can retain their best talent.

·??????Inbound Payment Profiling – liability for fraud reimbursement as the receiving bank will generate greater focus on inbound payments.?To help mitigate losses and prevent fraud banks are incentivised to implement fraud preventative measures on incoming payments.

·??????Securing Investment – Obtaining investment to ensure regulatory requirements are met and enhancing fraud preventative capabilities.?With greater investments being made in fraud across the industry, banks will not want to attract greater fraud losses from having weaker controls compared to its competitors.

When should firms take action and where should they invest?

As firms have a detailed understanding of the upcoming regulatory changes and the scale of transformation required, firms can take action now. ?This will not only ensure future regulatory compliance but also help to enable sufficient time to successfully plan and deliver the required transformation of their fraud capabilities.??

In March 2023 the FCA issued a ‘Dear CEO’ letter to firms detailing numerous concerns that should be prioritised when it comes to payments.?One area detailed within this letter is fraud, with the FCA quoting ‘’ We have seen evidence of elevated fraud rates in some PIs and EMIs. We are also concerned that there could be a further increase in fraud as a result of the cost-of-living crisis. This makes it essential that firms take action now to address weaknesses in their systems and controls to prevent fraud.’’.?The FCA expect firms to take immediate action to protect customers from the risk of fraud.

Firms may be questioning where to start and what areas they should invest in.?We share some areas to consider:

·??????Enhancing Fraud Technologies – Investing in fraud solutions that will enhance fraud prevention and detection capabilities.?Built with agility to manage the changing threat landscape and business requirements.?Implementing technology that provides the ability to gain better understanding of the customer and their behaviour, which will improve fraud prevention capabilities whilst also enhancing and personalising the overall customer experience. ?However, recognising that even the leading fraud technology and innovations are only as effective as the data that drives them.

·??????Advanced Data and Analytics Capabilities – Underpinned by the right fraud data, maximising existing analytics and building functionality to integrate external fraud data and intelligence.?This is a core and vital element of a successful fraud strategy and will amplify your fraud technology, controls and processes whilst also driving better fraud investigative outcomes.

·??????Artificial Intelligence (AI) / Automation – Advanced technology, implementing greater automation and utilising AI capabilities plays a huge role in an organisation’s success.?These technologies can reduce operational costs, improved customer experience while further enhancing fraud prevention and detection capabilities.?The most transformational will be those that have ability to implement ‘’real-time’’ AI.?All AI is powered by data, further driving the importance of investing in advance data and analytics, with real-time data being the most valuable data of all.

·??????Outsourcing Operations – It may be beneficial to consider outsourcing certain fraud related operations. This will enable firms to deliver resource requirements faster and provide firms with the ability to focus current resourcing on higher value activities.?

Transforming Fraud Capabilities

The ability for organisations to manage change is a key differentiator in any industry, which we have seen throughout the last few years with the pandemic. Delivering successful transformation projects is more critical than ever.??Also, over recent years we have seen increased innovation and advanced technologies in the fraud prevention space providing firms with multiple opportunities to transform their fraud capabilities.

My thanks to Donna Dimmack, Darren Harrison, and Krupa Ladva for contributing to this article. Should you require any further help and assistance with any of the topics within this blog, or if you would like to discuss how to improve your firms fraud capabilities please contact Donna Dimmack , Darren Harrison or Krupa Ladva .

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